THE FRAUDS AND FLAWS OF SELLING BY AUCTION

Worst real estate disaster?

Article originally published APRIL 9, 2003 –Reviewed and approved.

By Neil Jenman

It was billed as “The worst real estate disaster – and it could happen to all of us.” A recent episode of A Current Affair told the story of how the highest bidder at an auction refused to sign the contract. The sellers were devastated. By the time they found another buyer – and paid for the sudden cost of bridging finance – they were $43,000 worse off.

This story exposed another of the many flaws in selling real estate by auction, a system riddled with fraud. One must ask, surely, how a bogus buyer can be allowed to bid for a home? Well, it’s because agents rarely check the bona-fides of buyers. They have no idea who is in the crowd. And, in this case, the highest bidder was a bogus bidder.

But what about the other bidders – the ones who bid below the bogus bidder? According to the story there were two other bidders but they both immediately rushed out and bought other homes. If true, this shows how hopeless most agents are at negotiating. If it’s not true, it shows that the highest bidder was not the only bogus bidder at this auction.

Agents use dummy bidders at most auctions. But there are different types of dummy bidders. There are dummy bidders planted in the crowd who are often paid by the agents and there are bids taken from trees, birds or passing cars by the auctioneer. These are the dummy bidders that are denied by the likes of Enzo Raimondo of the Real Estate Institute of Victoria. Raimondo has been the laughingstock of Victoria since he said no one had explained to him what is meant by a dummy bid.

Finally, there are the bogus bidders, much rarer of course, who bid for the fun of it. In this case, the losers were the sellers.

But the real blame belongs to a system riddled with flaws where the losers are always consumers, never agents. And it’s the agents who push the lie that auctions are the best way to sell. The responsibility belongs to the agents for recommending a flawed system.

This story exposed a major flaw of the auction system – the lack of qualifying of bidders. If you want to borrow half a million dollars from a bank you must qualify for the loan. But if you want to bid $500,000 at an auction for a home, all you have to do is stick your hand in the air. It’s insane.

Another flaw of the auction system – and one which most consumers are not aware of – is that until a contract is signed, no sale is certain. Said one NSW lawyer, “The fall of the hammer is meaningless.” Another lawyer, from Victoria, agreed. He said that agents who tell bidders they are legally committed are “perpetuating a fraud” because no one is committed until they sign a contract.

There is no denying that the bogus buyer in A Current Affair’s story created a great deal of trauma for the sellers. But the auction system allowed it to happen.

Far more common are the many genuine buyers and sellers who are bullied by agents into making instant decisions, often with devastating consequences. They do not realise the auction system is basically one big bluff.

If you are selling or buying at auction and you are pressured into making an instant decision, don’t sign anything. If the agent says you are legally committed, don’t be bluffed.

Just walk away and find a lawyer.

And remember, at every auction a consumer always loses. Don’t let it be you. 

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