Online Auctions Cut Costs, Increase Revenues for Tax Liens, Tax Deed, and Property Foreclosure Sales

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1 Online Auctions Cut Costs, Increase Revenues for Tax Liens, Tax Deed, and Property Foreclosure Sales October 2011 Online Auction White Paper

2 Executive Summary Counties that conduct live auctions to sell delinquent tax liens, tax deed, and foreclosed properties regularly experience the shortcomings of that sales method. Live auctions require significant staff time, incur unique costs, and slow the process of generating revenues for county budgets. The process also proves cumbersome for bidders, limiting bidder participation that results in fewer bids and lower revenues for the county. The live auction model provides ample opportunity for fraud through a variety of methods that shortchanges counties of significant revenue. Online auctions solve these problems and provide numerous additional benefits. The Challenge: The Problems Inherent with Live Auctions County governments nationwide sell millions of foreclosed properties and tax liens from unpaid property taxes each year through live auctions. The live auction method, however, proves costly to counties in a variety of ways. As a result of the recession, county governments nationwide have cut budgets and trimmed the number of staff they employ, stretching the remaining staff to accomplish numerous tasks. Yet, the process of conducting live auctions of tax liens and foreclosed property continues to require substantial staff time. County government staff spends a large portion of time each day on customer service for a live auction, answering questions and addressing issues. Live auctions of foreclosed property require weeks to complete, which often leads to a large backlog of properties waiting for auction. As a result, the staff struggles to conduct county business in addition to the auctions. Meanwhile, the number of foreclosed properties and tax liens from unpaid property taxes continues to increase as another symptom of the sputtering economy. A successful auction requires a large pool of bidders and competitive bidding to generate significant revenue. Live auctions require that bidders are physically present, preventing the participation of interested parties who are unable to attend in person. Also, live auctions held in small towns or hard-to-reach locations often have a small pool of bidders. This provides fertile soil for collusion 1 Online Auction White Paper

3 bidders who meet in advance of the auction to divide the properties, keeping the winning bids low. Inclement weather may force county staff to reschedule a live auction or may lead to a small number of bidders participating. Since each live auction requires weeks of staff work, the revenues generated by an auction are delayed in reaching county coffers. Counties also frequently incur additional costs when conducting live auctions, such as the need to rent facility space and to hire security when bidding tensions threaten the safety of bidders. The live auction process does not typically require bidders to make a deposit before bidding, which may translate into a number of bidders who do not follow through on their purchases. As a result, the auction must be rescheduled in the case of foreclosed property. For the sale of tax liens, the county may incur a shortfall in tax money for any unsold liens. Since each live auction requires weeks of staff work, the revenues generated by an auction are delayed in reaching county coffers. The live auction process proves cumbersome for bidders as well, particularly for novices. Prior to a live auction, bidders perform due diligence on investments in tax liens and foreclosed properties by visiting multiple government offices and searching various websites. For example, a bidder might visit the appraiser s office to ensure the property s appraised value, then visit the county clerk s office to verify that the property did not have secondary or IRS liens, then visit the tax collector s office to verify the number of outstanding tax liens, and so forth. The integrity of the auction results can be compromised in a live auction. Participants may meet in advance to manipulate the bidding process. In addition, the personnel conducting the auction choose the winner of a bidding tie, which may lead to the impartiality of that decision being questioned. Tampering with auction results after the fact is easier in the case of a live event where results information is being recorded manually. 2 Online Auction White Paper

4 The Solution: Online Auctions Online auctions greatly simplify the auction process and require a few weeks to implement. Transition to an online auction format follows a straightforward step-by-step process. Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 The vendor sets up the auction web site. Prospective bidders receive instructions and access the auction site. Bidders register and make deposits. The county publishes a list of tax liens or properties on the web site. Bidders conduct due diligence through resources on the auction site. The auction opens and bidders enter their bids. The auction closes. The system determines the winning bids and posts the results. Within the county-specified time of the auction s closing, bidders must pay their bid amounts, minus their deposits, through the auction s electronic funds-transfer system. The system sends the auction data to the county. County staff includes the data in compliance reports sent to the state. 3 Online Auction White Paper

