Auctioneer's Perspective

I spoke with Carl Carter, public relations manager for J.P. King, following the auction of 40 condos at The Hamptons at Tampa Palms. 171 bidders from 15 states arrived and 40 units were sold. The planned sale was 40 absolute with another 60 units with a minimum bid. In addition, there were another 160 the developer still owned and wanted to sell. The following are excerpts from that interview:

Mish: Can you describe the auction?

Carter: The auction was in a format called “high bidder’s choice.” The winning bidder had a choice of condos in pools of similar picks, typically by unit size. There were one-bedroom, two-bedroom, and three-bedroom pools being auctioned, and the high bidder had his choice of units remaining in the pool.

Mish: How many units of each type were sold?

Carter: 20 two-bedroom units, 15 three-bedroom units, and five one-bedroom units.

Mish: What was the price range on the units sold?

Carter: $130,000-200,000. Total auction proceeds were $5.9 million.

Mish: Does that include auction fees?

Carter: Yes.

Mish: What is the primary reason developers are resorting to auctions right now?

Carter: Condo sales by normal methods are practically dead and carrying costs are eroding the developers’ anticipated profits. Sellers are looking for a way to preserve profits or minimize their losses.

Mish: What happened?

Carter: In short, developers overbuilt. The market was distorted by speculators who were flipping units for a quick profit, and that made it look like demand was higher than it was. When the speculators disappeared, reality set in. That reality is coming as a huge shock to many developers and flippers alike: Units are just not going to be sold for prices anywhere close to what was being offered a year ago — no matter what marketing method is used. In many instances, flippers are competing with developers to sell units. This is pushing prices down.

Mish: Is this a Florida thing only?

Carter: No, but Florida probably has the biggest oversupply. We are getting calls from developers every day, and several attended the Tampa auction just to see how it works. Some developers who last year had never even thought about an auction are seriously considering it. We have done condo auctions recently in Door County, Wis.; Austin, Texas; Florida; Alabama; and Michigan.

Mish: What about supply and demand issues?

Carter: Demand is still very weak, and supply is still increasing. From that perspective, it just seems very unlikely that we are close to a market bottom.

Mish: Are you speaking nationally or just about Florida?

Carter: I am speaking nationally, but when it comes to the oversupply, Florida’s the national situation on steroids.

Mish: Was the auction a success?

Carter: Definitely. We had 171 bidders from 15 states — more than four bidders there for every unit we sold. That’s a good turnout, which tells us we got the current market value. The developer would have offered 60 more units if the prices had been running higher. This is simply a weak market. Still, 40 units is a lot of units to move in a weekend, and the developer is happy to have reduced his carrying costs significantly. From the point of view of the buyers, many are pleased with the bargains they received.

In a response to a question as to “developer interest,” Carl Carter informed me that approximately half a dozen developers showed up to witness the auction. Obviously, those developers wanted to see how things went.

Previous Listing Prices

Carter noted that previous asking prices on the condos were in the neighborhood of $181,000 for the one-bedroom units, $239,000-289,000 for the two-bedroom units, and $309,000-340,000 for the three-bedroom units. He believed those to be average prices.

A link from NewCondoReality showed prices and numbers of units to be as follows:

1 Bedroom — from $169,000
2 Bedroom — from $220,000
3 Bedroom — from $299,000

As of Nov. 4, there are 70 units out of 300 units already under contract.

Let’s Do the Math

Giving everyone the benefit of the doubt, let’s assume the original prices offered/paid were at the low end of the range, as opposed to the average prices that Carter quoted:

5 one-bedrooms: $169,000 * 5 = $845,000
20 two-bedrooms: $220,000 * 20 = $4.4 million
15 three-bedrooms: $299,000 * 15 = $4.485 million

Total: $9.73 million

Auction total: $5.9 million

Subtracting a 10% auction fee, the revised auction total net $5.31 million to the seller.

Quick math shows that any investor who bought at last year’s prices is now 45% underwater on average, not counting maintenance fees, property taxes, insurance, interest payments, etc. Note too that the developer is still holding 60 additional units he was hoping to unload at the auction, but failed to. The developer also has an additional 160 units waiting in the wings. Pent-up supply?

The only units sold at the auction were units offered on an unconditional basis (no minimum bid). Inquiring minds might be wondering if this auction was really a “success.”

Shell-Shocked Comparison

Please consider “Shell Shocked in Key West” for comparison purposes:

“Before the start of the auction, Slokumb had estimated 100 people would attend the event, but more than 200 showed up, with 58 registering to bid. Many chose to hang onto their bidding cards, and those who did bid were cautious. Absent were ‘bidding wars’ with people vying back and forth for the highest bid while the price climbs higher and higher. Instead, most were content to let the property go to someone else for a lesser ‘bargain.’

“None of the asking prices was met. The closest bid fell $149,000 short, while bidding on the most expensive property, located at South Street, fell more than $2.5 million shy of the almost-$6 million asking price.”

Not a single home sold at that Key West auction. By comparison, the Tampa auction has to be considered a rousing success. How else can one look at it? What was the difference? The difference is “unconditional” versus “conditional.” There was no minimum bid required on the 40-unit J.P. King Tampa auction. There was a minimum bid on the Key West units.

Please note that I am not attempting to make a hero or a goat out of any auctioneer. Some of the terms and conditions of the auction are set by the sellers, not the auctioneer.

Pent-up Supply

Let’s now return to a question I asked Carter:

Mish: What about supply and demand issues?

Carter: Demand is still very weak, and supply is still increasing. From that perspective, it just seems very unlikely that we are close to a market bottom.

Can anyone doubt Carter’s reply? Indeed, 40 units sold, but how many of those were to the next flipper hoping to unload at a higher price? Did this auction, no matter how successful, reduce any supply? Even if it did (which is debatable), what about the condos still under construction in Miami, Tampa, Las Vegas, San Diego, Chicago, Boston, D.C., Seattle, and countless other places?

What have we learned from this?

  • Units will sell at an unconditional vs. a conditional auction
  • Conditional sellers are still too stubborn about price
  • Anyone “needing” a particular price likely cannot get it
  • Condo prices have declined 40% in some locations, and we still are not at the bottom
  • Carry costs are mounting
  • There is still pent-up supply.

Final Thoughts

Panic has still not set in, but it will eventually. That event could be years off.

Mike Shedlock ~ “Mish”
December 13, 2006

The Daily Reckoning