【 California Association of Realtors seek to ban Auction ‘shill bids 】 A little-known practice in which auction companies privately bid on the properties they’re selling is pitting two real estate groups against each other. On the one side are Irvine-based real estate auction firms Auction that defend the practice. On the other is the California Association of Realtors, which calls the practice “shill bidding.” Real estate agents have complained for years about Auction, first about its practice of making seller bids and, more recently, about a program that second-guesses deals agents reach. Now the two groups are battling over a Realtor-backed bill requiring real estate auction houses to disclose each bid they make on a seller’s behalf as the bid is made. The measure, Assembly Bill 2039, passed the lower house of the Legislature and is pending before a state Senate committee. Currently, it’s common for auction firms to make bids on behalf of a seller – without revealing the identity of the bidder – to get the price of a home or commercial property up to the “reserve,” or the minimum price needed for a sale to go through. If the reserve isn’t met, the auction house doesn’t get paid. The real estate trade group wants the bids revealed, saying the current process creates an illusion that a bidding frenzy is taking place. “Fake bids are submitted to artificially drive up the price,” said Alex Creel, the Realtor group’s chief lobbyist. “It gets the competitive spirit going,” he added. “Once the bids start coming in, you think, ‘Wow. This must be really worth it’ ... and you don’t know you’re bidding against a fake bid.” But Auction Executive Vice President Rick Sharga said Realtors are blatantly misrepresenting what’s going on, implying that auctioneers are falsely ratcheting up the price. “That’s not what we do; it’s not what any legitimate company does,” he said. Auction long has disclosed on its website that it employs the tactic and openly defended its use in the past. “It helps them get close to the reserve, so the seller can consider the deal,” Sharga said. “If you eliminate bidding on behalf of a seller, you cause a lot of these transactions to not take place. It’s not good for the buyer or the seller.” Auction, which claims to be the nation’s biggest online real estate seller, is seeking to overhaul the traditional approach to home and commercial property sales by moving transactions online. The firm sparked agents’ ire in the past couple of years with the creation of its “market validation program” to ensure that lenders get top dollar during short sales, or sales for less than is owed on a mortgage. Under the program, lenders require that agents submit their short sale listing to an online auction after locating a buyer but before closing the deal. Sharga said 57 percent of those auctions generated higher prices in California. In many cases, agents lost both the sale and their commission. “It’s hard to argue (against) the benefit of selling a home at a higher price,” Sharga said. During an interview last year, Auction co-founders Rob Friedman and Jeff Frieden maintained that submitting seller bids is common in the auction business. “That’s not something we invented,” Friedman said, noting that Sotheby’s and other art auction houses do the same thing. But Creel noted that eBay forbids “shill bidding,” which it defines as anytime “a seller – or someone associated with a seller – bids on that sellers own item.” “EBay is the biggest online auction there is, and they don’t allow shill bidding,” Creel said. Sharga said Auction has made its disclosures more explicit on its website since AB2039 was introduced. But requiring individual disclosure each time a seller bid is made “would disrupt the process,’’ he said. The tactic is not without risks. When the Register toured Auction’s bidding floor last year, a technician inadvertently placed a bid just as an outside buyer was submitting an offer at the reserve price. Auction ended up with the high bid. Auction then was in the position of having to ask the buyer if he still wanted to pursue the deal at the price he last bid, with no guarantee of a sale. Creel said that his trade group first looked into the issue after learning that sellers and lenders put sole control of the transaction with the auction house while requiring brokers to sign an indemnity agreement holding the seller harmless for any problem with the sale. AB2039 forbids auction firms from requiring sellers and listing agents to sign indemnification agreements. “We said, ‘Hey, look. You can’t take the transaction away and not take away the liability,’” Creel said. Sharga said Auction would be willing to look at mutual indemnification language that protects both parties, but Auction would object to a law that eliminates seller bidding or mandated disclosure of seller bidding that disrupts the bidding process. “I think we can all settle on some aspect of disclosure,” Sharga said. “The ongoing debate is how granular the disclosure needs to be.”
Posted on: Thu, 31 Jul 2014 19:08:43 +0000
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