Internet Auctions: A Guide for Buyers
and Sellers
Whether you're looking for a collectible or thinking
about selling an antique, an Internet auction may be
just the place for you.
Since they began in 1995, Internet
auctions have become perhaps the hottest phenomenon
on the Web. They offer buyers a "virtual"
flea market from which to choose an endless array of
merchandise from around the world, and they provide
sellers a worldwide storefront from which to market
their goods.
But online auctions can be risky business,
according to the Federal Trade Commission (FTC), a federal
agency that works to prevent fraud, deception and unfair
practices in the marketplace. Among the thousands of
consumer fraud complaints the FTC receives yearly, those
dealing with online auction fraud consistently rank
at or near the top of the list. The complaints generally
deal with late shipments, no shipments, or shipments
of products that aren't the same quality as advertised;
bogus online payment or escrow services; and fraudulent
dealers who lure bidders from legitimate auction sites
with seemingly better deals. Most complaints involve
sellers, but in some cases, the buyers are the focus.
Whether you're a buyer or a seller,
understanding how Internet auctions work can help you
avoid these problems.
Auction
Rules
Internet auctions are online bazaars. Some are the scenes
of business-to-person activity, where a Web site operator
physically controls the merchandise for sale and accepts
payment for the goods. But most specialize in person-to-person
activity where individual sellers or small businesses
auction their items directly to consumers. In these
auctions, the seller — not the site — has
the merchandise.
The person-to-person sites require
sellers to register and obtain a "user account
name" (or "screen name") before they
can place items for bid. Sellers also must agree to
pay a fee every time they conduct an auction.
Many sellers set a time limit on bidding
and, in some cases, a "reserve price" —
the lowest price they will accept for an item. When
the bidding closes at the scheduled time, the highest
bidder "wins." If no one bids at or above
the reserve price, the auction closes without a "winner."
At the end of a successful person-to-person
auction, the buyer and seller communicate — usually
by email — to arrange for payment and delivery.
Payment
Options
Successful bidders usually pay by credit card, debit
card, personal check, cashier's check, money order,
or cash on delivery. Credit cards may offer buyers the
best protection in that they allow buyers to seek a
credit from the credit card issuer (also known as a
"charge back") if the product isn't delivered
or isn't what they ordered. Typically, sellers on business-to-person
auction sites accept credit card payments. In contrast,
most sellers in person-to-person auctions require a
cashier's check or money order before they send an item.
In many cases, an online payment service
or an escrow service is used to facilitate payment.
Online
Payment Services
Online payment services are popular with both buyers
and sellers. They allow buyers to use a credit card
or electronic bank transfer to pay sellers who may not
be set up to accept credit card or electronic bank transactions.
They also may protect buyers from unlawful use of their
credit cards or bank accounts because the online payment
service, not the seller, holds the account information.
Many sellers prefer online payment services because
payment services tend to provide more security than,
say, personal checks.
In online payment services, both the
buyer and seller set up accounts that allow them to
make or accept payments. Buyers provide payment information,
such as bank account or credit card numbers, and sellers
give information about where payments should be deposited.
To complete a transaction, the buyer
tells the online payment service to direct appropriate
funds to the seller. The seller then has immediate access
to the funds, minus any service fee.
Online
Escrow Services
Online escrow services operate differently. Their primary
purpose is to protect buyers and sellers from fraud.
Escrow services accept and hold payment from the buyer
— often a wire transfer via check, money order
or credit card — until the buyer receives and
approves the merchandise. Only then do they forward
the payment to the seller. The buyer pays the fee for
an online escrow service — generally a percentage
of the cost of the item. Online escrow services usually
are used for big-ticket items, like computers, cars
or jewelry.
Types
of Fraud
Most people who complain to the FTC about Internet auction
fraud report problems with sellers who:
- fail to send the merchandise
- send something of lesser value than advertised
- fail to deliver in a timely manner
- fail to disclose all relevant information about
a product or terms of the sale.
But some buyers experience other problems,
including:
- "bid siphoning," when con artists lure
bidders off legitimate auction sites by offering to
sell the "same" item at a lower price. Their
intent is to trick consumers into sending money without
proffering the item. By going off-site, buyers lose
any protections the original site may provide, such
as insurance, feedback forms or guarantees.
- "shill bidding," when fraudulent sellers
or their "shills" bid on sellers' items
to drive up the price.
