Bidding at a real estate auction can be complicated and intimidating, but it becomes even more so – and actually frightens a lot of would-be investors off entirely – when the issue of bid-rigging comes into play. A major issue in today’s real estate auction arena is that of “bidding rings” or “clubs” of bidders who all agree ahead of time to put competition aside until the auction is over in order to keep prices artificially low. At first, this might seem harmless. After all, if businesspeople get together and work out an arrangement ahead of time to avoid competition, that is just foresight, right? Well, although it can be, but in many cases it is more simply fraud.

When a bidding ring works at an auction, bidders decide ahead of time who is going to bid on the properties on the block. Once the properties are won and purchased, they are entered in a secondary, private auction. Ultimately, most – if not everyone – involved walks away a winner because the properties go for less than they would have on the “open” block and the designated bidders make a bundle on the second auction since they paid artificially low prices on the original properties. In some cases, these “clubs” actually divide the profits up to make membership more worthwhile.

Whether it seems fair or not, the Department of Justice says “not.” In fact, this type of rigged bidding violates the Sherman Antitrust Act and people have been charged and convicted for this type of behavior.

Have you ever encountered this issue? How did you deal with it as an investor?

Please leave your questions and comments below.