Auction.com, the online real estate auction site has seen some negative media in the past several months. Most notably, Auction.com’s relationship with Nationstar has made real estate agents across the nation very unhappy. You see, Nationstar requires borrowers that want to sell their homes as short sales to auction those property through the auction.com website.
Many consumers are misled by the name: Auction.com is NOT auctioning property that went through the foreclosure process. This is a pre-foreclosure arrangement between Nationstar Mortgage and auction.com.
The Nationstar and Auction.com Short Sale Process
Here’s how the Nationstar and auction.com short sale process works: After a short sale offer and all of the accompanying paperwork is submitted to Nationstar Mortgage, the listing agent is then notified that the property must be placed on the auction.com website. The property then becomes available for public bidding through the website, and Auction.com requires one or two open houses during the public bidding period.
Here’s the part that makes folks a little bit angry: When a buyer makes an offer on Auction.com, Auction.com charges a 5% premium on top of the sales price at closing. And buyers can make offers online despite the fact that there is a fully executed, legally binding contract that has been submitted to the short sale lender.
What also seems not so on the level: Agents have already marketed the property and the seller—the rightful owner of the property until the foreclosure date—has selected the buyer.
When the property is placed on a third party website, this legal contract is ignored. In fact, if the current buyer has a contract on the property to purchase it for $100K and an Auction.com bid exceeds that offer, the current buyer will have to bid against other bidders in order to purchase the property. At the end of the auction, the highest bid wins and there is no opportunity to counter the offer after the auction closes.
In addition to that, the Auction.com contract implies that shill bidding can occur within the transaction. Auction.com’s properties listed for sale have unpublished reserves that allow the auction company to decline the transaction, even if you are the winning bidder. In order to encourage bidding up to the unpublished reserve, Auction.com will bid against buyers in its own auctions. Unlike other sites (such as ebay) where the reserve is visible to the consumer, Auction.com does not publish the reserve amount.
But, unlike other auction sites, Auction.com does actually reserve the right to bid against the consumer. In their Reserve Auction Terms and Conditions, Auction.com states, “The starting bid is not the Reserve Price. Except where prohibited by law, during a live bidding event (online or otherwise) the Auctioneer may open bidding on any Property by placing a bid on behalf of the Seller and may further bid on behalf of the Seller up to the amount of the Reserve Price by placing successive or consecutive bids for a Property, or by placing bids in response to other bidders.”
Homebuyers need to understand that the Auctioneer may be bidding against them and, as a result, inflating the price paid to the property to their own benefit and the benefit of the seller.
California Association of Realtors® Takes Stand on Shill Bidding
Agents across the nation have complained about this process. And, despite their complaints, nothing has changed. In fact, the California Association of Realtors® contacted Nationstar and Auction.com and states in an announcement on the California Association of Realtors® website that if agents are going to take these listings, they need to accept the process.
The good news is that finally the California Association of Realtors® Board of Directors recently took a stand against shill bidding.
At a recent meeting the CAR® Directors did as follows: C.A.R. Sponsored AB 2039 (Muratsuchi) was amended to prohibit the use of so-called “shill” bidders working for an auction company.
Here is the initial proposal at the Transactional & Regulatory Committee:
AB 2039, Muratsuchi; C.A.R. Sponsored bill on auction companies – Kevin Birmingham, Transactional Issues Chair
AB 2039 currently addresses the issue of agent and seller liability that arises from the required use of an auction company in a short sale, and prohibits the auction company from shifting liability for its negligence to the seller or agent. During discussions of the bill and examination of auction company contracts, it appears that auction companies may be using “shill” bidders to manipulate the auction process. It is not clear how often this practice takes place, or whether good faith sellers or Realtors® transactions have been prejudiced by it.
This amendment to the original proposal now takes a hard stand against shill bidding. And, if we are lucky, it will become a law in the state of California. Not having all of the information up front makes it difficult to get through a real estate transaction. If agents cannot bid up the price on a local listing, then the auction houses should not be permitted to do it either.
Just my 2 cents! Take it or leave it.