- "bid shielding," when fraudulent buyers
submit very high bids to discourage other bidders
from competing for the same item and then retract
those bids so that people they know can get the item
at a lower price.
Another type of fraud occurs when
sellers or buyers pose as escrow services to improperly
obtain money or goods. The so-called seller puts goods
up for sale on an Internet auction and insists that
prospective buyers use a particular escrow service.
Once buyers provide the escrow service with their payment
information, the escrow service doesn't hold the payment:
The payment goes directly to the so-called seller. The
buyer never receives the promised goods, can't locate
the seller, and, because the escrow service was part
of the scheme, can't get any money back.
In some cases, a fraudster poses as
a buyer and, after placing the winning bid on an item,
insists that the seller use a particular escrow service.
The escrow service tricks the seller into sending the
merchandise and doesn't send the payment or return the
goods to the seller.
Tips for Buyers...
Despite complaints of fraud, online
auctions remain a fun, efficient and relatively safe
way to do business — if you act prudently. Here's
how:
Before Bidding
- Become familiar with the auction site. Never assume
that the rules of one auction site apply to another.
If the site offers a step-by-step tutorial on the
bidding process, do it. It may save you frustration
and disappointment later.
- Find out what protections the auction site offers
buyers. Some sites provide free insurance or guarantees
for items that are undelivered, not authentic or not
what the seller claimed.
- Know exactly what you're bidding on. Read the seller's
description of the item or service, and if a photograph
is posted, look at it. Read the fine print. Look for
words like "refurbished," "close out,"
"discontinued," or "off-brand"
— especially when shopping for computer or electronic
equipment — to get a better idea of the condition
of the item being auctioned.
- Try to determine the relative value of an item before
you bid. Be skeptical if the price sounds too low
to be realistic. "Brick-and-mortar" stores
and price comparison sites may be good for reality
checks.
- Find out all you can about the seller. Avoid doing
business with sellers you can't identify, especially
those who try to lure you off the auction site with
promises of a better deal. Be aware that some fraudulent
sellers may use a forged email header that makes follow-up
difficult, if not impossible. Get the seller's telephone
number so that you have another way to get in touch.
Dial the number to confirm that it is correct. Some
auction sites post feedback ratings of sellers based
on comments by other buyers. Check them out. Although
these comments and ratings may give you some idea
of how you'll be treated, know that sometimes, comments
may be submitted by the seller or "shills"
paid by the seller.
- Consider whether the item comes with a warranty
and whether follow-up service is available if you
need it. Many sellers don't have the expertise or
facilities to provide services for the goods they
sell. If this is the case with your seller, be sure
you're willing to forfeit that protection before placing
a bid.
- Find out who pays for shipping and delivery. Generally,
sellers specify the cost of shipping and give buyers
the option for express delivery at an additional cost.
If you're uncertain about shipping costs, check with
the seller before you bid.
- Check on the seller's return policy. Can you return
the item for a full refund if you're not satisfied
with it? If you return it, are you required to pay
shipping costs or a restocking fee?
- Email or call the seller if you have any questions.
Don't place any bids until you get straight —
and satisfactory — answers.
When Bidding
- Establish a top price and stick to it. This can
help ensure that you get a fair price and protect
you from "shill bidding." Don't bid on an
item you don't intend to buy. If you're the highest
bidder, you're obligated to follow through with the
transaction. Some auction sites bar "non-paying"
bidders, also known as "deadbeats," from
future bidding.
- Save all transaction information. Print the seller's
identification; the item description; and the time,
date and price you bid on the item. Print and save
every email you send and receive from the auction
company or the seller.
Before Paying
- Know and understand what form of payment the seller
accepts. If the seller accepts only cashier's checks
or money orders, decide whether you're willing to
risk sending your payment before you receive the product.
- Protect your privacy. Never provide your Social
Security number, driver's license number, credit card
number, or bank account information until you have
checked out the seller and the online payment or escrow
service, if you're using one, to ensure legitimacy.
- If the seller insists on using a particular escrow
or online payment service you've never heard of, check
it out. Visit its Web site. A site that is generally
of poor quality with, say, misspelled words or claims
that the service is affiliated with the government,
is suspect. Call the customer service line. If there
isn't one or if you call and can't reach someone,
don't use the service.
- Before you agree to use any online payment or escrow
service, read the service's terms of agreement:
- If it's an online payment service, find out
whether it offers buyers any recourse if sellers
don't keep their end of the bargain, whether it
prevents sellers from accessing their funds if
buyers are not satisfied with the product, and
who is responsible for paying for credit card
charge backs or transaction reversal requests.
