Distressed property sales go upscale

More than 170 people crowded the ballroom of a Long Beach hotel for what amounted to an upscale fire sale.

The event was an auction. The products were 38 posh waterfront condominiums. And bidders like Mike Murphy came looking for bargains.

The Internet marketing worker snapped up a two-bedroom unit for $376,000, less than half the original price. In all, he and other eager buyers ponied up $14.9 million in less than 90 minutes.

Last Monday's event represented the latest evolution in distressed-property auctions: These last-resort sales are going high-end. In contrast to auctions of foreclosed homes, which are as ubiquitous as trashed houses in the suburban hinterlands, these sales involve brand-new, often luxurious condominium units in prime locations.

Across Southern California, projects conceived during the housing boom, but completed after the bust, are sitting largely vacant. Developers are desperate to unload these units, but they face some particular challenges. Banks often won't provide mortgages to buyers in buildings that are less than 50% occupied, reducing the pool of eligible purchasers. Converting the projects to rentals means even steeper losses because the cash flow often won't cover a developer's construction costs.

Condo developers are now hosting their own auctions to attract a critical mass of buyers fast. It's a practice that Irvine real estate consultant John Burns projects will become more widespread this year.

"I don't think you have much choice," he said. "You either turn it into an apartment rental complex or find some other way to turn it into 50% occupied very quickly. An auction seems like a logical choice."

Real estate values continue to fall across much of Southern California, keeping many buyers on the fence for fear of paying too much. An auction gives them real-time assurance that the price is set by an open, competitive process, not the seller's whim, said David Parsky, director of West Coast investments for Citi Property Investors. That's a unit of Citigroup Inc. that is the controlling owner of West Ocean Two, the Long Beach building that auctioned its units last week.

"If people don't have to buy, they're not going to unless there's a reason," Parsky said. "If the market had more demand than supply, we wouldn't be doing this."

Other recent auctions include new condominium projects in downtown Los Angeles and South Pasadena. More are coming in places including Pacific Palisades and Playa del Rey.