Things to Know to Avoid Complications (Even Fraud!) in the Auction Process

Imagine that your friend tells you the following story. He was walking down the street and a woman approached him, claiming to be a licensed Rolex dealer. She offered to sell him a brand new Rolex watch, for a fraction of the cost. Your friend had just gotten paid $500 from his summer dog-walking job and gladly handed over the money. When he got home, he discovered that an inexpensive watch had been cleverly manipulated to look like a real Rolex watch. Your friend is angry at the woman for "swindling" him. Yet, realistically, how sorry do you feel for your friend? In fact, you must be thinking that your friend is a real "sucker" because he missed all the signs that pointed toward a fraudulent transaction.

In the world of online auctions, it can be just as easy to pick up on the signs that point towards fraud, if you know what you are looking for. In general, if you are the buyer, it is important that you know the seller, the product, and the terms of the deal.

The three things buyers and bidders need to know

1) Know the seller

Even in an online transaction, where sellers can originate from all corners of the globe, it is still possible to get to know the seller. In the "real world" you wouldn't trust someone just because she says she is a "licensed Rolex dealer." So why do it in the realm of online auctions? Do your homework and try to learn as much about your seller as possible.

First, check to see if the auction site allows users to post feedback. Feedback is the positive and/or negative comments previous bidders and sellers have posted about each other. If negative feedback has been posted, read the comments to see why others have been unhappy, and decide whether it is worth risking a similar thing happening to you.

Next, try to identify the seller by name, rather than just an email address or screen name. You might want to email the seller and ask for a phone number at which the seller can be located. Verify that the phone number is correct, and that the name matches the number. Find out the seller's mailing address, and try to get a street address rather than solely a post office box address. This makes it easier to contact the seller if there is a problem and also might indicate that your seller is not trying to conceal her identity for fraudulent reasons.

2) Know the product

Even though online services mean that you do not have the same opportunity to carefully examine the product in person, try to learn as much about it as possible. Carefully read through the information that the seller has posted and examine any photographs of the product, if available. Assess whether the photograph is of the item you are bidding on, or whether it is a general photograph of the product, such as one released by a manufacturer. Ask the seller if she has a photograph of the item you are bidding on, so you can better determine the condition of the item. Make sure you know if the product is new, refurbished, discontinued, or off-brand.

Email the seller if you have more questions about the product. Save hard copies of any claims that the seller has made about the product. It is illegal for a seller to misrepresent the product she is selling, so having evidence of the seller's representations may help you later.

3) Know the terms of the deal

As a bidder, you may be legally obligated to perform if you are the highest bidder. Take the time to know the terms of the deal before placing your bid.

Determine how the seller expects payment and whether there will be any type of warranty on the product. Clarify the terms regarding the shipping (See Let the Bidding Begin: A Walk Through the Auction Process to learn more). Some shipping companies automatically protect your shipment against loss or damages up to $100. If your shipment is worth more than this amount, you may want to purchase additional insurance for the package. The United States Postal Service and most express shipping companies sell additional insurance for both domestic and international shipments.

Main concerns for buyers and bidders

The Federal Trade Commission reported that most complaints involving Internet auction fraud by sellers have centered on the following:

Non-delivery of the product by the seller

A buyer eagerly awaits delivery of the 1953 corvette for which she was the highest bidder. The seller contacted her right away for payment, which the buyer promptly sent. Unfortunately, no corvette shows up at her front door. In the end, the buyer never receives the car. Could this situation have been avoided?

Non-delivery problems are often the hardest to spot. If something seems too good to be true, it probably is. Look on other auction sites. Has the same seller put the same item on many sites? If it is a unique item, consider whether it is probable that the seller actually has that many items. For instance, if the bidder noticed this same seller auctioning off 1953 corvettes on lots of sites when only a little over 200 of this model are in existence, a buyer might be skeptical of whether the seller actually has any of the cars. Look for and verify all the contact information that the seller provides. If you are victim of this type of scheme, advise the seller that you plan to contact the proper authorities, such as your state Attorney General for mail fraud, if you are not refunded your money or sent the item. Of course, you should actually contact the proper authorities as well.

Bait and switch: delivery of goods different from those advertised

A seller claims to have a signed William Perry Chicago Bears jersey. However, upon receipt, the buyer discovers the signature was not authentic. Guard against this type of situation! Scrutinize photographs and descriptions of the products. Ask the seller lots of questions. Be wary of sellers who are unwilling to verify the authenticity of the item, such as a seller who says, "I bought the jersey from a dealer who claimed the signature was real." No matter how much you want the item, if all signs point toward a bum seller, pass on the bidding.

Failure to delivery in a timely manner

You were the highest bidder on the perfect hula gear for your trip to Hawaii. Y ou sent the seller the payment, but while waiting for the gear to arrive, you've already made it to Hawaii and back. Months later, your Hawaiian dress appears. Are you entitled to a refund?

Generally, yes, but make sure you know the terms of your deal. Even if the seller has not specified a time frame for shipping the item, most sites require that the item be shipped within 30 days. To avoid any miscommunication, confirm the shipping date with the seller and inform the seller you will expect a refund if the product is not delivered within the specified time frame.

