Car Auctions on the Rise, but Not Everyone’s Sold

With their carnival-style atmosphere and promises of steals on wheels, public auto auctions provide a popular option to traditional lots for buying used cars.

About 300 cars a month change hands at sales in Lake Forest and Garden Grove. Hundreds more are sold at two lots in Van Nuys.

But with success has come heightened scrutiny.

Car dealers eye auctions’ sales volume enviously, grasping for ways to compete.

Auto bid-offs have grabbed the California Department of Motor Vehicles’ attention too, but for less salutary reasons: More than 625 consumer complaints about the sales have been filed with the agency since 1995, with defective cars, missing titles and oversized buyers’ fees topping the list of gripes.

Now auctions have the attention of the state Legislature, where a battle is revving up over how the sales should be regulated.

A bill advancing in the Senate would hold auctions to the same consumer standards as car dealers, who are liable for their cars’ condition as well as for DMV paperwork and fees.

A rival measure pending in the Assembly would do the opposite, creating a narrow new class of licenses that would allow holders to sell cars on consignment, free of many such responsibilities.

Both proposals would make auctioneers clearly disclose buyers’ fees--which can add more than $1,000 to a car’s bid price--before the gavel comes down on a sale.

“The controversy has reached the point that both houses and both sides of the aisle think it’s time to make some policy,” said Peter Welch, lobbyist for the California Motor Car Dealers Assn.

Public auto auctions, which offer repossessed, seized, government surplus or traded-in cars, have flourished since the early ‘90s.

Though the total number of cars traded this way is unknown, about 20 companies statewide specialize in the sales, said Rick Graff, executive secretary of the California State Auctioneers Assn.

Reflecting the format’s growing popularity, Priceline.com and Ford Motor Co. are experimenting with online auto auctions.

Irvine-based Autobytel.com Inc., which operates a Web site for buying and selling automobiles, has added a wholesale auction program for licensed dealers and plans to extend the service to the public eventually.

At live auctions, would-be buyers get a couple of hours to look over the cars before bidding begins. They can start them, but not drive them.

Once the sale opens, consumers flash numbered cards to bid. Spotters blow whistles and point to show where the latest offer came from as the auctioneer’s rat-a-tat patter urges the crowd to raise it.

Winning bidders usually pony up 25% of the purchase price in cash, cashier’s check or certified check to drive away their cars.

“People like the concept of one-price selling, of not dealing with a salesman,” said Donald Morrow, president of North Bay Auto Auctions in Fairfield, which auctions off 50 to 60 cars every Saturday night for an average of $4,300 apiece.

Auctioneers typically add a buyer’s fee or “premium” of 10% to 15% to the winning bid, a sore point with critics.

“You think you’re paying what you bid, then you find out you’re paying a lot more,” said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento nonprofit group.

Auctioneers defend the fees.

“We perform a service, like a dentist or an accountant,” said Norman Haigh, owner of Auction Plus in Garden Grove and Auction Services in Lake Forest.

“We make our money from the buyers’ fee, not on a dealer’s markup,” he said, adding that auction companies also collect smaller fees from those who supply the cars to be sold. “We give disclosure in writing, we do it orally in English and Spanish, it’s even posted on huge signs.”

The DMV issues auto-dealer licenses to auctioneers who operate their own lots, entitling customers to seek redress from them if they cannot obtain a car’s title, if the car fails smog tests or if they encounter mechanical or safety problems.

But auctions have found a way to circumvent those rules. Before consumers enter, they must sign forms agreeing to accept a car “as is” and to handle compliance issues, fees and repairs themselves.

“They pass the buck,” Orange County Deputy Dist. Atty. Wendy Brough said.

Brough sued Haigh in 1997, accusing him of false advertising, gouging customers on fees and selling cars not in basic working order. A judge ruled that Haigh, as an auctioneer, was not liable for his cars’ condition, but ordered him to pay more than $28,000 in fines and refunds on the other charges.

Haigh’s case highlights the central question fueling this year’s legislative debate: Should auto auctioneers be treated like other auction concerns or like traditional car dealers?

