FBI seeks evidence of rigging in home auctions
Conducted interviews and executed search warrants through the entire Bay Area
By Carolyn Said
The San Francisco Chronicle
SAN FRANCISCO — 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.
Copyright 2011 San Francisco Chronicle