| Bid
Rigging is a Crime; Don't Do it!
Bid rigging
is one of the most serious offenses you can commit in the foreclosure
business. It is a crime punishable by significant monetary fines and
serious jail time.
What is Bid
Rigging
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.
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.
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. What makes it 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, 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's not worth it.
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