Are Penny Auctions a Scam?

I get a lot of email from companies that want me to share their products or services with you, the lovely readers of PocketYourDollars.com. As I read each of those emails I’m a cross between a momma bear and a gentle southern pastor. I want to share good information that will help each of us grow and be better financial stewards, sort of like a good-hearted pastor would be over their flock of sheep. It’s all peaceful and good in those moments.

But in a flash, I can turn into a momma bear (it isn’t pretty). It happens when a company tries to tell me that their product or service would be very valuable to those in the Pocket Your Dollars’ community, but I think they are full of it. I think their products are harmful and deceptive.

One type of company that makes me turn into a big fat momma bear are penny auction sites.

What is a penny auction?

A penny auction website runs auctions on popular merchandise – often electronics like iPads, computers and gaming devices. But these aren’t auctions like what you’ll participate in on eBay.

These are pay-to-play auctions. You buy the right to bid. Despite the name, bids aren’t a penny, but $0.50 to $1.00 each. In order to participate, you are required to buy a “pack of bids” which start at $5 or $10.

The bottom line: bidding at a penny auction is a gamble. You will spend money. You may or may not have anything to show for it.

Understand the rules

Although each penny auction site operates by their own rules, you can be sure that the fine print is slanted in their direction. A few examples:

Shipping

If you were able to win an auction at one of these sites, you’d be responsible to pay shipping and handling. Those charges vary by product and aren’t usually disclosed up front.

Bid bots

In computer-speak a “bot” is a non-human computer program that performs some sort of action. For instance, Google has “bots” that go and “read” all  the webpages on the internet so that Google knows what is out there and what to present in search results when you are looking for something. Penny auctions are not regulated like casinos and can use “bid bots” that automatically bid against humans without much consequence.

To me, that is the same thing as gambling in a casino where the slot machines may or may not be rigged.

Time extensions

Back when e-commerce meant buying something from one of two websites – Amazon or eBay – I was an eBay-er. I’ve bid on lots of things and won (and lost) plenty of auctions. One thing I often looked at on eBay was the “time remaining” clock. As a bidder I find it useful to know how much time is left until the auction closes.

With penny auctions, the auction duration is often extended with each bid that is made. For instance, imagine that you decide to get into a bidding war with 2 minutes left on the auction clock. Each time you make a successful bid, time is added to the auction clock. Then, a bot or a human successfully bids against you, which adds more time to the clock. It’s like NFL where the last 2 minutes can drag out forever, but each bid is income to the penny auction site.

Buy-now options

If you were to bid and lose on an auction, you typically have the option to “buy now”. The auction site will let you buy the item you were bidding on – at a price they determine, which isn’t usually the best deal on the web – minus the cost of any bids you made. It’s one way these sites try to distance themselves from the gambling label.

So, are they a scam?

I haven’t and wouldn’t ever bid at a penny auction site, personally. To me, it is a form of gambling with potentially-less-than-fair and less-than-clear rules. Sure, some penny auction site owners claim they lose money on half the goods they auction away, but you don’t know if you’ll get that or if you’ll get sucked into spending $50 to lose an auction.

If I had to rate them on a scale of 0 being totally legit and 10 being a Bernie Madoff ponzi scheme, I’d rate these about a 7.

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Were you familiar with penny auction sites before reading this article? What is your experience with penny auction sites?

Are there other products or services that claim to provide great deals, but you wonder if they are too good to be true?