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Auction firms accused of 'shill' bids

Posted: June 14, 2014 9:43 p.m.
Updated: June 14, 2014 9:43 p.m.
 

A growing trend of banks placing distressed homes up for sale with online auctions has left Santa Clarita Realtors crying “foul,” claiming online auction sites are using “shill” bids to drive prices up.

One company, Auction.com, however, does disclose on its website that it “may counter bid on behalf of the seller.”

The Irvine-based company’s reasoning is that bidding on a property they’re selling through auction helps to meet the seller’s reserve price. The company claims it does not continue bidding if the minimum sales price is met or exceeded.

But the practice has prompted California Realtors Association – C.A.R. - to sponsor legislation to stop the practice.

As a result, Assemblyman Al Muratsuchi, serving the South Bay Region in Los Angeles – and also a former prosecutor – introduced Assembly Bill 2039 to stop the practice.

But passage of the bill into law won’t come soon enough for the buyers represented by Kim Thomson of Keller Williams VIP Properties. A home they’ve been eyeing is going to auction this coming week.

Bidding

“These poor buyers have been waiting for months on this short sale and now the house has to be put up for auction and they could lose it,” Thomson said. “What doesn’t seem quite fair is if they are out bid they can lose the house, but if the bids do not get as high as their current offer, they cannot lower their bid lower and buy the house at the current bid price. It should work both ways.”

It’s been a new practice where some lenders require homes in a short sale transaction to be put up for auction by a third party chosen by the lender, said Nancy Starcyk, president of the SCV Division of the Southland Regional Association of Realtors.

“If the bids come in under the original offer, then the offer is accepted,” she said. “If, however, a higher bid is submitted then that bidder can purchase the home. And, yes there are ‘shill’ bids driving the price up. This is a common and regular practice.”

Yet counter bids isn’t the only issue raised.

Investor experience

A regular investor, Lorie Ras of Fair Oaks Ranch has been successfully bidding on – and winning – homes on Auction.com for a while now.

She refers to it as the online auction company she “loves to hate” because while she questions some of their practices, Ras continue using them as long as she can make money, she said.

However, not all winning bids have been successful for Ras.

Last year she had the winning bid on a bank owned home and received notice from the auction company that her bid had been approved by the bank. She wired her 5 percent earnest money over as deposit but the home didn’t go into escrow as scheduled.

It took Ras weeks to find out what was happening with the property.

Finally the Auction.com representative said they never got a signature from the bank approving the sale. The $260,000 home ended going up on the Multiple Listing Service.

At the time Ras was notified of her winning bid, she was also informed that she would be required to pay a $125 non-refundable fee that would be kept by the escrow company holding the deposit waiting for bank approval.

“While all sales are subject to bank approval, there was nothing about the fee disclosed in the paperwork,” Ras said.

And after successfully bidding on a condo off Sierra Highway in April, she found out that there was $1,200 in HOA dues that hadn’t been paid by the lender, she said.

As it turns out, the auction company claims no liability and says any errors are the bank’s responsibility. Even so, that only spelled out in the small print of the contract, she said.

“The lender, of course, has complete control over the auction contract,” Starcyk said.

As a condition of approving the short sale and absent legislation to the contrary, the lender can include a provision in the contract requiring the homeowner to agree to “defend, indemnify, and hold harmless the auction company from any costs, liabilities, and damages arising in connection with any claim resulting from the auction company’s actions,” Starcyk explained.

Ras finally worked to get her own Realtor’s license and as of January of this year began working with RE/MAX. The experience she says has left her realizing how much responsibility online auction companies have been shunning.

Responsibility

“As a Realtor, there’s a lack of transparency on auction.com. They’re representing the seller in transaction but they brush their hands of everything,” she said. “The transparency needs to be up front.”

For one, she said, the auction company never presents a listing agreement showing they have authorization to sell. Ras said she sometimes properties just disappear from the website or MLS listing service.

The pending legislation will stop auction companies from putting the burden of lender errors onto the shoulders of the homeowner or listing agent.

Currently homeowners have no leverage to negotiate, Starczyk said.

“Homeowners are forced to release the auction company from liability or the lender won’t consider their short sale offer, leaving them with no other choice but to allow the property to go into foreclosure,” she said.

Online auction companies like Auction.com, however, may not be villains.

Auction.com just leveraged technology to elevate the real estate auction market to a new level. In March, it landed a $50 million investment from Google Capital giving the company a seat on their board. Auction.com hopes to draw on Google’s expertise in digital and mobile marketing.

Even a few of Realtors say they don’t know if the some of the problems they’ve experienced are related to the online company – or the banks which have already been heavily fined for poor practices during the mortgage meltdown.

Still, Realtors are suspicious of behaviors that aren’t transparent.

Sam Weller with Keller Williams said a friend recently lost his home to foreclosure. Despite the comps showing the home should have been valued at $1.3 million, the house sold online for $1.05 million. He felt someone had some kind of ‘inside information,’ he said.

“The bank foreclosed very fast without giving him a chance to short sale or make a payment schedule,” Heller said. “And neither I nor the title company can find any information of the listing on the Internet after it sold - like it never happened.”

As long as auction companies operate as a third parties to the sales, they should be subject to some accountability and some of the same rules that bind Realtors to fairly represent their parties, Realtors say.

“The legislation is good,” Ras said. “They need to have more transparency and be bound by the same ethics we are as Realtors.”

jana@signalscv.com

661-287-5599

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