Watchdogs: Don't get bitten by 'penny auctions'

Online-auction sites such as Bidcactus, Bid Rivals, HappyBidDay and Quibids tout their amazing online deals - as much as 95 percent off retail. But an investigation by Consumer Reports released this morning, following up on an August warning from the Federal Trade Commission, says bidders are routinely getting burned because the sites charge you to make bids.

So, yes, you may be able to snare "an $1,800 high-definition television for $73, or "a $15 store gift card for 28 cents." But CR says "that for all the people who click their way to an amazing deal, most end up spending a lot of cash only to end-up empty handed."

The reason? To get the amazing deal, consumers have to jump through a series of daunting and costly hoops.  The sites' rules vary, but the process generally works the same way at each:

Like traditional auctions, participants bid on items, with each bid increasing the price. To bid, you click a bid button. Auctions are timed so when the clock runs out, the last and highest bidder wins the item at final price. Often that price is ridiculously low. That’s because bidding starts at or near $0, and each bid raises by a fixed increment, usually just a penny or two. So an item that gets 1,000 bids in one-penny increments sells for $10, even if would cost you hundreds or thousands at retail.

But unlike with traditional auctions, bidding isn’t free. You must buy bids up front—typically for 50 cents to $1 each. To get bids, you register a credit or debit card or use PayPal. Bids are sold in packs, with the minimum pack costing around $25 to $60, depending on the site. Unused bids are refundable on some sites though sometimes within only 30 days of when you buy them.

One key difference between traditional and penny auctions is that any bids you make are gone, whether or not you win. So if you’ve made, for example, 100 60-cent bids on a $2,000 computer but you aren’t the winner, you’re out $60. If you wind up the winning bidder, you and only you would have the right to buy the computer for the winning price. So if the bidding ends at $14, the computer would cost you $74: the $14 plus the $60 you bid. If you lose, some sites give you the option of buying the item at a higher retail price, minus all or part of the amount you’ve bid. Not every site has this option.

Consumer Reports says dozens of the sites have shut down, but plenty of others are still operating. To address concerns, some sites, such as Quibids, have invited independent audits.

Beyond the basic "bidder beware" advice, Consumer Reports offers these general tips:

  • Be prepared to lose whatever you bid or the bids you've purchased.
  • Bid only on sites that allow unlimited refunds of purchased bids, offer advice and tips, and have a buy-it-now feature that lets you apply all your losing bids towards a purchase.
  • Find legitimate sites by checking user reviews. Look for a consensus among many reviewers instead of relying on just one or two posts. (We saw one report of a site paying or otherwise rewarding people for posting positive reviews.)
  • Run a search with the name of the site you're interested in with such words as "complaints" and "rip-off" to see what problems people might have had. Also get a report for a site from the Better Business Bureau, but don't rely solely on the BBB's letter grade. Read the entire report, paying special attention to the number and types of complaints and any government actions.