Not 'Even Worth Giving Them Our Name': Why Most Foreclosure Auctions Don't Actually Result In Sales

It was an uncharacteristically dreary day in Los Angeles County when a full-block Pasadena office property hit the auction block with a $114M opening bid — less than half its prior sale price. Despite the attractive price point and the many selling points of the Pasarroyo office complex, the results of the auction were equally glum.

The no-frills public auction was held on the steps of the Pomona Public Library, a low-slung, pasty beige building in Pomona, California. About one dozen people attended, toting folding chairs.

About half of those in attendance were there because of the Pasarroyo building. But when the time came to bid on the 640K SF property, the crowd was silent. No one bid and the property remained with its lender, Heitman. 

It’s a scene playing out on courthouse steps and under awnings of municipal and county buildings in greater numbers across the country. With commercial real estate loan distress at a 10-year high, foreclosure auctions like these are growing increasingly common.

Office properties in Houston, Miami and Washington, D.C., an apartment building in Atlanta, and one Margaritaville-themed hotel have gone to auction in the last five months, to name a few.  

The story for the Houston property, for example, is nearly identical to what played out in Pomona last month. Four Westlake Park, a 588K SF office building, went to auction for less than half of its previous price. No bidders emerged and the building’s lender, Pacific Life Insurance, took the building back.

No property type is immune from the kind of financial distress that can lead to a foreclosure auction, but with an estimated 44% of office properties nationwide underwater on their loans, they are the most likely to end up on the block right now. However, going to auction rarely means that a building will actually end up with a new owner.

In 15 years of running auctions for her company, Beacon Default Management, CEO Selina Perelskin said she’s only once seen someone show up with a full-bid check and buy a property at auction, and it sold for $6M. Beacon specializes in auctions for CMBS-financed properties, collateralized loan obligations and big-ticket properties like the one in Pasadena, decreasing the likelihood that a slew of bidders will show up.  

One of the biggest roadblocks to anyone actually buying a high-dollar property at auction is the fact that buyers are usually required to show up with a cashier’s check for the full amount they intend to pay.

“No one’s going to come with a $200M check,” Perelskin said. 

Instead, interested parties might approach the lender separately after the auction and try to work out a more traditional deal with financing.

Auctions like the one in Pomona are the result of nonjudicial foreclosures. They are a way for a lender to take back a property that secures a debt that has defaulted or where loan terms have been violated. It’s generally a quicker, less expensive way to foreclose than going through the judicial process, industry professionals said. In many states, nonjudicial foreclosures are a popular option for these reasons, even though the resulting auctions are usually lackluster.

Another reason not to bid is the same sticky wicket holding up many kinds of transactions these days: The prices are too high. In the residential world, foreclosure auctions are marketed as a place to score a good deal, but the bid-ask gap appears alive and well at commercial real estate auctions. 

Atlas Capital Advisors principal Bert Haboucha went to a foreclosure sale in mid-November for a small office building on behalf of a family office. Haboucha and his client were hoping that the property would hit the auction block at a significant discount to the outstanding debt on the building, an amount he didn’t disclose. When he arrived at the auction, he found the opening bid was the full amount owed on the property’s defaulted loan. He went home without placing a bid. 

“We were thinking of a much different number,” Haboucha said, referring to the difference between the amount his client was willing to pay and the opening bid. “It wasn’t even worth giving them our name.” 

A discrepancy between opening bids and would-be buyers’ expectations took place in the sale of one of New York City’s most famous buildings in a slightly different type of public auction last year. After a false start involving a winning bidder at nearly $190M, a group led by Jeffrey Gural ended up purchasing the iconic Flatiron Building in Manhattan for $161M. 

Gural was present at the first auction but wasn’t willing to go to $190M for the property.

“We would have liked to purchase it for a lower price,” Gural told Bisnow at the time. "It's a trophy property ... but we need another $100M to renovate the building.”

Gural and his group got another chance when the initial bidder failed to put up the $19M deposit for the property.

Kathleen Muñoz, a Dallas-based partner at Hunton Andrews Kurth, said even in her busiest years of foreclosing in the aftermath of the Global Financial Crisis, 95% of the auctions didn’t have a viable bidder show up and the lender would execute a credit bid and take the property. 

Still, these auctions serve a couple of important functions for firms trying to get a distressed property back on even footing.

If there are no interested buyers — if no one has approached the lender and started to negotiate to buy the loan, for example — and the lender wants to take the property back, the auction is a critical part of taking the title back cleanly, Cox, Castle & Nicholson Partner Katherine Bissett said.  

By going through the auction process, the lender, assuming it is the senior lienholder, is able to wipe the slate clean of most junior liens and other issues that could have cropped up on the title since it issued the deed of trust, such as mechanic’s liens. The foreclosure sale makes that slate-cleaning possible, Bissett said.  

“That’s really the benefit of the foreclosure,” Bissett said. 

Perelskin told Bisnow that about 25% of the auctions her company announced in 2023 actually happened. Most of the properties didn’t make it to foreclosure auction. Perelskin says she doesn’t know exactly why the auctions didn’t happen as planned. For example, a property’s note could sell to a buyer outside of the auction process, or the borrower and lender could come to an agreement that avoids a sale. But she anticipates the ratio will shift this year, with more borrowers losing their properties and more of those properties heading to auction than last year. 

A lot of the assets that needed to secure a loan workout or get refinanced started long before their respective financial deadlines cropped up, Perelskin said. Many have secured those new loans, but the ones that still can’t get new financing are the ones she expects will end up at auction. 

Muñoz said while it’s hard to predict so early in 2024 how lenders will deal with distressed properties, she did note that she anticipates a shift in the way things have been done so far. 

“At this point, there's been a lot of room and willingness on the part of lenders to do workouts, forbearance agreements and work with the borrowers, rather than take over, especially with office buildings. I don’t know that lenders really want to take ownership in the current market,” Muñoz said. 

But, “I think at some point, patience will start wearing thin and people will have to start moving forward with taking control of properties,” Muñoz added.