For anyone who buys or sells websites, fraud and scams are likely to be at the top of their list of concerns.
Sometimes, the word scam is misused; I’ve used it broadly to describe any situation in which there is a serious discrepancy between what you expect to get and what you actually receive. I’m going to run through a few of these situations and offer some practical things you can do to avoid falling victim. As usual, if you feel I’ve left anything out, please let us know.
1) Where’s my money?
There’s a saying that the greatest trick the devil ever pulled, was convincing the world Paypal is a safe way to sell a website. (I paraphrase a little but that’s the general gist of it ). At time of writing I read five horror stories this week alone on the nightmares of using Paypal for website sales. Here’s how the scam works:
You, the seller, agree to sell your site to the buyer using Paypal to handle your transaction. One of two things can happen
- The buyer makes a payment to you via Paypal, and they inform you that funds have cleared and it’s ok to “ship to buyer”. At this point you being the domain and site transfer.
- The buyer claims that they never received the ‘goods’ ordered from you and opens a dispute. In the case of an electronic transaction where no physical goods exist, Paypal will usually rule in favour of the buyer awarding them a refund. ( ** Paypal have recently advised that are looking into their dispute procedure to provide fairer arbitration for sellers of non physical goods)
Both scenarios result in the money being returned to the buyer, once they already have control of your domain and all your site’s files and data.
Paypal was never designed to be an intermediary for selling websites, and the scam can work both ways (you send money and receive nothing in return). Ideally, Paypal should only be used where the risk of losing your domain is acceptable to you (low value starter sites) should the worse case scenario occur.
One tip to help guard against the buyer claiming they have never received the product is simply to use the “physical product” option rather than “digital product”, and send the buyer the files on a DVD. This has two benefits
- You can track the delivery with almost any registered postal service worldwide and Paypal accepts the buyer’s signature for this as proof of receipt.
- You have the buyer’s address (avoid PO Boxes and rented mailing addresses wherever possible). If your domain registrar uses unique unlock codes, you can also send this on the DVD which guarantees the recipient is genuinely the person you are dealing with.
2) Where’s my site?
Flippa’s recent partnership with Escrow.com has helped to reduce fraud on the site and essentially, some form of protection will always be better than no protection at all. The problem is that the escrow service is for selling domains, not for selling complete sites, offering zero protection on anything other than the transfer of the domain name itself.
Consider this example (true story!):
You the buyer, agree to buy a web application that unlocks iPhones. The site is making little revenue, but the price is justified by the software itself which is completely automated and a custom application, allowing you to generate a truly passive source of income. After signing up to test the site, you place an order and unlock your phone; it seems everything is working fine.
You make an offer, the buyer accepts and a transaction is started using Escrow.com. You transfer the asking price and this is held in Escrow. The buyer begins the process to transfer the domain and notifies Escrow.com on its successful completion. They release the funds to the buyer as you now have the domain. You receive an email with a link to a zip containing the site files, but on installing them you realise that there is nothing but a few static pages.
You send an (irate) email to the seller who explains that this is all that is included in the sale (you later find out from a third party that the seller simply orders the code manually from another genuine site and emails it back to you whenever you place an order through his site, faking the automation part). At this point
- Escrow.com refuses to help. Their responsibility was only to ensure that the domain had been transferred.
- It’s highly unlikely the Forum or Auction Site that you purchased the website from will do anything except ban the seller which may provide some satisfaction, but won’t get your money back.
- Even if you paid by credit card, your card company will be unable to assist due to the nature of the escrow transaction.
Whilst there is no silver bullet to prevent this from happening, there are a number of measures you can take to limit the damage should it happen to you.
- With high value transactions where the client base, data or software make up a substantial part of the final price, ask the seller if they’ll consider staged payments where you pay one amount in escrow for the domain, and the remainder (again in escrow) for the site’s data.
- If the site you purchase is worth more than $10,000 consider using a solicitor / attorney to handle the transaction. This will give you scope to agree your own criteria for the payment of your money to the seller.
- It seems like a no-brainer but do your homework. Whilst a buyer won’t show you their entire client database before you’ve handed over any cash, you can always ask to see the finer details once you have placed the money in escrow and the buyer can see you are serious.
Use this with caution however, as the seller can easily complete the transaction and claim the money if they manage to transfer the domain before you’ve had the opportunity to take a look for yourself.
3) Where’s my traffic?
Possibly the most common scam, sellers often misrepresent financial and statistical data (sometimes without realising).
Consider this; you purchase a site whose asking price is justified by a seemingly active community and high number of monthly unique visits. As any experienced site trader knows, where there’s relevant traffic, there’s profit. On buying the site, you realise one of three things have gone wrong:
- The traffic is untargeted or non converting traffic. Site owners can cheaply purchase traffic from sites that redirect visitors through a variety of methods such as pop-unders or malware that will inflate your traffic numbers with people most likely not interested in what you have to offer. White hat tactics such as bookmarking with Stumbleupon can see traffic spike by 10x overnight, but again, from people more interested in window shopping rather than sticking around.
- The traffic figures have been greatly exaggerated. Traffic based on server logs (such as Awstats) is often inaccurate and the buyer refuses to install Google Analytics.
- Traffic (and often PR) is coming from paid links that the buyer has failed to disclose. The cost of maintaining these links, if you are fortunate enough to be told that they exist, far exceeds the revenue generated by the site, and the loss of links results in loss of traffic.
Preventing a traffic scam all boils down to thorough research.
