Penny Auction sites like Beezid and BidFun advertize such amazing deals: laptops for 90% off and iPads for $18. This sounds too good to be true — so what's the catch?

How Penny Auctions Work

Each time you make a bid, it costs you roughly between 50 cents and a dollar. Imagine if you went to a live auction and every time you raised your paddle you had to pay a buck. But this is an auction house with an unlimited amount of bidders.

To sign up, you have to buy bid packs. The more you buy at a time, the lower per-bid price you pay. On Beezid, for example, you can buy a pack of 30 bids for $27 (which works out to 90 cents per bid) all the way up to 1000 bids for $550 (.55/bid). Then you find an item you want to bid on, and start bidding. Each time you bid, it raises the price of the item by one cent and often resets a timer for another 10 seconds or so of open bidding. Bidding can be done manually, or you can set up auto-bidding, which will program the site to bid for you, usually at the last second.

But Here's The First Catch

Each time you bid, you up the ante by one cent — but you use one of the bid credits that you bought up front for between 55 cents and a dollar. In other words, bidding a penny actually costs you at least 55 cents.

And Here's the Second Catch

In a traditional auction, if you don't "win", you don't lose either; if someone outbids you, you don't pay anything. With most of these penny auction sites, the opposite is true: You could easily make 1000 "penny" bids and not win the item. But remember, each of those bids cost you at least 55 cents — so you'd be out $550 with nothing to show for it.

What Happened to Me

I bought $60 in bids and got in on an iPad auction. I bid occasionally, trying to time it when the counter neared zero, but I quickly blew 40 bucks in bids. Someone always jumped in at the last second, usually someone using the automated bid setting. So I signed up for automated bids myself, and I was amazed. My $20-worth of remaining bids flew out in 24 seconds. And I didn't win. My 60 bucks was goners! In fact, I watched the most aggressive bidder make 30 bids a minute for 2 more hours until the auction ended. 3600 bids, at a minimum 55 cents a bid. That's $1980 for a device that costs retail $499, and that guy didn't even win!

Story continues

And while this one example I witnessed is extreme, the other auctions I watched were not impressive. On another site, the winner of an iPad2 "won" the item for $0.83 — which the site will no doubt advertise as an example of the incredible deals their customers get. But in order to get the iPad for 83 cents, the "winner" actually paid $301 in bids, making his total cost $302. The exact same product sold on eBay that same day for $320. Okay, so he saved 18 bucks. But it could have gone differently: Don't forget the 15 other bidders who walked away with nothing after spending a few hundred bucks in bids. The auction site probably made over $3000 on an item that cost them $400.

FTC Warnings

The FTC has offered warnings on penny auctions, state consumer protection agencies have filed complaints, and there are class action lawsuits pending against many of these sites. Just as an example: Penny auction site Skoreit listed the retail price of an Invicta Speedway watch as $895 so bidders will really go all out, but when I checked Amazon, I found it for $299.

These sites bill themselves as "entertainment shopping" that's like calling the craps table "entertainment banking." Penny Auctions are thinly veiled gambling and the odds are NOT in your favor.

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