Are Real Estate Auctions Rigged?

We recently came across a study by the University of Melbourne in Australia that questioned whether real estate auctions were “rigged” against potential buyers of the auctioned property.

With the tremendous rise in foreclosures and the auctioning of financially distressed property in this county, we thought we would post the conclusions of the Melbourne report and ask for your comments.

Here is what the professors at the University of Melbourne had to say:

Auctions have always been promoted as a tried and proven method of achieving the highest sale price for a property. It gathers together prospective purchasers in one place at one point in time and sells the property to the highest bidder.

It has been proven in empirical research that auctions generally achieve a higher final transfer price than an open market sale.

Even though both approaches are applied in the same marketplace within the definition of ‘market value’, there have been no valid reasons to explain this difference.

One practice that has been openly acknowledged is the practice of ‘dummy’ bidders, which may partly explain this premium. The use of ‘dummy’ bidders by the vendor and/or auctioneer could have the effect of distorting the true market value, designed to deceive the purchasing public into competing at an inflated price in the auction process.

It appears that the genuine popularity and reputation of the auction process is seriously threatened by the deceitful use of ‘dummy’ bidders. Steps must be taken to eradicate the tactic before the entire residential auction industry is discredited, and the ‘level playing field’ must be returned for the vendor, auctioneer and the bidders alike.

Potential improvements to the auction industry to discourage this practice could include strong fines to both the individual auctioneer and their employer, with endorsement of the fines by the relevant industry body.

Not until after the successful eradication of the ‘dummy’ bid and associated deceitful practices (e.g. ‘two tier’ marketing) will purchasers and vendors be able to confidently trade in a fair and equitable marketplace. Only then will valuers be able to rely on true market value sales with a higher level of confidence.

Does this reflect your experience with real estate auctions? What advice would you give to those who are thinking about buying property today at an auction? Your comments are welcome!

UPDATE:

For our post on the investigation of an auction of foreclosed homes by California-based real estate auctioneer Real Estate Disposition Corp. to determine whether some homes were sold before the foreclosure process was completed, click here.

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One response to “Are Real Estate Auctions Rigged?

  1. Interesting post. Where did you get that Univ. of Melbourne passage? Can you cite the source? I’d like to read more. Thanks!

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