Foreclosure auction bid-rigging is an old real estate scam, widely practiced in California, that was turbocharged by the housing crisis until the feds busted a bunch of folks in 2011.
Around 46 people have pleaded guilty to charges brought by the U.S. Department of Justice (DOJ), the latest in March, that they blatantly colluded to suppress the price of foreclosed homes put up for auction in the Bay Area counties of Alameda, Contra Costa, San Francisco and San Mateo.
For instance, real estate investors would gather on the steps of the Alameda County Courthouse for what appeared to be an open auction of foreclosed properties. It was a group of familiars who decided the system would work better if they agreed to not drive up the price by bidding against each other with a crowd of unfamiliars and an auctioneer they didn’t totally control.
Instead, they would designate a single person to bid, grab the property on the cheap and hold their own private auction later. Bidders not in the group were sometimes crowded out to prevent their participation, or suckered into bidding too high by the kind of “pump and dump” strategy that worked so well for the “Wolf of Wall Street.”
The secondary auction often took place right on the courthouse steps or close by. The bidders frequently pooled the difference between the first and second auctions to reduce the last vestiges of risk.
Prices were low in the second auction, according to the Chronicle, facilitating a lucrative quick flip to a new owner. The investigation calculated that properties purchased by the 46 guilty investors between 2007 and 2011 cost, on average, $50,000 less than the Bay Area average of $275,000.
And there were a lot of properties changing hands. Nearly 150,000 area homes were foreclosed on from 2007 to 2012 and bidders spent $7 billion for 25,000 of them.
When the feds finally moved in, one of them reportedly told investor Casorso it was the “biggest open secret there is.”
Casorso’s response was he couldn’t believe anyone cared. A group of savvy investors attempt to bring order to a chaotic process managed by panicked, inefficient banks that don’t know how to safely move their product. It’s a win-win for everyone and once the FBI eases up its ongoing investigation, Casorso predicted, it could be business as usual.
All they need is less oversight and another downturn in the economy to reignite a housing crisis and revive the flow of foreclosures that has become a comparative trickle.