Real Estate

October 28, 2009

Ocracoke Real Estate: Anatomy of an auction of island properties

By B.J. OELSCHLEGEL

There was a slight pounding in my chest and my hands were shaking. I was thankful to be accompanying a prospective buyer as opposed to bidding for someone else or making my own bid. I have no experience with an auction of any kind. I was standing in totally unknown territory. The prospect of witnessing momentous real estate purchases on Ocracoke was exciting.

The anticipation of great deals in action was heightened by the buzz circulating around the village for several weeks before the auction.

“What do you think they will go for?” was a very common question. And there was, “How is it going to work?” Someone who had been to a real estate auction told me how there is a strategy involved with auctions. Interested buyers needed to confer with other buyers to determine who wanted what and the increments of price increase they could expect from one another.

I swear it all moved so fast, it felt like a lot of flying by the seat of one’s pants.

I would like to attempt to describe the lead-up to the eventful day of the auction over Columbus Day weekend.

As properties begin to spiral down after countless efforts to restructure and refinance, the owners list their real estate for sale in hopes of digging out of the hole. Two residential units and one commercial unit were sold prior to the foreclosure. These sales were not enough to tip the scales. Ultimately, the loan was unable to be repaid to the bank.

When a borrower defaults on a loan, the bank is forced to enter into foreclosure proceedings. At this point the bank becomes the owner of the property and accepts all of the assets and the liabilities. The assets would be the existing rental income from both the commercial and residential units, not sold prior to the foreclosure. The residential income was derived from both weekly and monthly rentals. The liabilities would be the condo fees for each of these units. These condo fees cover expenses such as repairs and maintenance, taxes, common area utilities, the insurances, pool maintenance, and the reserve for future big expenditures.

The clock had been ticking. The income may have offset the outlay, but banks are not in the habit of owning property. They basically just wanted their investment repaid. The banks put these units back on the market for sale, at reduced prices.

The residential units were listed locally, and the commercial was listed through a commercial broker in Nags Head (with local ties). Whether it was because of the economy or the knowledge that eventually an auction would occur, the sales did not come fast and furiously.
After more than a year, it came time for the bank to take the next step of scheduling an auction of the property. The intention was to take the proceeds and satisfy the debt and any accrued interest and legal expenses.

As we approached the date of the auction, there were two residential offers that were accepted by the bank and two that were rejected. These buyers wanted certainty about their transaction rather than take a chance at an auction. Consequently, these accepted contracts had selling prices that were higher than we would have expected out of the auction. The contract for a two-bedroom unit sold for $201,000, and a one-bedroom penthouse went for $140,000. The bank also closed, at $150,000, on a residential studio apartment that had been in the works before the auction was set. The bank was hoping that these pre-auction sales would set the bar for the public sale.

The commercial broker worked closely with the bank and the auction company to prepare the details of the auction. Once the details were worked out and the package was prepared, the bank signed a contract with the auction company. This company took over the advertising and orchestrating of the auction. A Web site was put up as the source of all the details for the sale. This public notice, along with a hearing before a judge or clerk of court is a requirement of any foreclosure proceeding.

Initially, the auctioneer was going to auction off individual units to the highest bidder. On the day of the auction, not enough bidders were registered and so the rules changed. The new plan was called “bidder’s choice” -- the award went to the highest bidder and that person could choose whatever unit or group of units he or she desired. The next highest bidder in that round was then offered the opportunity to purchase one or more units at the level of that winning bid.

Once the bid was awarded, there was an additional fee of 10 percent of the bid which went to the auction company. It was called a “buyer’s premium,” but felt a whole lot more like an auctioneer’s premium.

In the first round, the first highest bid was $180,000, and a two-bedroom residential unit was chosen. The second round saw $180,000 as the highest bid and a second two-bedroom residential unit went.

There were a total of eight rounds, and the results are listed below. Please note that only the real estate was being sold at this auction, not the businesses that lease the real estate. I am using the names of these businesses merely as landmarks:

•    Third Round: The highest bid was $137,000, with premium $150,700, per unit for the units commonly known as Ocracoke Restoration, Zillie’s former location, the studio apartment above these commercial spaces. The second highest bidder took the opportunity to purchase a two-bedroom condo at this rate of $150,700

•    Fourth Round: The highest bid was $125,000, with premium $137,500, per unit. The Ocracoke Foundation took three two- bedroom units and one studio apartment in an effort to provide affordable housing for future teachers and public employees.

•    Fifth Round: The highest bid was $112,000, with premium $123,200, for the end unit that had been used as the office, when the project was a hotel.

•    Sixth Round: The highest bid was $57,000, with premium $62,700, for the commercial unit commonly known as The Gathering Place.

•    Seventh Round: The highest bid was $57,000, with premium $62,700, and the bidder took the two commercial units commonly known as The Sunglass Shop and Intimate Apparel.

•    Eighth Round: The highest bid was $54,000, with premium $59,400, for the commercial unit commonly known as The Bead Shop.

A lot of people fear that these auction sales will affect our market values.

My understanding was that because the auction sales were not open or free-market sales, they should not be given weight when working on an appraisal. My real estate text book defines free market as “the area of economic activity in which buyers and sellers come together and the forces of supply and demand control their dealing with each other.” An auction is missing the “demand” component. The reason why folks were considering this purchase was because of the potential for an incredible deal.

However, I was wrong.

I spoke with John Hunter, who has been doing appraisals on the island for many years, and he straightened me out.

“When the majority of sales in the market are foreclosures, short sales, and sales of duress, they have created the market by the shear number of these kinds of sales,” he said.

There were 18 units sold at the auction -- six commercial and 12 residential. There have only been 12 other sales on the island for the year. The auction of those 18 units created the market.

This auction will have an effect on comparable sales for like properties, such as other condo units, being sold on the island. Detached, single-family dwellings will not be affected by the sales activity over the weekend of the auction.

I discovered a final point of interest in completing my research. According to The North Carolina Real Estate Commission 2006-2007 Manual, “virtually all deeds of trust used in NC today grant the power to sell the property in the event of a default by the borrower.”
This part we knew, but here comes the interesting portion: “The proceeds from the foreclosure sale are applied first to satisfy the underlying debt plus accrued interest on the debt and legal expenses, and next to any liens which have been attached to the property. Any remaining sale proceeds are then paid to the borrower-property owner.

If however, the proceeds from the foreclosure sale are insufficient to pay the debt, then the lender has the right to sue the borrower-property owner for a judgment for the unpaid portion of the debt.”

It strikes me that a foreclosure and a subsequent auction provide legal closure, for both parties, in a failing financial relationship, but little satisfaction.

(B.J. Oelschlegel has lived on Ocracoke Island for 32 years and has worked in the real estate business for 26 years. She is a broker with Ocracoke’s Lightship Realty and a real estate columnist for The Ocracoke Observer. You can reach her by e-mail at bj@ocracokelightshiprealty.com)