By Pete Edwards
You only have to scan the legal announcements in the Cleveland Daily Banner to confirm that the housing market is in shambles. The credit crunch has made it more difficult to get a mortgage unless the down-payment is significant because lending institutions are reducing their financial risk. The downturn of the US economy has forced many American homeowners to default on their mortgage payments requiring lenders to foreclose on the property to protect their investment.
Although this is an unenviable position to be in as a defaulting homeowner, it provides those with sufficient funds an opportunity to invest in property while prices are low and provides buyers for properties that have few traditional customers. To attract buyers, many property owners and lending institutions are using auction companies instead of a real estate broker to sell homes quickly, but this has exposed auction bidders to abuse and fraud.
An auctioneer should sell the property to the highest bidder unless there is a reserve price placed by the seller, below which there will be no sale. It has been noticed that at some local auctions the selling price is being artificially inflated with ghost or shill bids by the auction company, and bidders are being duped into thinking they are bidding against a rival bidder, when in fact there are none. Also, because callers employed by the auction company work the crowd looking for bids it is sometimes almost impossible to detect misconduct.
I was asked to alert our readers to this practice and give an explanation. The following is from the National Auctioneer's Association website -
Question - I currently work for a firm that is involved in the sale of real property. I observed at an auction that the Auctioneer selling the property reached a peak of a $200,000 high bid. He then "threw" a bid to the crowd of $210,000 at which time he was the high bidder. He then "worked" the crowd to get them to bid a $211,000 bid so as to avoid being the purchaser of the property and was successful at getting a bidder to the $211,000. Is this an illegal practice? I have a real moral issue with this practice and wanted to get a second opinion on the matter.
Answer - According to the NAA Code of Ethics, Article 2, "Members must, in conducting an auction, deal with customers in a manner exhibiting the highest standards of professionalism and respect. Members owe the customer the duties of honesty, integrity and fair dealing at all times." The NAA Code of Ethics defines customer as "The party who attends the auction for the purpose of buying the property offered for sale." The obligation to deal fairly and honestly with the customer would generally prevent an Auctioneer from submitting a bid. State law may also prevent an Auctioneer and the Auctioneer's agents from bidding during an auction in which the Auctioneer is crying for bids. The law prohibits an Auctioneer from bidding in an absolute auction he/she is conducting. In addition, some states prohibit Auctioneers from bidding in a reserve auction. The majority of states permit the Auctioneer to bid at his or her own auction only after the seller consents and adequate disclosure of the Auctioneer's intent to bid has been made. The agency relationship between the Auctioneer and the seller creates a fiduciary duty in which the Auctioneer owes the seller loyalty. This duty of loyalty is called into question when an Auctioneer wants to bid at his or her own auction, which means the seller must consent to the Auctioneer's bidding prior to the auction being conducted. After the seller consents, the Auctioneer should announce his or her intent to bid on items prior to the sale. Whether or not this practice is permitted is generally an issue of state law.
In addition to Auctioneer bidding, this may also be considered a shill bid. A shill bid is a bid where the person submitting the bid has no expectation of purchasing the item or property being auctioned. Shill bidding may also be referred to as ghost bidding or by-bidding. The sole purpose of the shill bid is to artificially increase the price of the item or property being sold. In the context of an absolute auction, the effect of a shill bid is that the qualified bidder may be unknowingly bidding against himself or herself. For example, if a bidder submits a bid of $10,000 and a shill bid of $15,000 is made and the qualified bidder then bids $16,000, the legitimate bidder was bidding against his or her own bid because the shill bidder had no intent to purchase the property. If the Auctioneer has knowledge of such a bid or knowingly participates in attracting a shill bid, then the Auctioneer has violated the NAA Code of Ethics, most likely violated states law, and may have committed fraud. Even if state law permits the Auctioneer to bid on property he or she is selling (after the seller consents and the Auctioneer makes the disclosure to the bidders), the Auctioneer should only submit legitimate bids when he or she intends to purchase the property. When conducting auctions, Auctioneers must remember that they are bound by ethical considerations and that engaging in unethical practices is a negative reflection on them and on the Auctioneer profession generally. In states that allow Auctioneers to bid at auctions they are conducting, it is important to uphold the professional standards.