BLM tightening guidelines to reduce defaults

Jennifer Shubinski

Monday, Nov. 10, 2003 | 11:23 a.m.

Five people defaulted on six land parcels sold at the Bureau of Land Management auction last week -- leading the federal government to explore legal action and a new policy that will require bidders at future auctions to put down a deposit to qualify.

The defaults represent 15 acres, or $4.3 million in high-bids, which dropped the total amount of land sold Thursday to almost 734 acres for $127.1 million. While errors in a highly competitive bidding process can be made, defaults for land bought at federal auction appears to be a growing problem.

Since the BLM began selling land at live auctions in November 1999, 15 winning bidders have reneged on their promise to buy the land. Six of those defaults occurred last week. There were three defaults apiece in three previous auctions.

Federal authorities say many of the same people have defaulted on land deals several times. Winning bidder names, including the names of those people or groups that defaulted, were posted on the BLM's website.

"They struck a deal with the federal government and they defaulted and this is a very problematic situation," Phillip Guerrero, BLM spokesman, said. "We are going to deal with this issue very strongly."

Merv Boyd, BLM assistant field manager of land sales and acquisitions, said the agency is looking into recourse options, including legal action.

"There can be legitimate reasons someone can't complete the sale, but we don't want this to happen," he said. "We fully expect people that bid to follow through with the purchase."

Reasons for defaults at this last auction included one bidder who said she bought the wrong parcel and a man who said a courier disappeared with his money. Several problems present themselves when someone defaults on a winning bid.

In past auctions any property that didn't sell at the live land auction, or was defaulted on, was put up for auction via the Internet. Unlike live auctions, the Internet venue does not provide as competitive a bidding situation and buyers routinely obtain the land at the appraised price or slightly more than the appraised price.

Live auction prices often soar above the appraised price. At last week's auction, the composite price was almost 26 percent above appraised fair market value.

There is the possibility that people are bidding up the price at live auctions -- to make sure that they win -- then default only to bid on the same parcel at the Internet auction, virtually guaranteeing them the parcel at a lower price, Boyd said.

While there is no evidence this has happened in past Internet auctions, to remove the possibility entirely, none of the parcels that were defaulted on at this last auction will be offered for sale via the Internet. Instead, they will come up for auction at the agency's spring land sale.

Only one parcel will be offered via Internet auction next week. That is a 30-acre parcel, appraised at $8.4 million, that did not attract any bids because of confusion by some over the BLM's land map, Guerrero said.

Another concern about people defaulting on land purchases is the probability that those same groups bid on land against other parties -- raising the final price for the winner.

"Our concern is that it is really unfair to other bidders," Boyd said. "It's unfair to people who in good faith wanted to buy those parcels."

John Ritter, chief executive of development company Focus Property Group, bought a 2.5-acre land parcel at Thursday's auction for $325,000 -- 85 percent above the appraised price.

Ritter said it has always been a concern of his that people bid on land just to drive up the price for others.

"The system has some definite flaws in it," he said. "We've talked with the BLM about those flaws, and they've addressed them on the large parcels, where you now have to put up 20 percent of the funds (of the appraised price). But as far as the smaller pieces, it is a very difficult problem to address."

Ritter said it might be difficult for smaller or inexperienced investors to follow the bidding process and know exactly what they are buying.

"In general people get caught up, especially the smaller bidders and people who don't have years of experience," he said. "They think their top number is X and they go far beyond that, and then they talk to their wives or partners who say, 'What did you do?' "

Guerrero said the BLM decided Friday it will require bidders to put down a deposit. It will likely be 20 percent of the lowest appraised price for land being put up for auction. However an exact policy hasn't been decided, he said.

"This is not a game. This is big business, and this is big business for Nevada," Guerrero said. "The crying shame is we lost $4 million from these people through default and that money will not be available to complete conservation projects. It not just hurts us but it hurts the people of Nevada."