DUMMY BIDDING

Inside auction's notorious fraud

Dummy bidding is false bidding. It is done to fool genuine buyers into thinking real buyers are bidding. But, as you will see, dummy bidding is also used to get sellers to lower their prices.

Dummy bidding happens in two ways. First, the auctioneer calls out bogus bids, pretending someone in the crowd has made the bids. This is referred to as "pulling bids", often from trees or walls. Second, stooges are planted in the crowd who call out bids. Many auctioneers use secret signals to tell stooges when to bid. It happens at thousands of auctions. But for years the public message from the real estate industry has been to say it is "isolated". Or even to deny it with statements such as "Dummy bidding? I don't know what you're talking about."

In 2001, John Hill, the President of the Real Estate Institute of New South Wales was quoted as saying, "There would be tricks of the trade out there but I've never experienced dummy bidders." The CEO of the Real Estate Institute of Victoria, Enzo Raimondo, in an interview on ABC Radio, said, "I'm not sure what is meant by dummy bids. I haven't heard anyone explain to me what a dummy bid is."

The announcer explained it to him: "Someone standing in the audience pretending to be a real bidder and they're not." Raimondo said, "The auction process has been around for a long, long time." When he used similar statements on Radio 3AW, the announcer said, "Enzo, you are treating me as an idiot here."

Anita Roddick, the founder of The Body Shop and a fierce critic of corporate dishonesty, once wrote, "When you take the high moral road, it is difficult for anyone to object without looking like a complete fool." The defenders of dummy bidding were beginning to look very foolish.

Dummy Bidding Goes to Court
In June 2001, an auction agent sued a buyers' advocate for calling him "an idiot". The buyers' advocate, Justin Dunne, saw the agent, Tim Fletcher, using dummy bids at an auction. Mr Dunne, who was representing a genuine buyer, refused to bid when dummy bids were being made.

The home did not reach its reserve price. The auction stopped and Mr Fletcher went inside the home with another genuine bidder (who had been bidding against the dummy bidders). Reportedly, Mr Dunne banged on the door, demanding the right to negotiate. Mr Fletcher refused to negotiate with Mr Dunne's buyer even though Mr Dunne's buyer was apparently willing to pay more money. The home was sold to the other buyer at a lower price. Not only did Mr Dunne's buyer lose the home, but the seller almost certainly lost several thousand dollars. Mr Dunne was reported to have said, "The owner's relatives think you are an idiot. I am going to report you to the fraud squad." Fletcher said it was "absolutely fundamental" for his reputation that he be viewed as "an upstanding person". And so he sued Dunne for defamation.

In July, the case was dismissed. The magistrate said, "I find that Mr Fletcher, in using what on evidence, sadly, is a common practice, was indulging in a deceitful, misleading and fraudulent stratagem to boost bids." The magistrate described fictitious bidding as "evil". Mr Fletcher, with his reputation in tatters, continued to defend dummy bidding. He said his father had done it and so had his grandfather. He said the magistrate was wrong and that the decision was "an attack on the vendors of this state". Enzo Raimondo from the Real Estate Institute of Victoria referred to dummy bids as 'vendor bids' and said they were "clearly designed to protect the vendor's interest."

Fletcher claimed it was "almost a civil liberties issue" as sellers had the right to protect themselves with dummy bids. But as one consumer said, "Since when has fraud been a civil liberty?"

Defending Dummy Bidding: The Reality comes to light
With Fletcher's public disgrace, it was hard for the real estate industry to keep denying what had been known for years – dummy bidding goes on in all states of Australia and in New Zealand.

Many agents pay dummy bidders to attend auctions. The deceit had become so blatant that some agents were even sending invoices to sellers for the cost of dummy bidders.

The Century 21 network once sent an urgent fax to its salespeople demanding that they stop asking homesellers to bring dummy bidders to auctions, inferring that this was giving away their secrets. "Do not tell the vendor any more about the processes we use to achieve a sale than is absolutely necessary," was the instruction. The network wanted to have its own dummy bidders – which it referred to as "helpers". The message ended by saying, "They are to be OUR HELPERS not the vendors."

The public exposure of dummy bidding drew a common corporate response to questionable business methods – change the name. Just as killing whales is called "harvesting", or gambling is called "gaming", dummy bidding is called "vendor bidding".

