Posted on May 17, 2022

When high-priced mega-mansions languish on the market — sprawling, flashy and unable to attract a buyer — some owners turn to a double-edged option: a real estate auction.

The auction block can move trophy properties with nosebleed-worthy price tags quickly after they’ve idled for years. But that comes with a harsh reality.

An auction can act as a metaphorical real-estate guillotine, slicing inflated asking prices in half or worse, according to a CNBC review of recent sales.

The three highest-priced homes ever to sell at auction each came up for sale in the past 14 months. And while each transaction carried an eye-popping final bid, the three mansions saw their original asking prices slashed by 70% on average — leaving a combined $600 million on the table.

It’s an unfortunate fate that could come about again, this time for a dermatologist-turned-developer whose home has an upcoming date with the auctioneer.

Dr. Alex Khadavi, a celebrity skin doctor in Los Angeles, was hoping for a quick sale and big payday when he finally completed a 21,000-square-foot mansion that took seven years and tens of millions of dollars to develop.

But a little over a year after he listed it for sale — with a price tag featuring a string of lucky 7s at $87,777,777 — the doctor’s dreams of cashing out are being crushed by a mountain of debt, unpaid contractor bills, bankruptcy court proceedings and trouble with the law.

Now he’s running low on luck, money and time.

Khadavi, who filed for Chapter 11 bankruptcy protection about two weeks after putting the home on the market, hasn’t lost his sense of humor, though.

“The home is sandwiched between billionaires, and I’m the poorest guy on the block,” he told CNBC with a laugh.

Khadavi admitted he got in over his head developing the luxury Bel Air residence, which includes seven bedrooms, 11 baths and over-the-top features such as a glass-encased industrial elevator, a giant car gallery, a stealth DJ booth that rises out of the marble floor powered by subterranean hydraulics, and a high-tech audio-visual system for projecting a collection of non-fungible tokens, or NFTs, inside and outside the home.

“It kind of became a passion and obsession, and it cost more money than I thought,” Khadavi said.

Public records show Khadavi paid $16 million in 2013 for the lot at 777 Sarbonne Road, which included an existing home he later demolished. Then came a string of seven-figure financing deals, including a sizable loan in 2020 for $27 million.

Those nine years also brought a storm of financial trouble around the property including default notices, a government lien, the looming threat of trustee sales, and two mechanic’s liens filed by contractors who claimed they were never paid for their services.

On top of it all, last year Khadavi was arrested after he was allegedly caught on a surveillance camera in the lobby of his apartment building residence using homophobic slurs and threatening to kill his neighbors, who are a married gay couple. Khadavi pleaded not guilty. He told CNBC he had no comment on the pending case.

Despite all his legal troubles, Khadavi managed to finish the home but said he never imagined he’d have to carry the cost for more than a year while waiting for a buyer who would never materialize. With few options left, he’s surrendered to the fact that his home’s value will soon be determined at auction.

“I can’t carry the cost. I had to do what I had to do,” he said.

Hoping for a quick sale, Khadavi together with the home’s co-listing agents, Aaron Kirman of Compass and Mauricio Umansky of The Agency, decided to auction the house.

“He had a very tight timeline. And he was willing to give up a level of control ... and let the market determine the price in a very tight, elevated moment,” Kirman told CNBC.

The sale will be handled by Concierge Auctions, the leading luxury home auctioneer, and includes a reserve set at $50 million, which means Khadavi won’t entertain offers below that number. The bidding is set to start on April 21, and the auction will unfold over five days — the standard duration for most of the company’s home sales.

“It’s a very short time frame, which could either be good or bad,” said Kirman, who recently partnered with Concierge on the auction of 944 Airole Way, a mega-mansion that was auctioned for a record $141 million.

Khadavi hopes that big sale will bode well for his upcoming auction. While he believes the view alone from 777 Sarbonne is worth his $87.78 million asking price, he admitted he’d be happy with millions less.

“My magic number is $77 million,” Khadavi told CNBC. (His favorite number is 7.)

“I’d like it to be that. It would be amazing.”

