Why Do Wealthy People Auction Multimillion-Dollar Homes, Rather Than List Them?
Count Spaur zu Flavon und Valer’s family had lived in its 80-room castle in the Dolomites for more than 650 years; having recently poured more than €10 million ($11.25 million) into its restoration, the count decided in 2012 that it was time to sell. And then the castle, which was priced at more than €30 million, languished unsold for four years.
Halfway around the world, in Mendocino, Calif., Rudy and Linda Light, the owners of a 1,750 ranch in Mendocino, had watched their property languish on the market for the better part of two years. Priced at $8 million and boasting a 7,500 square-foot mock-Victorian house, the listing had failed to attract buyer interest.
After losing patience with traditional real estate brokers, both owners (independently) decided to take a risk and put their properties up for auction.
The Lights’ property, which is being sold by Miami-based Platinum Luxury Auctions, has a reserve price of $3 million, meaning the property can’t sell below that amount. The castle, which is represented by New York’s Concierge Auctions, doesn’t have a reserve price, which means that technically, it could hammer for $1.
While frustration with the traditional sales process is a factor in sellers’ decisions, it doesn’t fully explain why already wealthy owners would opt to swing for the proverbial fences–especially with the potentially frightening consequence of a low sale, or the stain of a failed auction. So why do they go to auction?
“It’s a combination of several factors,” said Trayor Lesnock, the president of Platinum Luxury Auctions. “First, it’s because the property’s situation is usually a unique one, which means the seller has trouble pricing it, and the buyer has the same problem.”
In the case of the Mendocino ranch, “It’s a beautiful property, but when you get down to it it’s a complicated property,” Lesnock explained. “It’s in California, where there are water conservation requirements and measurements going on that a buyer would have to comply with.” Those complications have obviously deterred buyers, but by holding an auction with a dramatically undervalued reserve, Lesnock said they can draw a relatively robust pool of buyers. “We expect three, four, maybe five bidders,” he said.
The rationale for selling the castle at auction was a little different. Yes, it's obviously a unique property—just look at that living room—but, at least in Concierge Auctions’ telling, the real impediment to a sale has been the castle’s lack of visibility. “Our process offers an intense exposure period and a much wider audience,” said Paulina Kimbel, director of business development at Concierge Auctions. In other words, a lot of castles are for sale, but there’s only one castle you could potentially buy with your pocket change. That’s the kind of offer that draws headlines, which draw bidders, which results, it is hoped, in a buyer.
As magical as it might be to imagine buying a life as an Italian squire for less than the price of movie ticket, take note: The castle might have no reserve, but Concierge, along with many other auction houses, has a few tricks up its sleeve. First it solicits pre-bids, effectively establishing a reserve price ahead of the auction. “Before the auction begins, we know what our opening bids are,” said Laura Brady, Concierge Auctions’ founder. The pre-bids are incentivized, she said, by a credit on the purchase price, which varies from property to property. The castle’s credit is a 10 percent discount on pre-bids of €10 million or more.
Next, the auction reserves the right to cancel the sale before the auction begins, so if there aren’t any pre-bids, or if there’s minimal advance interest, the seller can back out before disaster (i.e., a €35 million castle selling for $100). “We’re very transparent with our sellers about the activity we see leading up to the auction,” Brady said.
Both Concierge and Platinum auctions charge a 10 percent premium on the purchase price. Brady, the founder of Concierge, said that this year her company will auction about 140 properties with an average price of $3.8 million. Lesnock, of Platinum, said he holds about 25 auctions a year with an average sales price of $4.6 million. Both say their businesses are growing annually.
“Our client base has shifted,” Lesnock said. “It’s gone from people who are selling their third, fourth, or even fifth homes, to older folks who are downsizing.”