Bid-rigging occurs when real estate investors conspire together to keep auction prices down, by divvying up the properties beforehand and not bidding against each other. The money the investors save is money that would go to the distressed former homeowners: The proceeds pay off the rest of the mortgage, with the surplus going into the former homeowner's pocket.
It's certainly a dirty practice. But, like with many other crimes, the guilty pleas impress black-and-white results onto a gray reality. For investors, there are various levels of culpability.
See also: The Culture of Foreclosure Auctions
In May, based on interviews with real estate investors, we offered a hypothetical to illustrate how people get caught up in the net of conspiracy:
Picture the scenario: Twice a week, every week, for three months, John, Mike, and Sally see each other at the auction. They all do their homework and each have a good eye for undervalued property. So twice a week, every week, for three months, John, Mike, and Harry target the same undervalued properties. One day they all bid on a $350,000 condo in SOMA. John holds out the longest, and he gets it for $475,000. Another day, a $625,000 two-story in Pacific Heights, and Sally gets it for $780,000. And so on. Eventually they realize it makes more sense to just team up, keep the prices down, and split the bigger profits on each of the properties. Why split the goods three ways at market price when you can split it three ways at foreclosure price?
When some new investor, Bill, comes along, John, Mike, and Sally approach him. They won't necessarily tell Bill to not bid. They won't necessarily invite Bill into the crew. Most likely, they'll offer Bill some money to pass on a certain property. Bill is new, and he's just been cornered by three veterans who are offering to pay him to do nothing. So Bill accepts. And now Bill is part of the conspiracy, and will be arrested along with the others, because the FBI cameras or agents were watching the whole time.
The FBI investigation focused on California and Alabama. Much of the bid-rigging it uncovered occurred between 2008 and 2010, when the housing market bottomed out and the amount foreclosures peaked. This environment made foreclosure auctions particularly appealing: more available houses for cheaper prices. The collusion, however, violated the Sherman Anti-Trust Act, which bans monopolistic business practices.
Nowadays, buying foreclosed property is not as profitable an investment. According to an analysis by the real estate site Zillow.com, "foreclosure discounts" have sunk over the past year or two, nationally and locally. In January 2008, San Francisco buyers were able to get a foreclosed property for 20.4 percent below its market value. By September 2011, that rate was just under 9 percent. Today, it's less than 5 percent.