5 How Online Auctions Work Tax Lien Sales In the months preceding the opening of the tax sale auction, a vendor that sets up online auctions creates a custom web site according to county rules and specifications. When the sale opens to the public, previous and prospective bidders receive a welcome package that explains the new sale procedures and provides the dates of scheduled training classes to be held at the county. Potential bidders can visit a demonstration site to test the system before the actual auction begins. Bidders may visit the site at any time to register to participate in the sale. The county publishes a list of the items for sale simultaneously in the local newspaper and on the web site. Bidders access the auction through a web browser. The online auction web sites feature the Automated Clearing House (ACH) wizard, which is an electronic funds-transfer system run by the National Automated Clearing House Association. Buyers then place their bids during the auction opening and closing times. In order to be eligible to participate in the auction, bidders must meet the county s deposit requirements (different for every county and some may require no deposit) typically 10 percent of their anticipated winnings. For example, if a bidder places a deposit of $1,000, the bidder cannot win more than $10,000 of tax liens without adding more to their deposit. Bidders make deposits through cash, wire transfers, or checks. The online auction web sites feature the Automated Clearing House (ACH) wizard, which is an electronic funds-transfer system run by the National Automated Clearing House Association. For tax lien sales, which generally take place once or twice per year, tax liens sell in batches. The county decides the size of the batches, which are usually 500 or 1,000 tax liens each and arranged by subdivision. The county chooses the day when the online auction ends. At a specific time on that day, the first batch officially closes and the system determines winners. The system posts auction results on the web site within five minutes of a batch closing. Batch sales enable the bidder to see the auction results and quickly determine if they should adjust their bids for future batches. Bidders can make additional deposits at anytime during the sale. After all batches have closed, the bidder pays for the liens through the ACH wizard on the site. At the close of the auction, the system sends auction data to the county. County staff includes that data in reports to ensure compliance with state regulations. 4 Online Auction White Paper

6 Foreclosed Property Sales In the months preceding the opening of the foreclosed property auction, a vendor that sets up online auctions creates a custom web site according to county rules and specifications. Two weeks prior to the first sale, potential bidders may register on the web site and view properties for sale. The county posts information about the properties in the local newspaper and auction web site, and lists property background information on the site. Bidders access the auction through a web browser. The auction begins at a scheduled time and properties are sold one at a time. In order to be eligible to participate in the auction, bidders must make a deposit of 5 percent of their anticipated winnings. Bidders make deposits through cash, wire transfers, or checks. The online auction web sites feature the Automated Clearing House (ACH) wizard, which is an electronic funds-transfer system run by the National Automated Clearing House Association. At the close of the auction, the system sends auction data to the county. County staff includes that data in reports to ensure compliance with state regulations. The online auction automates the transmission of data between the county and the online auction vendor, such as importing updates on individual property cases and exporting auction results and payments. The Benefits of Online Auctions Online auctions solve the myriad of problems inherent in live auctions. Online auctions greatly reduce the amount of time county government staff spends on advertising and setting up auctions, managing the bidding process, and wrapping up post-auction paperwork. This enables staff to spend more time attending to other assignments a critical need since government offices must function with fewer staff members as a result of budget cuts. In addition, online auctions of foreclosed property conclude in hours, rather than weeks, enabling county governments to clear a backlog of cases. In addition to saving money through the reduced staff time required for the process, online auctions expedite the auction process from weeks to just a few hours. In addition to saving money through the reduced staff time required for the process, online auctions expedite the auction process from weeks to just a few hours. This enables governments to collect revenues on tax liens and property foreclosure sales more quickly. Online auctions also eliminate other costs such as the need to rent facilities for live auctions and the need to hire security to ensure the safety of bidders. Elements of the funding process become automated 5 Online Auction White Paper

7 with online auctions, eliminating days of staff time required to accomplish a variety of tasks. Bidders receive refunds through a two-click process with an online sale. Online auctions of tax lien sales enable more bidders to participate, which generally leads to more competition and higher winning bids, resulting in additional county revenue. Bidders on a foreclosed property sale who are unavailable during the auction can place bids in advance by proxy with an online auction, which further enlarges the pool of bidders. In addition, inclement weather does not prevent bidders from participating. Through one web site, online auctions provide resources that will assist the bidder in conducting the necessary due diligence on a potential property or tax lien purchase. This enables the bidder to conduct research from the comfort of home, making it possible to easily bid on multiple properties or tax liens. Customer service improves through the online process as potential bidders receive online help and vendor-provided live customer service; this also eliminates the time government staff spends on these functions. Online auctions of foreclosed property also ensure secure sales transactions for bidders, as well as accurate and fast delivery of calculations and documents. Live auctions provide opportunities for participants to meet in advance to manipulate the bidding process. Online auctions prevent this type of fraud and ensure competitive bidding. In addition, online auction software can employ electronic means to select the winner of a tie bid, preventing potential controversy over the choice of a winner in a tie situation. Online auctions also prevent government staff from tampering with bidding results. 6 Online Auction White Paper