Concierge founder and CEO Laura Brady told CNBC the majority of the company’s clients opt for an auction after unsuccessfully trying to sell on their own. But homes that sit on the market for an extended period of time with a sky-high ask aren’t likely to score that price at auction either, she said.

“Those that have been on the market prior to auction, especially if they’ve been listed for a year or more, have a hard time exceeding their prior list prices at auction, as they’ve already been exposed at those prices,” Brady said.

If Khadavi’s home sells for $50 million or more, the modern mansion will command a spot among the priciest homes ever sold at auction.

Here’s a countdown of the top four most expensive sales ever achieved at auction, the massive price cuts they suffered at the auction block and a closer look at some of the key players in each of the mega-deals.

4. Le Palais Royal aka Playa Vista Isle

This 60,000-square-foot, Versailles-inspired mansion located in Hillsboro Beach, Florida, first hit the market in 2015 with a $159 million record-breaking price tag. At the time it was the highest listing price ever for Broward County, which abuts Palm Beach County to the north and Miami-Dade to the south.

The over-the-top home, called Le Palais Royal, was covered in 22k gold leaf accents inside and out and includes several waterfalls along with a 150,000-gallon, resort-size pool in the oceanfront backyard.

The owner at the time was Robert Pereira II, an executive at Middlesex Corporation, a Massachusetts-based construction company founded by Pereira’s father. From 2015 to 2018, the home was on and off the market and underwent a name change from Le Palais Royal to Playa Vista Isle.

In 2018 Concierge brought the mansion to the auction block. Public records reveal the highest bid was placed by an LLC with reported ties to Teavana co-founder Andrew Mack.

The home, plus an undeveloped lot next door, sold for $42.5 million. At the time, the price was the highest ever achieved at auction — yet it was still $116.5 million short of Pereira’s original asking price, cementing a price cut of about 73%.

3. Villa Firenze

Villa Firenze in Los Angeles’ Beverly Park neighborhood reportedly took seven years to build and includes 20 bedrooms and 24 baths, according to the listing brokerage Hilton & Hyland.

The owner was Hungarian-born billionaire Steven Udvar-Hazy, who made his fortune in the airplane leasing industry and is currently the executive chair of Air Lease Corp.

By early 2021, he’d already been trying to sell the home for years.

The mansion first hit the market in 2017 for $165 million, which made it one of the most expensive homes for sale in America. But it sat on the market for four years with no takers, and it was unlisted and relisted several times before the price dropped just slightly to $160 million in 2020.

The $5 million discount didn’t persuade any buyers to jump, and in early 2021 the residence at 67 Beverly Park Court went to auction with no reserve. Concierge ran that auction, too.

Public records show the deal closed in April 2021 for $51 million, including a 12% buyer’s fee and a 1.5% commission split by the brokers on the listing, according to the auction platforms website.

The home was purchased by the Roy T. Eddleman Trust. Eddleman is the founder and former chair of Spectrum Labs, which was acquired by pharmaceutical company Repligen for $359 million in 2017.

Eddleman’s winning bid for Villa Firenze represented a $114 million decrease from the billionaire seller’s original asking price — a bargain at 69% off.

2. The Hearst Estate aka the ‘Godfather’ mansion

The Hearst Estate in Beverly Hills is one of the most storied homes to recently go to auction.

The eight-bedroom, 15-bathroom property was once owned by William Randolph Hearst and made even more famous by films such as “The Godfather” and “The Bodyguard” that featured the distinctive salmon-colored mansion.

In 2016, the home was listed for $195 million. Over the years, it came on and off the market and saw its price tag whittled down to $48 million.

In 2019 the LLC that owned the home was served with a notice of default on debt totaling more than $26 million. And in 2021 the estate’s owner, financier and litigator Leonard Ross, saw his home head to a courthouse auction.

Four listing brokers from three brokerage firms represented the listing, including John Gould of Rodeo Realty and Gary Gold of Hilton & Hyland. Both Gould and Gold were present in the courtroom to witness the billionaire bidding war that ensued.

According to Gould, five billionaires entered the courtroom and the judge started the bidding at $48 million.

“It was exciting,” he said. The judge looked around the room, fielding bids at $100,000 increments: “48-one, 48-two, 48-three ... At about $54-55 million, the first ones started to say, ‘No, too rich for me.’”

