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Franklin Towers Lofts
5 Day Sale Homebuilder Auction Case Study
Denver, Colorado

April 2, 2009

Facts:

Franklin Towers Lofts is a new 16 unit, 5 story, hip loft project in Denver’s Uptown neighborhood just east of Downtown and located within blocks of fine restaurants, clubs and shopping.

Each loft features unique, open floor plans, 10 foot ceilings, custom, ceramic tile, designer lighting and island kitchens with Granite slab countertops.  The project has 1, 2 and 3 bedroom units available. The penthouse boasts two levels, an atrium, and a 5th floor private terrace with epic city and mountain views!

Each of these 16 loft-style homes have their own individual character, and all boast the sleek, urban architecture and design elements that discriminating buyers would expect to find in the most upscale of Denver lofts. All of these loft residences feature imaginative interior finishes, quality construction, and modern appliances and fixtures. All have terraces or balconies and many have views of the mountains and Denver's magnificent skyline.

The two year construction project obtained its “certificate of occupancy” in August of 2008.  Three units were sold and one had been leased prior to www.AuctionBySeller.com being retained to conduct a 5 Day Sale style auction.  The project was built at a cost of nearly $275 per square foot and has been delivered to the market during the most challenging real estate down-cycles in our nation’s history.

The project was developed to appeal to the urban dweller at more affordable price points than were available at its Downtown Denver condo and loft competitors prior to the stock market implosion that began in October 2007.  With the introduction of several new Downtown condo projects including the acclaimed “Spire” development, the downtown inventory of residential condo properties is at an all-time high.  This is likely to lead to price reductions in the urban core and put further market pricing pressure on Franklin Towers Lofts.  

A local boutique real estate brokerage specializing in Downtown residential new-build properties was retained to market the property, but the builder was not happy with the firm’s performance at the time www.AuctionBySeller.com was retained to work with the listing firm in marketing the 5 Day Sale auction.

Issues:

The economic challenges of the day are unprecedented.  At no time in our country’s history have we seen downward real estate price corrections of this magnitude, speed, and severity.  It is a once in a century event.  

This watershed event coupled with changing consumer real estate behavioral patterns is adversely impacting   the historic status quo of the residential real estate industry for the Realtor, mortgage, and home building communities alike.

For quite some time we have seen the internet empower informed homebuyers as never before, and according to National Association of Realtors, more than 75 percent of those initiating the sale or purchase of a home begin doing so online. In 2006, 72 percent of all Internet users in the United States had the use of broadband to access the Internet, according to Neilsen/NetRatings -- that's 103+ million Americans able to quickly view and download large graphics files such as property photos and virtual tours.  Realtors are no longer the “gatekeepers” of information that they once were, and many consumers are looking to negotiate directly with buyers and sellers where possible in order to both flatten the “lines of communication” between them as well as save money on real estate commissions.

Furthermore, when it comes to selling a home in this challenging market, many sellers are dissatisfied with the traditional real estate listing approach, which is both expensive and passive by nature.

So, the core real estate issue presented by this case questions whether there is an alternative, viable, more proactive approach to marketing, valuing, and selling real estate than the traditional listing and sales market comparison approach?

Can the 5 Day Sale Auctioning methodology present an alternative approach to marketing, valuing, and selling new properties in the current marketplace?

This is of critical importance to homebuilders given the October, 2008 stock-market implosion that has since resulted in a nearly 45% loss of wealth to American investors, has caused homeowners to question the “true market values” of their real estate holdings, and has homebuilders looking to maximize the exit values of current projects and mitigate their losses where possible.  

Stakeholders:

Builders – are under great pressure to reduce inventory, mitigate losses, and find viable new projects

Bankers – have great financial exposure to construction loans that they will need to extend or mark-down on their balance sheets as the market works through the current economic down-cycle and “structural” price corrections.

Mortgage Lenders – are fiercely competing for a significantly contracting qualified borrower pool, and increasing concern that properties may not appraise for a given loan’s contracted price

Appraisers – under ever increasing regulatory scrutiny given inflated appraisals associated with the prior housing boom and corresponding bust.  They are extremely challenged by their licensing adherence to the  Uniform Standards of Professional Appraisal Practice (USPAP) guidelines, which requires them to disregard sales comparables that were sold under duress.  This is very difficult in the current marketplace that is predominately characterized by foreclosures, short-sales, and the historic structural price correction that is still in play

Realtors – there is great attrition in the ranks of the National Association of Realtors (NAR) as many are forced out of the business given the current economic slump.  Those who survive will need to adapt to a new marketplace and embrace new real estate business and revenue models, which many are reluctant to do.

New Home Buyers – face the quandary of making a real estate purchase in very uncertain economic times.  Many new qualified home buyers are fearful of losing their jobs, having a hard time getting comfortable        with real estate values, have an abundance of property offerings to choose from, believe that they have the negotiating leverage, want a bargain, and are concerned that property values will go down before they go up in this current real estate cycle.  As such, they are making conservative offers that hedge against these concerns and uncertainties. 

Existing Owners in the new Loft Project – are concerned about the potential negative impact that a 5 Day Sale auctioning sales approach may have on their property values.  They fear the unknown and have perceived stigma associated with real estate auctioning

Municipalities – are concerned about the overall market price-correction and its impact on “Ad Valorem” property taxes

Solutions:

Alternative #1: 

Adhere to the traditional passive listing method whereby properties are priced at or above market, which is  based on retroactive sales comparables that reflect property sales in healthier times.   This often results in sellers “chasing-down-the-market” with multiple significant price reductions and/or other seller concessions, increases the time a property is on the market, and often results in an overall lower exit price for a given property.

