Are you familiar with bidding fee auctions or penny auctions? If not, here’s a description of what they are how they work.

Sales scams are as old as humanity, but the Internet has introduced a whole new way to rip people off. Penny auctions are very popular because it seems like you can get something useful – cameras, computers, etc. – for way below retail. But you pay a small fee for each bid (usually $0.50 to $1.00) and if you aren’t the winner, you lose that bid money. Winners often are not even the top bidder, just the last bidder when time runs out. Although not all penny auction sites are scams, some are being investigated as online gambling. BBB recommends you treat them the same way you would legal gambling in a casino – know exactly how the bidding works, set a limit for yourself, and be prepared to walk away before you go over that limit.

This description was from the Better Business Bureau’s top ten scams of 2011. While I have said you shouldn’t always trust the BBB, the point was made that if they warn about something, you shouldn’t get involved. In short, the BBB just veto’d penny auctions as a way to save money or get a good deal.

The BBB isn’t alone.

The Washington Post goes into more detail about the bidding fee auctions in its coverage of Swoopo.com, a defunct bidding auction company with the same model as Zeekler. The article points out a number of reasons why it “may be the most devious way to separate folks from their money yet devised” including pitting buyers against each other, getting them to make snap decisions, and making it seem like they are spending much with relatively small bids. The article goes on: “In essence, what your 60-cent bidding fee gets you at Swoopo is a ticket to a lottery, with a chance to get a high-end item at a ridiculously low price…. the only winning strategy is not to play in the first place.”

The New York Times called Swoopo’s bidding auctions, “devilish” noting how the process allows for a business school professor to sell a $20 bill to educated college students and make $50 in bids. The article shows how Swoopo was able to auction a $1000 check and collect $2452 in total fees.

In fact these bidding fee auctions may be illegal lotteries. This NBC News article explains why:

“Doing something truly as a penny auction … there’s no doubt in my mind that’s an illegal lottery,” he said. “But I believe they could be conducted correctly. … Are there some operators doing things in addition to bidding that means they (satisfy) sweepstakes and lottery laws? It’s possible. Those things would have to be analyzed more deeply.”

There are three elements to an illegal lottery — prize, chance and consideration. In a basic penny auction, all three elements are satisfied, Lewczak said. The discount is the prize. There is chance involved, as the auction bidder does not know when an auction will end. And finally, there’s consideration: The bid fees.

Even the FTC has put out a consumer alert against these penny auctions (another name for bidding fee auctions). They agree that they are more lottery than auction saying, “But in many ways, penny auctions are more like lotteries than traditional online auction sites.” It warns that unscrupulous auction sites use computer programs that automatically bid on behalf of the website to extend the auction and keep people bidding (and spending money) as they chase the “win.”

When you add up the chance of losing money, the potentially illegal lottery/gambling, and potential for the fraud by the auction company itself, the only logical conclusion is that the Washington Post is dead on with bidding auctions, “the only winning strategy is not to play in the first place.” I previously only put bidding auctions as a 5 or 6 on Lazy Man’s Scam Scale, but after doing this research, I think I underestimated it.

Tomorrow, I will build on this illustrating one specific penny auction company that I’ve been looking into, Zeekler.