With the excitement building, Hilton & Hyland’s Gold said, it started to feel like the once-unattainable price tag could actually be in reach.

“You’ve got all these people absolutely putting their money up ready to make a purchase, sitting there with other people wanting to do the same thing,” Gold said.

“The difference is with these types of sales is there’s no contingencies, the gavel goes down and you are buying that house,” he said.

The top bid brought the final sale price to $63.1 million and transferred the home to Berggruen Holdings, the investment vehicle of billionaire Nicolas Berggruen’s charitable trust.

Each of the listing agents split a reduced commission on the deal, which was approved by the judge.

In October 2021 when the deal closed, the Hearst Estate edged out both Playa Vista Isle and Villa Firenze to become the most expensive home to ever sell at auction, but the price was still about $131.9 million lower than the 2016 asking price, a 68% cut.

Neither Gould nor Gold was involved with the home when it first listed on the market, but both men said the disparity between an asking price and an actual sale price, whether at auction or in a traditional sale, often says more about a seller’s unrealistic expectations than it does about market conditions.

“Anyone could ask anything they want for a property, as far as I’m concerned,” Gold said. “When they were originally asking $195 [million] ... That was just some seller’s, you know, pipe dream.”

Rodeo Realty’s Gould said he sees a lot of “ego-pricing,” where an owner asks a broker to list the home with a giant price tag, based more on the homeowner’s pride than on market-based valuation.

In reality, he said, the homes “may not be worth anything near that.”

1. ‘The One’

The infamous mega-mansion called The One sits high atop Bel Air and spans 100,000-plus square feet with 21 bedrooms, 42 baths, a 30-car garage, 60-foot indoor pool and massive nightclub.

The behemoth was originally publicized by developer Nile Niami with a $500 million price tag.

It took 10 years to build the residence located at 944 Airole Way, and along the way the developer racked up a mountain of debt topping $120 million, according to court filings.

The mega-mansion wasn’t even completed before it landed in bankruptcy court proceedings and headed to the auction block with no certificate of occupancy and a new asking price of $295 million.

The auction, also handled by Concierge, didn’t carry a reserve that would prop up a low-end threshold for bids. But in this case, the winning bid would require the final approval of a bankruptcy court judge, an unusual scenario. Only 5% of Concierge’s sales involve distressed properties, according to CEO Brady.

The mega-mansion brought in a top bid of $126 million delivered by Richard Saghian, the CEO of fast-fashion retailer Fashion Nova. Saghian paid the auctioneer’s standard buyer’s premium of 12%, or about $15 million, bringing the total sale price to $141 million — far and away the most paid for a single-family home at auction.

Weeks after a bankruptcy court judge approved the sale in March, Saghian seemed more than content with the deal.

“As a lifelong Angeleno and avid collector of real estate, I recognized this as a rare opportunity that also lets me own a unique property that is destined to be a part of Los Angeles history,” Saghian told CNBC through a spokesperson.

He paid just $1,342 per square foot in a neighborhood where high-end homes can command three to four times that number. But experts say Saghian will likely need to spend many millions more to finish the home and obtain a certificate of occupancy.

“We did everything that was humanly possible to get the highest number,” said Compass agent Kirman, who served as a court-approved listing agent, along with Williams & Williams.

Kirman was openly disappointed with the auction outcome.

The broker, who split a judge-approved 1% commission on the transaction, told CNBC he hoped the winning bid would top $177 million, a record price set in October when a much smaller mansion in Malibu was sold.

“I wanted to break a record. I mean, I wanted to hit, you know, $200 [million] or more,” Kirman said. “We were disappointed in it ... but the market spoke.”

Even after the auction fees, Saghian managed to hack $359 million, or almost 72%, off the original price tag of 10 years prior.

“It’s ludicrous,” Kirman said of the nine-figure disparity. “If you look at the high end of luxury real estate, more often than not, when you’re talking about a mega-mansion, they have sold for pretty much half the price.”

Original post: https://www.cnbc.com/2022/04/19/mega-mansions-suffer-massive-price-cuts-at-real-estate-auctions.html

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