HOUSING: Builders struggle to sell, turn to auctions

Though sales jump, new homes still standing

By ZACH FOX - Staff Writer | Tuesday, October 7, 2008 7:21 PM PDT ∞

Over the past year, auctions of beaten-up foreclosures have become increasingly prevalent as a sales tactic. Now, as the nation's financial infection spreads, new, upscale "estates" are popping up for auction, with starting bids 50 percent off the original price.

Case in point:

Shone Wang, president of Los Angeles-based developer National Security Construction, purchased a 14-house subdivision in Escondido after its original builder could not pay the construction loan. Most of the properties are sprawling ranch houses of about 4,000 square feet sitting atop a ridge overlooking East Valley Parkway.

Because of the slow market for new houses, Wang said he had to turn to an auction to sell the upper-scale products.

Originally listed between $825,000 and $1.2 million, the houses, known as Windstone Estates and located in east Escondido, will go to auction this Saturday with prices ranging from $385,000 to $575,000, a discount of about 52 percent. Unlike many foreclosure auctions, the houses do not carry an unpublished "reserve price" that would allow the seller to reject final bids not high enough.

Despite improvements in overall house sales, builders have struggled to sell new houses. Defaults on construction loans have started to pile up as builders said they could not sell houses for a profit and the few interested buyers could not qualify for loans.

"It's almost impossible," said Tom Dobron, chief executive officer of Innovative Communities, an Escondido builder. "Every one of my projects is in default, and it just didn't have to be that way." Dobron and others point to banks, saying lenders unreasonably froze credit lines.

Not all developers report such dire straits, and buyers have been able to take advantage of distressed builders.

New home sales still lag

Higher-end houses, on average, have not fallen nearly that much ---- the sector has dropped about 20 percent from a 2006 peak in San Diego County, according to Standard & Poor's Case-Shiller Home Price Index.

Wang said he purchased the houses from Bank of America for $5.9 million and spent an additional $2 million finishing the project. That means if the houses sell at the minimum bids, Wang's company would lose about $700,000 on the project.

But Wang said he thinks the auction will drum up enough excitement that buyers will bid up the houses enough for his company to turn a profit. However, he is selling in a market where sales are down 30 percent from 2005 and prices have fallen each month for the last two years. And though a boom in foreclosure sales has pushed sales up from a year ago, new home sales still lag.

"If you tell anyone, 'I'm going to buy a house,' today, everyone would laugh at you," Wang said. "So the only way we can sell these is through an auction."

Wang said he saw the real estate downturn coming in 2006 and halted new construction on his company's projects. Still, Wang said dodging the great crash was more luck than foresight.

Online auction

And with a seize-up in the credit markets over the last two weeks, Wang said the other developers interested in Windstone Estates ---- whom he outbid ---- might have been the smart ones. Lenders have cut off issuing loans to even the most creditworthy businesses and builders are worried qualifying for a mortgage will become even tougher.

"If I put this project up for sale two months ago, I would have no worries," Wang said. "But now, with the financial crisis, I have worries."

Another Los Angeles-area developer is turning to an auction to move brand-new houses. The 34-house subdivision is based in San Jacinto, a northern Riverside County city. It has drawn plenty of interest from potential buyers in Murrieta and Temecula. In another twist, the auction is online and interested buyers can submit bids on a Web site through Oct. 23. People wanting to place bids on the homes should visit fre.com.

"At this time, who knows how long it would take to sell all 34 homes? That's just a scary thought for someone in real estate," said Kelly Lovegrove, director of operations for LFC Group of Companies, the auction house handling the sale.

Michael Pattinson, president of Carlsbad-based Barratt American, has led a campaign to Sacramento and Washington in an attempt to persuade legislators into forcing lenders to make capital available.

Pattinson has shut down construction on all his developments and had to seek outside funding to keep a major project in Santee. "We're 90 percent out of the game for the time being," Pattinson said. "We expect to be back in the game at some stage, but not right now."

Sporadic success

While builders have struggled, auction houses have seen business boom as a result. Lovegrove said auctions with her company have doubled over the last year.

Likewise, Kennedy Wilson, the auction house handling the Windstone Estates project, did two auctions in 2006 and expects to complete 15 to 20 by the end of the year, said Rhett Winchell, president of the company.

However, auctions are not always successful. Dobron, the Escondido developer, said an auction for one of his projects could not have gone worse. Dobron tried to sell 14 houses in the Central Valley project.

Eight sold at the auction and only four or five of those sales actually closed escrow, he said. "It was a disaster," Dobron said. "It's a way to make auctioneers rich."

KB Home, a national builder, has avoided auctions altogether. Instead, the company hopes that building smaller, cheaper new houses will be enough to spur interest.

At its Wildomar development, called Monticello, the developer recently introduced a smaller floor plan that carries a price tag of $249,990.

Escondido-based builder Michael Crews Development also had an unsuccessful auction experience, said Mark Connal, sales director for the company.

Bids for the company's attached project in downtown Escondido were not high enough, so none of the five units sold, he said.

Unlike other troubled builders, Michael Crews Development has not defaulted on its construction loans. And slowly, the company has whittled its inventory down to just nine houses, Connal said.

No one took up Michael Crews on his much-heralded "buy one home, get one free" deal, but all five of the upper-end houses advertised have sold, he said.

Unloading the rest of the houses might be a tall order as it becomes increasingly difficult for banks to finance mortgages.

"We have three in escrow, but I cannot guarantee that they will close because of the credit markets," Connal said. "I've got someone who's putting $200,000 down in cash, but there's no telling whether that will close."

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business.

For pictures of the houses to be auctioned, see Business, Page D-1.

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