Alternative #2:

Retain traditional auctioneers, who implore sellers to conduct “absolute auctions” that put the seller at considerable price- risk, place onerous financial constraints on the bidders such as cash deposits to bid and  require buyers to purchase the property “as-is” with “all-cash,” charge high pre-auction marketing fees to the seller, and require that bidders pay the auctioneers significant “buyers-premiums,” thereby reducing the purchasing power of the “best bidder” to the seller.   

Alternative #3:

Pursue the www.AuctionBySeller.com  (ABS) business model where ABS works for the builder with or without the builder’s listing team, has a fiduciary relationship to the builder, and charges no “buyer’s premiums” to any bidders. 

In doing so, ABS enables the builder to:

  • Take a "proactive" sales approach by positioning the property for 5 Day Sale auction without the “price-risk” associated with absolute auctions at competitive fees
  • Market the property directly through targeted online and other advertising mediums, driving traffic to the www.AuctionBySeller.com website, allowing the builder to speak directly with potential buyers interested in the property with the direct support, participation, and counsel of ABS
  • Have the market speak directly to the builder regarding the properties attributes, limitations, and potential buyers perception of value over a two day period
  • Compress the real estate sales cycle, generate market offers, and make informed decisions regarding their project exit strategy

Alternative #4:

Endeavor to Restructure the Builder’s Construction Loan:

In the event that alternatives one through three do not result in a “pro-forma” sale, to share the market results with their project lender(s) as a genuine “current market indicator of value” in order to restructure their construction loans equitably in an effort to work through the current depressed real estate market cycle

Conclusion:

ABS marketed the units for nearly 3 weeks and had over 20 pre-registrations, 4 pre-auction sealed bid entries, and over 70 groups came through the project during the two day inspection period.  By Sunday night, March 8, 2009 there were 15 bidders for the four (4) units.

The round robin bidding session lasted 4.5 hours utilizing both phone and ABS’s online virtual auction room.

There were final and best bids generated for all of the units.  Given the quality of the loft project, there was great interest and success in bidding up the one-bedroom units, but the market didn't react favorably to the two-bedroom unit given the projects limitation of one (1) underground parking space per unit.  It became obvious that in a good market property defects or project design flaws do not appear to have as detrimental an impact on pricing.  Whereas in a down-market such defects or flaws are glaringly obvious, come under great scrutiny, and appear to have a significant detrimental impact on pricing.

On two of the one bedroom units the builder achieved roughly 83% and 85% of his target price and he is holding firm.  From what we (DU case study participants) observed, it would appear that there was enough critical mass of bidders (owner occupants; not investors) to suggest that for the weekend of the 5 Day Sale auction, that the offers were reflective of the market at that time, which given the current economic malaise, was an accomplishment in and of itself.  This was understandably disappointing to the builder.

The builder was impressed with the 5 Day Sale auction undertaking, as it generated great market interest and exposure for the project, created buyer activity where none existed before, produced excellent direct market feedback on the project's attributes and limitations, resulted in 15 offers for the 4 units, and may still possibly conclude with the sale of a unit in an extremely dysfunctional marketplace.

Lastly, the builder confided to us that since the offers fell below his break-even pro-forma unit price points,  that the proceeds from sale would go directly to the bank in order to pay down the note.  As such, the builder felt that he would have more leverage with the bank to renegotiate his construction loan terms by not accepting the market offers generated from the 5 Day Sale auction at this time.

Opinion:

We believe that the builder of Franklin Towers Lofts was correct in retaining www.AuctionBySeller.com (ABS) to pursue the modified 5 Day Sale auctioning strategy.  ABS avoided any potential conflicts of interest, and provided a high level of auction administration, marketing, education and support services at a fraction of traditional auctioning service fees.  This was accomplished through their online 5 Day Sale auctioning platform and expertise, and generated more sales activity and offers than had been generated since the builder received his certificate of occupancy (CO) on the new loft project in August of 2008.
ABS worked "side-by-side" with the builder, who proactively assisted and shared in the risk of marketing and administering the auction, and the effort resulted in direct market feedback and perfect information regarding the “true market value” of the selected project units for the weekend of the auction.

While everyone involved had hoped that the builders break-even price points would have been met, two of the three “best bidders” were unrepresented by buyer’s agents, and would have saved the builder an additional 4% in commissions thereby netting him more sales dollars had he accepted any of those two offers.

Finally, the results of the 5 Day Sale auction gave the builder the direct market feedback he needed to map out a new exit strategy for the project, which includes both a change of the current listing brokerage firm      (who frustrated the builder by not cooperating with the auction effort) and to lay the foundation for construction loan workout discussions with his lender.

 

DU Case Study Participants:

Kyle Cascioli
Adjunct Professor
Franklin Burns School of Real Estate & Construction Mgmt.
Daniels College of Business
University of Denver
2101 S. University Blvd.
Denver, CO 80208

Sean Adair                                          
Student
University of Denver

Ryan Burkhardt
Student
University of Denver

Oleysa Davidenko
Student
University of Denver

Jim Francescon
Student
University of Denver

William Joseph Nowack
Student
University of Denver

 

   
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