- If the buyer does not have Google Analytics installed, ask that they install analytics code (linked to your own account) for several days during the due diligence period to establish whether traffic claimed is genuine.
- Examine the referring sites that send the most traffic, and establish how the buyer established a link there to begin with. If you cant establish if a link is paid or organic, contact the publisher of the linking page and ask what the procedure is to get a link from their site
- Providing you have analytics installed, examine the bounce rate (the percentage of initial visitors to a site who click away to a different site, rather than continue on to other pages) and the time people spend on the site. A high bounce rate and low average time should send alarm bells ringing.
4) The Page Rank Scam
As much as we know we shouldn’t obsess over page rank, we still do. A like for like site that has a page rank of 4 rather than 2 has historically sold for an average of 53% more at auction (Flippa.com data from 20th March – 2nd April 2010), which is substantial proof that even if PR doesn’t matter to us as buyers, it is important to others when it comes to adding value to your site.
Page Rank can be faked. If a trader purchases a dropped domain, Google will continue to show the previous site’s PR for a period of time. This will usually reset when the next page rank update takes place resulting in complete loss of PR and most of the SERP privileges that accompany it.
The true answer, is never rely on Page Rank and certainly never purchase a site for its page rank alone. If the page rank is a major factor in the selling price of a site, do your homework
- Use the Wayback Machine link on any of our listing detail pages to see a snapshot of the site several months or years back.
- Try to establish how a site with a high PR has come to be. This can often be genuine even over a short time frame, if the owner has managed to obtain just a few links from sites with very high PR themselves, but these links should ideally be organically obtained (e.g. a press release or article rather than paid for) to ensure longevity.
5) The WSO Flip
The WSO flip technically isn’t a scam and arguably it may not even be considered as bad practice, but I feel it deserves a mention all the same.
You create a product, system or information pack and sell it through the Warrior Forum as a WSO – warrior special offer. The warrior forum is possibly the largest forum for internet marketing and a must for anyone involved in trading websites. Due to the nature of the forum, a good WSO will easily sell in volume simply because of the amount of targeted potential customers that will see what you have to offer. The downside is that with the forum being a forum, the offer will usually only last for a few weeks before they die out.
Once the buying activity tails off, the seller will then list the site for sale as having generated $x in just three weeks, effectively raising the perceived value for anyone who looks at revenue alone. Arguably, there is nothing unethical about this; the product has sold at the level the seller has quoted, however the problem comes from the fact that it may not be able to do it again.
The Warrior Forum is essentially the most focused demographic of internet marketing people ready to make a purchase. It’s highly unlikely that you will ever be able to replicate the same success in as short a time frame again without huge ad spends. Imagine selling Apple IPhone products, from the only Apple stand at an Apple convention versus selling the same product from a local greengrocer 30 miles out of town. The first may be short-lived but will inevitably generate huge revenues in days that may exceed what the greengrocer will ever be able to do.
When buying sites and making comparisons, we always look at three month average revenues rather than just the seller’s quoted month. For example a site that has made $300 in three weeks since starting is often misquoted as generating $300 per month. As a three month average revenue this figure is just $100, and provides a fairer comparison against a site that only makes $200 per month but has been doing so consistently for the last six months.
You should ask yourself if it’s possible to replicate the success of the WSO without the Warrior Forum by using Pay per click, organic search or possible joint ventures with similar niche site owners. Sales on the WSO are essentially justification for the fact a product will sell to a focused audience of potential buyers, which is always better than buying a new product with no proven sales history. The value you place on those past sales should be done with caution however, knowing that a short term buying frenzy is difficult to maintain and you could be stuck with a ‘burnt out’ product before you’ve got started.
6) Where’s my profit
Sellers can often fail to disclose vital pieces of information that will leave you puzzled when you’re consistently generating revenue, but have no money left at month end.
For example, a membership site that allows snowboarders around the world to connect and share live and pre recorded video of jumps can have several costs.
- The cost of hosting – the requirement for storage and bandwidth is likely to send costs soaring as the site becomes more popular.
- The cost of licensing for off the shelf solutions such as membership management software or a custom forum script.
- The monthly cost for their email marketing solution which is fairly substantial with the amount of members the site has. This is crucial for keeping existing members involved and keeping the community alive
- The outsourced cost of a designer to create new graphics and page headers for new articles and how tos.
In my experience, I have never seen an auction listing where a seller has disclosed ALL of a sites fixed costs upfront. This may not be deliberate, but without any formal accounts, it can be easy to forget what you’ve spent.
- Know your niche. Running a wordpress blog is unlikely to require much financial commitment outside of hosting and possible licence fees. On the other hand, a site that permits huge downloads or hosts online video is likely to have high monthly costs in order to supply the necessary storage and bandwidth. Having knowledge of your niche will essentially give you a heads up of the likely operating costs even when the seller has failed to disclose them.
- Keep a template checklist with every potential cost category you can think of (e.g. hosting, outsourced services, licences etc). During due diligence, ask the seller to simply check yes or no to each category, and expand on those where the answer is yes.
You should also remember to factor in the yearly costs that you may not see straight away, such as licenses for scripts and applications that can sometimes run into the high $000s. Ask the seller for a full list of ALL the site related purchases they have made since starting the site when a formal set of accounts aren’t available.
Ultimately, there is no guarantee that a sale will always go to plan regardless of the measures or procedures you have in place. You can however, severely reduce the risk by doing your homework and keeping your due diligence as tight and consistent as humanly possible.
If you’ve been on the wrong end of a transaction gone badly, we’d love to hear from you.