If the online payment service cannot recover the
loss from the seller, it might try to recover
its loss from you, using the credit card or bank
account information in its file. To limit your
exposure, consider reserving a separate credit
card, stored-value card or bank account to use
just for online transactions.
- Examine the online payment and escrow service's
privacy policy and security measures. Never disclose
financial or personal information unless you know
why it's being collected, how it will be used,
and how it will be safeguarded.
- Be suspicious of an online escrow service that cannot
process its own transactions and requires you to set
up accounts with online payment services. Legitimate
escrow services never do this.
- Check with the Better Business Bureau, state attorney
general or consumer protection agency — where
you live and where the online payment or escrow service
is based — to see whether there are any unresolved
complaints against the service. Keep in mind that
a lack of complaints doesn't necessarily mean that
a service has no problems.
Tips for Sellers...
Know Your Legal
Obligations
- Under federal law, you're required to advertise
your product or service and the terms of the sale
honestly and accurately. You can't place "shill"
bids on your item to boost the price or offer false
testimonials about yourself in the comment section
of Internet auction sites.
- You're prohibited from auctioning illegal goods.
While many auction sites monitor their sites to ensure
that illegal items are not being offered, the responsibility
for ensuring that a sale is legal rests with the seller
and buyer. Some auction sites post a list of prohibited
items as a guide.
- You are required to ship merchandise within the
time frame specified during the auction, or, if a
time frame is not specified, within 30 days. If you
can't meet the shipping commitment, you must give
the buyer an opportunity to cancel the order for a
full refund or agree to the new shipping date. To
learn more about your responsibilities when shipping
products, see A Business Guide to the
Federal Trade Commission's Mail or Telephone Order
Merchandise Rule.
Advertising Your
Product
- When describing your item and its condition, state
whether it's new, used or reconditioned.
- Anticipate questions buyers might have and address
them in the description of your item or service.
- When possible, include a photograph of the item.
The saying that a picture is worth a thousand words
is especially relevant in Internet auctions.
- Specify the minimum bid at the lowest fair price
you're willing to accept.
- Specify who will pay for shipping, and note whether
you'll ship internationally.
- State your return policy, including who's responsible
for paying for shipping costs or restocking fees if
the item is returned.
- Let prospective bidders know whether you provide
follow-up service; if you don't, tell them where they
can get it.
Dealing with
Bidders
- Respond as quickly as possible to bidders' questions
about the item you're auctioning or the sales terms.
- When the auction closes, print all information about
the transaction, including the buyer's identification;
a description of the item; and the date, time and
price of the bid. Save a copy of every email you send
and receive from the auction site or the successful
bidder.
- Contact the "winning" bidder as soon after
the auction closes as possible; confirm the final
cost, including shipping charges, and tell the buyer
where to send payment.
Arranging for
Payment
- If you accept credit card payments from the buyer
directly, bill the credit card account only once you've
shipped the product.
- If a buyer insists on using a particular escrow
or online payment service that you've never heard
of, check it out. Visit its Web site. Be suspicious
of claims about being affiliated with a government
agency. Call the customer service line. If there isn't
one, or if you call and can't reach someone, don't
use the service.
- Before agreeing to use an online payment or escrow
service, read the terms of agreement:
- If it's an online payment service, find out
who pays for credit card charge backs or transaction
reversal requests if the buyer seeks them.
- Examine the service's privacy policy and security
measures. Never disclose financial or personal
information unless you know why it's being collected,
how it will be used, and how it will be safeguarded.
- Be suspicious of an online escrow service that cannot
process its own transactions and requires you to set
up accounts with online payment services. Legitimate
escrow services never do this.
- Check with the Better Business Bureau, state attorney
general or consumer protection agency — where
you live and where the online payment or escrow service
is based — to see whether there are any unresolved
complaints against the service. Be mindful that a
lack of complaints doesn't necessarily mean that the
service has no problems.
For Buyers and
Sellers...
Where to Turn for
Help
If you have problems during a transaction,
try to work them out directly with the seller, buyer
or site operator. If that doesn't work, file a complaint
with:
- the attorney general's office in your state.
- your county or state consumer protection agency.
Check the blue pages of the phone book under county
and state government.
- the Better Business Bureau.
- the FTC. File a complaint online at www.ftc.gov
or call toll-free 1-877-FTC-HELP (1-877-382-4357).
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