Failure to disclose all relevant information or terms of the deal

Chad visits an online auction site and sees a picture of 10 antique Pez dispensers that will complete his collection. The seller advertises a "collection" of antique dispensers, and refers the bidder to the picture for reference. Chad bids on the Pez dispensers and when the auction closes he is the highest bidder. However, in communicating with the seller at the close of the auction, he is informed that the seller actually only has five of the Pez dispensers and that the five constitute the "collection" he was auctioning. Does Chad have to pay for the dispensers, when he believed he was bidding on all ten?

Chad will probably not be held to the deal. His claim that he should not be held to it would be even stronger if he communicated with the seller beforehand and received verification that he was bidding on all the Pez dispensers in the picture. All communication should be saved and printed out in hard copy form for later proof.

Other concerns for buyers and bidders

Besides the schemes specifically noted by the FTC, buyers and bidders should also be wary of the following:

Bid shilling

This is a type of fraud that occurs during the bidding process where the seller enters the bidding under another screen name or enlists another person to bid in order to drive up her overall return. Many auction sites use technology that detects certain forms of bid shilling. As a bidder, watch out for bidders who always bid on a certain seller's goods but who never seem to win the bidding.

E-sniping

Sniping technology allows a bidder to enter the bidding at the last few seconds of an auction. Without such technology, it would be nearly impossible to plan for a bid to occur in such a precise time period. Sniping is legal, and there are many different types of sniping software available. If you find you are often outbid in the final seconds of an auction, your adversary probably has sniping technology.

Don’t release unnecessary information

A seller should NEVER need your social security number, driver’s license number, or bank account number. In addition, no seller should request a cash payment from you.

The three things a seller needs to know

As a seller you want to portray your product in the best possible light and make the most money possible without doing anything illegal. In addition, you want some assurance that the bidders will act lawfully. In general, as a seller, you need to know your duties, know how you want to structure the deal, and know what precautions you should take to protect yourself against fraudulent buyers.

Know your duties in avoiding fraud on your behalf

You want to auction off some video games that you have played but still have the original packaging for. Although you feel like the games would get a higher price if you advertised them as "Brand New," is it legal to do this? No.

In general, a seller has a duty to advertise the product in the most accurate means possible. It is against the law to lie about the condition or quality of the product you are selling. Be honest in your description of the product and try to include a photograph of the product if possible.

It is illegal to place shill bids or cause them to be placed. Although you want to earn as much money as possible through the bidding, it is fraudulent to enter the bidding under another name and bid on your own product. It is also illegal to elicit others to place shill bids for you.

Know what you want from the deal

As the seller, know exactly how you want the transaction to be structured. Decide on the best payment method, the best shipping procedures, and any warranty or refund policies, etc. Be clear and firm with bidders and potential bidders about what you expect. Answer questions quickly and save a copy of all communication.

Know situations in which there might be potential for fraud on the buyer

Bid Shielding

The bidding has begun on your set of old textbooks. You are very surprised to see that the second bid placed is many times higher than you would have ever expected. As the auction gets ready to close, the second bidder retracts her bid and you are stuck with awarding your old textbooks to the next highest bidder, for a price much lower than you expected.

Bid shielding occurs when the bidder tries to win an auction with a low bidding price, by creating another screen name or eliciting someone else to enter the bidding with such a high price as to scare off other bidders, only to retract the bid near the close of the auction. Some auction sites have technology that protects against certain forms of bid shielding. Other websites allow you to set a minimum bid so that you can at least recoup what you expect. In addition, if the auction site allows you to view the history of the bidders, try to determine in advance whether there has been a history of this type of conduct on the part of the either bidder. If you feel bid shielding has occurred, contact the host site or other agency and report your suspicions.

Lost/Damaged in the mail

The auction is over. You've received payment from the winning bidder for your Tickle Me Elmo collection. You've sent off all of your Elmos. Now you get a call from the buyer stating that the Elmos never arrived, or that the Elmos arrived damaged. The buyer demands a refund.

The claim may be fraudulent, if the buyer refuses to return the "damaged" Elmos. Or if the buyer contacts you months later stating that the product never arrived. So, the best thing to do is to prevent this situation from happening. Insist on insuring the product, and if the buyer resists, make clear that the risk of loss is on the buyer if the product arrives damaged or gets lost in the mail. Have the package tracked and make the buyer sign for the package. Keep insurance receipts and tracking numbers. Have the buyer confirm delivery and the quality of the products upon arrival.

Returning a different product

Upon payment, you sent your winning seller a limited first edition Pikachu stuffed animal. Yet, the buyer calls you and says that she is unhappy with the quality of the Pikachu and asks for a refund. Being a nice person, you say "Sure, just ship the Pikachu back." However, you open the box and instead of a "Pikachu" there is a poorly stitched yellow stuffed animal in the box that is different from what you shipped.

It is important to let buyers know from the start what your return policy is. Be firm, and insist that you will not refund their money until you have had a chance to inspect the goods that they return to you. If you have been the victim of a "return and switch" situation as is here, the best means to deal with this is to return the goods with a letter explaining that it is not the product you shipped. State that no refund will be granted until that goods are returned. Keep copies of all your correspondence.

Next: What to Do if Something Goes Wrong