Lennar Tries Web Auction
To Battle Housing Slump

Last November, Allen Harper says he made an offer of $390,000 for a brand new three-bedroom house in a development sprouting here in the desert east of Palm Springs. Home builder Lennar Corp.'s response: No thanks.

Six months later, Lennar jumped at the opportunity to sell the home for that very price to Mr. Harper, a 42-year-old golf course construction engineer. So he scooped it up Monday in a rare online auction that attests to the lengths a major builder will go to jump-start sales of vacant homes. The event also signaled there will be no quick exit for home builders from their current doldrums. (Not all markets are slumping; see story.)

Last year as the housing market weakened, Lennar was among the first U.S. home builders to aggressively discount homes in order to move inventory; now the Miami-based company is placing another potentially trend-setting bet by testing eBay-style Internet sales in the housing market.

Online auctions for homes are on the rise nationwide, but they are typically held by desperate homeowners or banks unloading foreclosed properties, not by major builders pushing blocks of brand-new dwellings.

The experiment in Indio is proving that changing home buyers' habits isn't easy. During the set auction period, the 14 Lennar homes garnered 692 bids but not one that met undisclosed reserve prices, the minimum price Lennar deemed acceptable. Mr. Harper's $386,000 tender was the highest received for houses with list prices of up to $460,000.

Lennar agreed to sell after coaxing Mr. Harper, who was still competing with one other bidder, up to $390,000 minutes after it revealed the reserve prices at the end of the auction Monday.

Lennar sealed two other deals that day for about the same price; the sales depend on buyers obtaining financing.

"There are a lot of home builders watching this auction," says Tony Isbell, chief executive of RealtyBid.com, the online-auction site that conducted Lennar's 20-day event. From his point of view, the sale is a big success, drawing more than 23,000 Web-site hits and about nine bidders per property, as opposed to RealtyBid.com's average of about four. Sales picked up yesterday in a postauction phase as Lennar lowered its reserve prices, and Mr. Isbell expects that most of the homes will be sold.

Lennar reacted cautiously to the outcome. "We are happy with traffic levels," Chief Financial Officer Bruce Gross says. "We will evaluate it and see if we want to use [an Internet auction] somewhere else in the country."

Mr. Gross says the auction is meant as a marketing tool to create buzz and entice buyers to Palm Springs and the Coachella Valley, where pockets of the market are oversupplied. This vacation and retirement area was a magnet for speculators and second-home buyers during the housing boom, and builders also bet on growth among middle-class buyers who were priced out of Los Angeles suburbs.

But when the market turned, many buyers canceled their contracts and left Lennar and others with a glut of vacant homes. To be sure, prices haven't dropped in all segments of the greater Palm Springs market, particularly for many high-end custom-built homes. But for more modest homes, it has become difficult to find buyers as lenders have tightened financing.

Lennar's online sale, says Mr. Gross, is part of a strategy to "try different things in a challenging time to find out how we can convert inventory to cash at a faster pace."

In the quarter ended Feb. 28, Lennar's net profit fell 73% to $68.6 million from a year earlier, its orders for new homes dropped 27% and its average selling price fell 7% to $303,000. The California slump is especially painful because it has been the most profitable of 15 states where Lennar operates.

The Internet-auction gambit is perhaps the most creative example of Lennar's moves to cut prices to sell homes, an approach that may help the company weather the downturn better than many of its competitors. "They are much better strategically positioned by moving through assets and getting returns today as opposed to waiting for a sunny day," says Credit Suisse analyst Ivy Zelman, a housing-market bear. But the flip side is that an auction smacks of desperation and may deter already skittish buyers who are worried that the market could further soften.

For its inaugural online sale, Lennar put up 24 residences in three locations, a small but representative sample of the company's extensive holdings in the Coachella Valley. In addition to the Indio community where Mr. Harper bid, Lennar offered two million-dollar-plus homes in upscale Rancho Mirage, which was also a closeout sale, and eight condominiums to launch a new development in La Quinta. None of the properties fetched their reserve prices during regular bidding, but yesterday Lennar agreed to sell a home for $1.1 million that had been listed at $1.4 million.

Bidders didn't have to prequalify to participate in the auction, but any auction winners would have to go through normal processes to secure financing. To receive certain incentives, potential buyers had to be qualified by a Lennar-designated lender.

Auction participants had to register at RealtyBid.com and enter bids through its Web site, using a log-in name. Bid amounts and log-in names were displayed in real time, and participants could be notified by email when a certain property received a new offer. Often bids were surpassed by others within seconds. When the official auction ended below the reserve price, Lennar contacted bidders with that price, and RealtyBid.com took fresh offers online. Successful bidders must pay RealtyBid.com a fee of 2% of the sales price.

Lennar took pains to avoid the appearance of a fire sale -- even instructing salespeople not to refer to it as an "auction." Buyers must sign an antispeculation agreement, pledging to hold the homes for at least a year. By setting reserve prices, Lennar has given itself cover for refusing to sell, though the benchmarks are flexible, auction participants say. The pressure is evident: Lennar has stipulated that auction homes must close escrow this month, so it can book the sales this fiscal quarter.

The Indio development at the center of Lennar's online auction bears witness to the housing slump. Built around an artificial 20-acre lake and near a golf course that was once home to professional "skins" competitions, Terra Lago encompasses five neighborhoods being developed by four builders. A freshly opened clubhouse has swimming pools, a fitness center and a plush reception hall, as well as an information office displaying discounted home prices and special incentives. Some 250 families live in Terra Lago, whose first phase calls for 635 homes.

Lennar has two of the subdivisions, but the 14 houses it has been selling online come only from the more expensive 84-unit Marquesa neighborhood. The other Marquesa homes had already been sold conventionally, some for more than $500,000, but new residents say they received sharp markdowns. John Nelson moved from a nearby town two months ago after Lennar accepted an offer, he says, that was $85,000 below list price.

The Internet auction certainly spiked interest in the Lennar homes. Saleswoman Carol Corcoran fielded inquiries from as far away as Canada and Hawaii. Hundreds of shoppers visited the homes in person, including representatives of rival builders doing reconnaissance work, Lennar employees say. In the end, there was spirited competition for several homes, but just 34 actual bidders.

One of them was Kristin Trom, an Orange County lawyer. She learned about the auction from a pop-up advertisement on her computer and spent six hours in Indio last week. Intent on winning a vacation home, Ms. Trom canceled her appointments Monday, the final day of bidding, so that she could monitor the auction on two computers: one tuned into RealtyBid.com and the other logged into her email account where she received real-time alerts when she was outbid. She emerged as the top bidder for one house, but her $350,000 offer is far below the reserve level. "Looks like we won the battle but not the war," she says with resignation.

Yesterday, she officially lost: Her coveted house received a postauction offer at the reserve price of $390,000.

Seattle resident Ken Crow, who owns a condo in nearby Palm Desert, decided to bid after monitoring the area's steadily declining prices. A year ago, he considered making an offer for a Lennar Marquesa home that listed for $530,000. On Monday, his highest bid was $377,000, but he was beaten out by competing offers for two homes after the closing bell. He says he's out of the running for now. "I would only buy one of those houses if I could get it at a ridiculously low price where I couldn't get hurt in this market," he says.

Mr. Harper, the successful bidder, ended up with the high offer for four of the 16 homes. Even as he agreed to a price for one, he received emails from Lennar offering a discount on an even larger home.

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