8 Online Auction Benefits Significantly Reduces Staff Time Spent on Auctions Expedites Property Auctions and Clears Backlog of Cases Enables County to Collect Revenues More Quickly through Shortened Process Enables More Bidders to Participate, Leading to Competitive Bidding Calculates and Generates Documentation Eliminates Additional Costs Such as Facility Rental and Hiring Auction Security Improves Customer Service and Ensures Secure Transactions Greatly Reduces the Possibility of Auction Fraud Bidders Can Bid in Their Pajamas Reduces Overall Administrative Cost Increases Agency Efficiency 7 Online Auction White Paper

9 Two Counties Experiences Highlight Benefits of Automating Auction Processes Miami-Dade County (property foreclosure sales) In 2009 and 2010, Miami-Dade County Clerk of Courts Harvey Ruvin and his staff were inundated with 7,000 property foreclosures to auction each month. The backlog reached epic proportions in January 2010 with 110,000 foreclosure cases waiting to be processed. The county tackled the workload by working with Realauction to implement an online auction system. Before deploying the online system, the clerk and his staff spent so much time managing the processes connected with live auctions that auctions were held just three times each week. The staff conducts online auctions five days a week, processing over 1,200 properties each week at its peak. Since the online auctions began in early 2010, the county has sold approximately 32,000 foreclosed properties as of September When the county held live auctions, altercations often erupted between bidders, forcing the county to hire security staff and install security cameras. As a result, staff often spent valuable time watching surveillance footage to determine if onsite staff handled the altercations correctly as a legal precaution. Online auctions eliminate these security issues. In a Government Technology article, Ruvin said that online auctions eliminate approximately 23,000 hours annually that staff devoted to live auctions. 1 Online auctions save the county approximately $750,000 annually in reduced staff time and other costs. 2 The county implemented online auctions at the same time that it cut its annual budget by 18 percent due to budget shortfalls. Ruvin added that putting the auctions online makes them available to a wider pool of bidders, which increases competitive bidding and tends to raise additional revenue. Cook County-Chicago (tax lien sales) Before Cook County (IL.) automated many of the processes of its auctions, both county staff and investors underwent a time-intensive process for the annual sales. More than 300 bidders would converge on the county courthouse to fill out forms to participate in the auction. Then staff would rekey each of the forms. After the auction, the winning bidders stood in long lines 8 Online Auction White Paper

10 to pay for their purchases and receive printed receipts. The county typically sold 20,000-30,000 tax liens at each annual sale. About a dozen county staff members invested four weeks in the entire auction process. Another aspect of the auctions proved cumbersome for both staff and bidders. Illinois statutes allow investors to purchase not just the initial year of taxes, but also subsequent years of taxes on a property if those taxes are also delinquent. The staff holds the auctions six months after the taxes are due on a property, making it likely that another tax installment is unpaid as well. Most buyers wish to purchase the original year of taxes so they can purchase the subsequent years, noted Cook County Treasurer s Director of Operations Pat Nester. Illinois law guarantees a 12 percent interest rate on the subsequent years. As a result, buyers usually bid 0 percent on the lien that is for sale in order to obtain the subsequent years. Nester said that as a result, dozens of buyers would shout a bid of 0 percent at the same time. The auctioneer randomly picked a winner of the bid, often creating a hostile auction environment. Automating portions of the auction process solved both of these problems. Illinois law requires that auctions are held in person, rather than online. Therefore, the Cook County staff automated as much of the process as possible. Now, buyers register for the auction and store their bids online in advance of the sale. Then on the day of the auction, the buyers go to the county courthouse, log on one of the computers in the county office, and submit their bids online. The system chooses the winning bid for each sale, the buyer pays online, and the staff prints the buyer s receipt. The system also randomly chooses the winner of tie bids and an independent agency regularly confirms the results. Instead of spending numerous hours at the courthouse over the course of a month, the buyer spends just five minutes over the course of four days. A dozen county staff devoted more than a month to the live auction process; the newly automated process requires just two staff members. Nester said that the number of tax liens sold has not increased through online auctions, due primarily to the economy. Cook County typically sells $100 million in tax liens annually, with about 12 buyers making 80 percent of those purchases. Those buyers must borrow at an increased interest rate because of the economy, which has leveled off sales. 9 Online Auction White Paper