The Real Estate Institute of Queensland issued a statement saying consumers were being confused based on "spurious evidence". The president, Mark Brimble, attacked "self-appointed consumer advocates" for damaging the "integrity" of auctions. He said, "We all know that no matter how many 'vendor bids' are made before the reserve is reached, none are going to result in a sale." Enzo Raimondo from the Real Estate Institute in Victoria repeated the common excuse made by many agents: that vendor bidding is "protecting the vendor's interest". They claim that dummy bids are only made below the reserve price so that homes will not be undersold.

Then why have them? If the property is not going to be sold below the reserve price, there is no need to have any bids below the reserve price. The auction can just start at the reserve price. Melbourne lawyer Peter Lowenstern said, "There is no need for vendor bids at all." His comments upset many agents, and again, Raimondo from the institute leapt to the defence of dummy bidding arguing that legal advice given to the institute was that vendor bidding was not misleading. But another lawyer, Neil McPhee, who lectured in business law at the University of Melbourne had written as far back as 1993 that "a reserve price offers far better protection" for sellers than dummy bidders.

The defence of dummy bidding comes from the real estate industry, not from consumer advocates, lawyers magistrates or consumers. Research shows that 84 per cent of consumers do not support dummy bidding. The typical real estate industry response is that the critics "do not understand".

To most consumers, the standard arguments in support of vendor bidding don't make sense. There must be other reasons, reasons they are not being told.

A major reason that agents start the bidding below the reserve price is because they have been underquoting the price to buyers. If the reserve is $500,000 the agents may have told buyers "bidding to start from $400,000". Imagine the reaction of buyers if the auctioneer said, "Ladies and gentlemen, the reserve price on this home is $500,000. That is the lowest the seller is prepared to accept, so we will start bidding at $500,000." The buyers would know instantly that they had been duped.

If auctions began at the reserve price, then, by the agents' own admission, there would be no need for dummy bidding. There would also be no need to tell lies to buyers about the expected selling price. But less buyers would be lured to auctions by the falsely quoted cheap prices. Auctions would not work as well for the agent. Real estate auctions depend on deceit.

Dummy bidding is a fraud on all consumers. Many consumers may not understand it completely, but they do understand one thing – it doesn't feel right. As Marsha Bertrand, author of Fraud! How to Protect Yourself from Schemes, Scams and Swindlers, points out, "Often when [consumers] don't understand something, they think it's because they're stupid. But the truth is that they don't understand something because it doesn't make sense."

How Dummy Bidding traps Sellers
Agents use the dummy bidders to get the bidding up to the price at which they feel the sellers will crack. If there is only one genuine buyer at an auction – which is often the case – the agents will want to sell the home to that buyer, whatever the price. But, without dummy bidders, they will not be able to get the auction going. The dummy bidders allow the agents to fool the buyers into thinking they are bidding against other buyers.

Dummy bidding also hides from the sellers the fact that there is only one bidder. It makes sellers think that the crowd (read, "the market") is saying their home is worth what is being bid. Sellers have no idea that there is only one genuine bidder. They see the crowd, they hear lots of bidders and they think, "With all these 'buyers', this
must be the best market price for my home." This is exactly what agents want sellers to think.

As it becomes harder to get more bids from real bidders, the auction will slow down. The agent will pause the auction at a real bid and then pressure the sellers to lower their reserve. As one textbook teaches agents, "You shouldn't worry if the reserve seems a little high because when the bidding slows down, the reserve can be lowered immediately to the amount of the highest bid." This teacher than adds these words in bold letters, "Bingo! Another sale."

Agents start bidding below the reserve price because they intend to make sales below the reserve price. It's a fairly obvious point that most sellers don't understand - until it's too late.

If bidding began at the reserve price this would protect the sellers. But the agents have lied to the sellers about the likely selling price and they use dummy bidding, followed by high pressure and the statement, "This is what the market is saying," to manipulate sellers into lowering their prices. Dummy bidding looks like it is helping sellers, but it is dragging them into the jaws of the crocodiles. They get crunched. As Douglas Rushkoff, author of Coercion, explains, "The better and more sophisticated the manipulation, the less aware of it we are."

Dummy bidding brings to a horrible conclusion weeks of conditioning and false information. Typical real estate selling is all about making the sales and getting the commission. And, Because of the lies told to sellers and buyers, the best way to make sales is to find the best method of conditioning. This is why the Real Estate Institute of Australia describes auctions as "the fastest and best conditioning method".

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This Alert is an extract from the book Don't Sign Anything! by Neil Jenman.