This article from SF Gate was so well written, I decided to quote it pretty much as is. Having been to the courthouse steps, mostly just to see how it’s done, but once to help a client about to have his home sold (we were able to forestall it at the 11:59 hour), this story caught my eye.
If you’ve every toyed with buying a foreclosure (and I have plenty of cash rich clients that have) it’s worth the tourism to check it out one day. For my money, I want no part of them for a myriad of reasons, buying ‘blind’ being the biggest. It’s too much risk for anyone other than a group of investors that have calculated into their business model the fact that many will not turn a profit once all the unknown pitfalls surface.
Foreclosure auctions take place every weekday on the steps of courthouses throughout California. Now the FBI is investigating whether some real estate speculators are illegally rigging bids for these sales.
“Last week, the FBI conducted interviews and executed search warrants through the entire Bay Area as part of a long-term investigation of anti-competitive practices at trustee sales of foreclosed homes,” said bureau spokeswoman Julie Sohn. The probe is shaking up the tight-knit world of investors who bid at these auctions. The issue, sources say, is that some participants allegedly pay others to refrain from bidding on certain properties to keep their prices low.
Such bid-rigging violates the federal Sherman Antitrust Act and can carry a maximum penalty of 10 years in prison and a $1 million fine. That maximum can be increased to twice the perpetrator’s gain or twice the victim’s loss. “There have always been rumors of collusion at the courthouse steps,” said Sean O’Toole of ForeclosureRadar.com, a Discovery Bay company that provides detailed information on properties sold at the auctions. At a typical auction, many investors clutch clipboards with printouts from his website.
“If you have a small crowd of guys that talk to each other every day, it’s natural for them to say, ‘Why are we bidding each other up? Let’s just buy this and work it out afterward.’ ” O’Toole said. But when he speaks to real estate clubs and others, O’Toole said, “I am very clear. I say: ‘This is illegal. Don’t do it.’ ”
Most properties revert to lenders at courthouse-step auctions, which are the final step in California’s foreclosure process, but about 20 percent get sold to outside investors.
Rules of the game
Bids are all cash; properties are sold as is, subject to existing liens and with no guarantees as to condition, so only deep-pocketed, experienced investors generally make bids, seeking properties that still have some equity that they can fix and flip, or hold onto for the long term.
A real estate agent who attended some San Francisco auctions in hopes of buying investment property described what he witnessed.
“If you start to bid, there are about five guys who work together and who box you in,” said the man, who asked not to be named for fear of retribution. “One guy came up to bid who clearly was not part of that crew. The guys were bidding. At some point, (their ringleader) turned to (the outsider) and said, ‘You must really like this property. It must be really important to you.’ He had a piece of paper in his hand; he showed it to the guy. The guy nodded OK and then disappeared into the building.”
The man said he was positive that the outsider was being paid off not to bid, although he did not witness money changing hands. At Alameda County’s auction Wednesday, most investors declined to discuss the issue, but some said they welcomed the FBI’s interest. “This has been going on for many years,” said one man who declined to give his name. “It’s a closed group that doesn’t always allow the properties to go up to their true value.”
O’Toole and others said the margins at the auctions are pretty thin.
In general, he said, “the opening bid is only 20 percent below market, and the average sale is only bid up 12 percent. It’s hard to make a living in this business – by the time you pay repairs and sales costs, you’re looking at about a 5 percent net return.”
In a case that resembles the current probe’s focus, in April a Stockton real estate agent pleaded guilty to bid rigging. Anthony B. Ghio admitted “that he conspired with a group of real estate speculators who agreed not to bid against each other at certain public real estate foreclosure auctions in San Joaquin County,” according to a news release from the U.S. Department of Justice. “The primary purpose of the conspiracy was to suppress and restrain competition and obtain selected real estate … at non-competitive prices.”
The release said that after a “designated bidder” bought a piece of property at the public sale, the co-conspirators would hold a second private auction to determine who in their group ended up with the property. The difference between the two auction prices “was the group’s illicit profit, and it was divided among the conspirators in payoffs,” the release said.
The FBI encourages anyone with knowledge of anti-competitive practices at foreclosure auctions to call its tip line at (415) 553-7400.
E-mail Carolyn Said at firstname.lastname@example.org.
FBI looks into bid rigging at courthouse auctions [SFGate.com]
Personally, I can’t understand why foreclosures haven’t headed online and into the 21st Century. It’s archaic the way they do it now; Cryer’s call out trustee numbers and addresses at lightning speed, traffic whizzing by, you can barely hear all while a few of the usual suspects hang out with large cashiers checks in multiple increments burning a hole in their pockets…waiting for the next bid – or postponement which is more often the case. Someone should really pitch an online central exchange, it’d be a lot safer, more fair and efficient if you ask me. Added benefit is transparency to the homeowner might be in the middle of a short sale or mortgage modification only to have their home foreclosed on, all the while being assured it’s been forestalled by one arm of the bank that isn’t talking to the other. Yep someone should really pitch that…
UPDATE: Investor pleads guilty to bid rigging at public foreclosure auctions. For more information, click here.
Meredith Martin is a life long resident of the bay area and a real estate professional with over 15 years experience. She can be reached at email@example.com.