11 Realauction s Best Practices Realauction ranks as the largest provider of online auction technology for county government. The company s online auction systems have processed the sale of more than 240,000 foreclosed properties and more than 2.5 million tax liens since the company began in Usually at no cost to the county, the company creates a customized web site through which the county hosts auctions and manages all auction processes. Realauction manages the data transfer from the county s software system to its custom web site. Realauction staff also review the county s auction process and advise them on how to streamline the process. For states with legislation that prevents online auctions, Realauction can automate the pre-auction and post-auction process, which enables counties in those states to still realize significant efficiencies. To smooth the transition to an online auction system, Realauction provides bidder orientation and back office staff training. As the largest provider of online auction technology for county government. The company s online auction systems have processed the sale of more than 240,000 foreclosed properties and more than 2.5 million tax liens. In addition to automating a county s auction processes, Realauction s staff develops software to meet the needs of specific counties. For example, Realauction designed tax deed application software for use in each of the counties it serves. This software enables the county to process a tax deed application submitted by a tax lien investor in order to sell a property with two years of unpaid property taxes so that the tax lien owner receives the initial investment plus interest. Before Realauction designed this software, a county staff member invested one hour to process each tax deed application. Now, the county can process thousands of tax liens within minutes. As part of this software package, Realauction developed specific software modules. The module for tax collectors automatically calculates the amount due on each tax lien, tracks payments electronically, and notifies the user when funds have settled. The system processes receipts, notifications, and title orders on hundreds of tax liens simultaneously with one click, accomplishing these tasks in a matter of hours rather than days. Another module enables clerks of the court to process and manage thousands of tax deed applications. The system automatically calculates the amount due on each application for court fees, as well as costs associated with sheriff s services, advertising, copies, postings, and certified mailings. Up-to-the-minute payment status from the tax collector module alerts the clerk when delinquent taxes have been satisfied. Using another module, title company 10 Online Auction White Paper

12 staff can retrieve new tax deed applications electronically, with secure and immediate access to accurate parcel identification. Once title searches are completed online, they are transmitted securely to the tax collector. Another module enables investors to execute one or dozens of tax deed applications. In one transaction, investors can file their applications and pay off multiple tax liens for multiple bidder accounts. The alert feature automatically notifies the taxing authority when investors submit new applications and payments, speeding workflow. Each of these modules can function as one system or as stand-alone modules. Realauction also created software that automates the county s process to create a notice of sale for foreclosed property. Prior to automation, staff manually typed legal language from the hard copy version of the foreclosure judgment, as well as language from other documents. This process required significant time. For example, this process required the time of three Miami-Dade county staff members and just 250 notices of sale were processed each day. Through the automated process, the staff accesses the online form through the online auction site and the software snaps an image of the legal language from the judgment so there are no human typing errors. Then the information is electronically transferred to the county s records and to the local newspaper to advertise the sale. Realauction also designs a web page as part of a county s customized web site, on which the county can sell tax liens that remain unsold after an auction concludes. This enables a county to recoup additional tax revenue that would otherwise be lost. Auction bidders pay a fee that covers the cost for Realauction s services so the county does not incur any costs. Each county receives a Realauction coordinator who oversees the transition to online auctions from beginning to end. The transition typically requires two to four weeks. The company also hosts user groups so that participating counties can share ideas with other counties and further streamline their processes. 11 Online Auction White Paper

13 Conclusion Counties nationwide must auction a growing number of tax liens, and tax-defaulted and foreclosed properties as many homeowners fail to make payments in tight economic times. Yet, counties must tackle the growing workload with fewer staff and smaller budgets. Live auctions require considerable staff time, incur a variety of costs, and slow the process of getting needed tax revenue to county coffers. Many counties migrated to online auctions to solve these and other problems. Other counties, whose state laws require live auctions, have automated various portions of the process, realizing substantial benefits. About Realauction Realauction is a market-leading provider of technology solutions for government agencies. Realauction helps governments reduce costs by providing consultation, design and implementation for online auctions of tax lien sales, tax deed applications and foreclosure sales. With over 50 years of combined experience in the delinquent tax and real estate data transfer industry, Realauction is committed to providing the software and customer service to help governments succeed. For More Information: Realauction.com, LLC. Telephone: Corporate Headquarters Fax: SW 78 th Avenue, Suite 102 info@realauction.com Plantation, FL Online Auction White Paper

14 Endnotes 1 Miami-Dade County Deploys Online Foreclosure Auction, Government Technology, February Auction.html 2 Dade Begins Online Auctions, Miami Herald, Jan. 12, Online Auction White Paper