The Senate bill--supported by consumer advocates, prosecutors and car dealers--groups auctioneers with dealers. The measure would make auctions responsible for much of what they disclaim in terms-of-sale forms.

“I don’t want to create an undue burden on the industry, but clearly they’re in the business of selling cars and they should be responsible for what they sell,” said Sen. Jackie Speier, D-Daly City, who introduced the bill. The Assembly bill, by contrast, equates auto auctions not with dealerships, but with auctions of rugs, furniture or other products.

Backed by the state auctioneers association, the Assembly proposal would carve out an exemption from auto-dealer standards for auctions that sell only on consignment and get their cars from institutional clients such as governments, banks and companies with large fleets.

City of Industry-based Nationwide Auction Systems, the measure’s sponsor and the state’s biggest auction concern, has maintained for years that consignment sellers like itself should be treated differently.

“Nationwide never takes legal possession of the vehicles,” said Fred Taugher, lobbyist for the company, which has annual sales of more than $100 million and counts the counties of Los Angeles and Orange among its clients.

Nationwide has refused to obtain a dealer license from the DMV, challenging the agency’s jurisdiction to regulate it.

The DMV agreed to delay an enforcement action against Nationwide for operating without a license until August while the company makes its case with legislators.

Under Nationwide’s proposal, consignment sellers would be licensed by the DMV as retail fleet auctioneers, not dealers.

They would not be liable for cars’ condition, smog certification, sales tax collections, or title transfers and fees, but would have to disclose who their vehicles’ owners are so that consumers could pursue complaints with them.

But consumer advocates say it may prove difficult to pin down owners who funnel problem cars through auctions.

“What if the owner says ‘We told the auction it was in a wreck, it’s not our fault you didn’t get the information?’ ” Shahan said. “Then you’ve got a Catch-22 because the law would make it impossible to go after the auction.”

Car companies and insurers often use wholesale and public auto auctions to dispose of returned lemons and salvaged wrecks, said Bill Brauch, director of the Iowa attorney general’s consumer protection division and an expert on the issue.

The titles should be branded to alert consumers, but sometimes are not, he said.

Car dealers have a different gripe. They say the Assembly measure would give auctioneers an unfair competitive advantage over other used-car sellers.

“If one of our dealers sold you a car on consignment--and many of them do sell that way--if you had a problem with it, you’d sue the dealer and we’d be liable,” said Welch, the lobbyist for the car dealers group.

So far, both auto-auction bills are advancing. Each gained approval from the transportation committee in its respective house. They are now being considered by appropriations panels.

In the meantime, regulators offer several tips for auctiongoers: Clarify fees in advance and determine if there are minimum bids. Ask who holds title to the cars being sold. Don’t get caught up in the auction’s frenzy and buy impetuously.

North Bay’s Morrow said he gets one or two complaints per auction. Common sense solves most of them, he said.

“If a guy gets 10 miles away and the car starts overheating, you gotta take care of him,” he said. “But people have to limit their expectations based on what they’re paying. If they’re looking for something they can commute in for three years, they may be disappointed.”

Buying By Bid

Public auto auctions offer repossessed, seized, government surplus, and traded-in cars, promising prices well below blue-book value. But critics say they provide little recourse to consumers who buy problem cars. Here’s how auctions work:

1: Participants sign a release acknowledging they understand items are offered “as is,” true mileage is unknown, vehicle may not meet smog/safety standards and buyers are responsible for sales tax and ownership transfer.

2: Participants examine cars for two hours; mechanics are allowed. Cars may be started, but not driven.

3: Bids made by raising number cards handed out as buyers arrive.

4: Each vehicle goes to high bidder, but auctioneer may nullify sale if final price does not meet owner’s expectation. Vehicle may then be offered at subsequent auction.

5: Auctioneers add 10-15% buyer’s fee to bid price in totaling each sale.

6: Participants typically must provide 25% down payment in cash, cashier’s check or certified check immediately. Some auctions offer financing plans.

Source: Various auction companies