Bill Would Ban Shill Bids at Real Estate Auctions

Many people, both inside and outside of the real estate business, believe that an auction is the best way to determine the true value of a property. But suppose that shill bids are employed. A shill bid is a bid submitted by the seller -- or someone acting on behalf of the seller -- in order to drive the price up. It is not a bona fide bid by an arm's length buyer. The auctioneer may even be the one who, just by falsely announcing it, submits a shill bid.

A shill bid may be used to get the price up to a seller's reserve -- the minimum the seller will accept -- or it may simply be used to drive up the bidding in any setting.

Suppose, then, that we have an auction on a property with an opening bid set at $350,000. Spirited bidding has driven the price up to $465,000. The person with the highest bid has gone higher than he originally thought he would, but he is still satisfied, and eager to hear the final "SOLD!"

Then, in comes the shill bid. The auctioneer announces he has a new bid of $475,000. Bidding is in increments of $5,000. Finally, after some head shaking and gnashing of teeth, the former high bidder goes to $480,000. His bid prevails. He gets the property for $480,000.

So, is the true value of the property $480,000? Or is it $465,000? Surely, there are arguments on both sides. Have at it. I would be delighted to hear what others think.

Currently, there is a bill in the California legislature that would prevent, or at least unmask, shill bidding in the context of auctions that are required by short sale lenders. The bill, AB 2039 (Muratsuchi) began on a much less controversial note. Sponsored by the California Association of REALTORS^®(CAR), it originally addressed an issue of liability. Short-sale lenders, who were using auction companies to determine the "true" value of properties being considered for short sale, were requiring listing agents (and sellers) to indemnify and hold harmless auction companies for liability they (the auction companies) might have incurred as a result of their actions. The bill would have prevented them from doing this. The bill was moving through the legislature without any registered opposition.

But, then an amendment was added that "would also prohibit any person, including the seller, auctioneer, or their agents, from bidding at a real property auction for the sole purpose of increasing the bid on a property being sold by an auctioneer."

That brought out the organized opposition. Both Auction.com and The Internet Association (whoever they may be) have registered opposing views. The Internet Association has written that the amendment "unnecessarily prohibits counter bidding, a common practice that has been utilized successfully by online auction sites and that, when properly disclosed, leads to greater market efficiencies and better results…" "In the same way, online auction sites for real estate that utilize counter bidding can help buyers and sellers achieve a mutually acceptable price point that benefits not only those parties, but also neighboring communities, financial institutions, and the ultimate lenders."

The author has amended the bill so that "counter bidding" may be allowed, but it will still have to be fully disclosed. The amended bill now states, "However, an auctioneer or another person may place a bid on the seller's behalf during an auction of real property, provided prior notice has been given that liberty for such bidding is reserved, and that the person placing such a bid contemporaneously discloses to all auction participants, including other bidders, that the particular bid has been placed on behalf of the seller." [my emphasis]

Given that kind of disclosure, a "counter bid" would pretty much be seen as having the status of a counter offer from a seller, not a bona fide bid from a real competing buyer. It would probably lack the same impact as a bid from a buyer.

The California legislature is in its final "action" period, so we will soon know how AB 2039 has fared. Whether we ever know the true value of auctioned properties is another question.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.