By Herb Weisbaum ConsumerMan
msnbc.com contributor

It’s fun and exciting and a whole new way to shop. If you know how to play the penny auction game — and are very lucky — you may be able to buy name-brand products and gift cards at amazingly low prices.

But before you rush to sign up, you’d better understand how penny auctions work. The bidding starts at zero and goes up by only a penny each time. But you have to pay anywhere from 50 cents to a dollar to place a bid. And most penny auction sites make you buy a package of bids to get started.

“They’re very different from other auctions because you have to pay to play,” says Bob Schroeder with the Federal Trade Commission. “You could end up spending more than the value of the product you’re bidding on.”

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For example, one site I visited this week highlighted a $25 BP gas card that went for just $1.13. Sounds like a fabulous deal. It’s not. I checked the auction record and the “winner” had bid on the gas card 55 times at 65 cents a bid. When you add in the shipping and handling charges, that $25 gas card really cost $40.25.

Go to any penny auction site and they’re packed with testimonials from happy customers. And indeed, some people will walk away with bargains. But the list of unhappy customers is growing.

So far this year, more than 1,000 people have complained to the Better Business Bureau about online penny auctions: delivery delays, poor customer service, misleading advertising and unauthorized charges.

“We feel consumers need to be extremely careful,” warns Becky Maier with the BBB of Pittsburgh.

Lisa Jane Braddom of Sparta, Tenn., got stiffed when she won a computer monitor at a site called Wavee.com. The monitor she bought was supposed to arrive within 10 days. That was back in December. Despite repeated assurances from the company that the monitor was about to be shipped, it never came.

Braddom kept hounding the company and finally got her money back. She was lucky.

“I will never go to a penny auction site again,” she says.

The Governor’s Office of Consumer Protection in Georgia investigated Wavee US, LLC and determined this was not an isolated case. Last month, in a settlement with the state, Wavee agreed to close its site and refund more than $200,000 to unhappy customers. (Restitution claims must be filed by August 30, 2011)

Warning: Some penny auction sites don’t play fair
You should also know that some of these sites are not on the up-and-up. And it’s often hard to know you’re being scammed.

Last year, Washington State shut down a site called PennyBiddr. The state’s lawsuit accused the company of cheating by using phony bids to drive up the prices.

“The shill bids would be placed automatically by a software program or they might hire people to manually place bids,” says Washington Attorney General Rob McKenna. “Each fake bid inflates the price of the item, extends the auction time and increases the number of bids required to win.”

Another catch: Automatic enrollment
Arthur Godfrey of Kissimmee, Fla., was on Facebook recently when he spotted an ad offering “10 Free Bids” on Grabswag.com, a new penny auction site based in Orlando. As part of the registration process, he needed to provide a credit card number.

“As soon as I clicked ‘submit,’ it automatically billed me for $99,” Godfrey says.

When he called the company to complain, the customer service agent said there was nothing she could do for him.

“She said I didn’t read the fine print. And then she hung up on me.”

Godfrey called back and after much haggling got them to refund half of his money. (I told him to file a fraud report with his credit card company to get the entire charge reversed.)

“I think I was scammed,” Godfrey says. And he insists there was nothing on the site that said that by agreeing to the free bids his credit card would be charged.

Dana Badgerow, CEO of the Better Business Bureau of Minnesota and North Dakota, knows how to read fine print and says Godfrey is right. As a test, she signed up for Grabswag’s “10 Free Bids” offer and was also charged $99 for a “Starter Pack.”

“Nowhere was that disclosed in any of the information,” Badgerow tells me. “It was not in the terms and conditions, which I read diligently, or any of the pages that led up to the data entry page. So I was really stunned."

Badgerow was also surprised to find the “BBB Accredited Business” seal on Grabswag’s home page. They are not and have never been a member of the Better Business Bureau. In fact, the BBB in Orlando just issued a report on Grabswag’s parent company, Nextown Technologies, LLC. The company has an “F” rating.

Holly Salmons, vice president of BBB of Central Florida, tells me they have received 32 complaints about Grabswag in the past two weeks. The company has only been online a little over a month.

“There is a clear and concerning pattern to the complaints,” Salmons says. And the company has not responded to these complaints.

“Growing pains,” says Michael Andrews, director of operations at Grabswag. “We are working diligently to make sure that any open issues with consumers are resolved promptly.”

Andrews insists the company clearly discloses that the offer is 10 free bonus bids when you buy a pack of 132 bids for $99. And he tells me they are working to make the disclosure better.

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And what about using the BBB logo on the site when the company is not a member? Andrews says he doesn’t know anything about that. It’s not there now. If it was there in the past, he says, it was a mistake.

My two cents
Traditional auctions are a great way to bargain shop. Penny auctions are more like online gambling. Quite frankly, I don’t like the idea that shoppers have to pay to place a bid. You could spend money and get nothing.

Then there’s the problem of shill bids and unauthorized charges. People who’ve been ripped off say it’s very hard to contact the company.

Sorry, this is not a smart way to shop.

If you’ve had a problem with a penny auction site, I encourage you to file complaints with your state’s consumer protection office, the Better Business Bureau and the Federal Trade Commission.

More info:

FTC: Online penny auctions: Nothing for something?

BBB Cautions Consumers on Penny Auctions

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