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Last Updated: May 14th, 2012 - 22:24:01 |
Bid rigging is one of the most serious offenses you can commit in the foreclosure business. It is a crime punishible by significant monetary fines and serious jail time.
What is Bid Rigging
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Bid rigging is the practice whereby two or more investors decide to conspire to keep the winning bid at an auction at an artificially low price. Let's say that investors A, B, and C decided to rig the bid on a particular foreclosure auction. They all agree ahead of time to three conditions: (1) not to bid against each other, (2) that one of them (let's say A) would get to buy the property, and (3) that A would pay a fee to B and C for staying out of the bid.
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Let's assume that the opening bid was $50K on a property worth $90K, and A was the high bidder at $51K because B and C did not bid. A pays a fee (let's say $3,000) each to B and C, for a total of $6K for their role as partners in crime. This means that the cost to A for buying the property is $57K. A would then flip the property (let's say for $84K) to make a nice profit of $27K ($84K - $57K), minus expenses. On the next deal, the group might decide to follow the same plan and allow B to get the property. Then C would get the next deal, and so on.
Ordinarily, if they had all competed among each other, the high bid would most likely have increased beyond the previously mentioned $51K. So by their actions, the trio has artificially lowered the high bid for the property, distributed and collected fees in the process, and thus committed a crime.
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Now, just to make sure we're clear, there is nothing wrong with investors teaming up on particular deals and deciding to split the profits fairly. From the previous example, if A, B, and C decided to be partners and they were the high bidder at $57K. They might then jointly work the deal and sell the property for $84K, for a gross profit of $27K ($84K - $57K). A, B, and C would each get a profit of $9K for the deal minus expenses. This approach is reasonable, fair, and legal.
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What is considered illegal however is if they jointly decide that one of them would pay a fee and that the others would accept a fee for not bidding at the foreclosure auction, and thereby affecting the price.
The Penalties
The penalties for bid rigging are severe, ranging from thousands of dollars in fines to several years in jail. The severity of the penalty for a given group of offenders is based on the number of times they engaged in bid rigging and the amount of money involved in the process.
Conclusion
Bid rigging and any related activity is a crime. Don't do it. You should always operate your business in a legal and ethical manner. You may get away with some rigged profits in the short term, but you will eventually get caught. It is not worth the risk.
For more foreclosre information, go to Foreclose.com
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