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I have a local classifieds website. We started as one, and now we want to open it up to the surrounding communities. Here is how we currently have it structured. There are 3 domains:

classifieds1.com classifieds2.com classifieds3.com

When you visit any of the sites it first displays content from that particular domain first, in the order of most recent posts. Then, in that same domain, it potentially can show the listings for the other two, listed in order of distance from the user. If you were to find an item and click it, then, it would open the item on the other domains if that were indeed where they were originally posted. We did this specifically to avoid duplicate content. We also took a page from the craiglist playbook where, if the there are no search results but some in the next closest cl subdomain vicinity, then it will show those.

In our minds minds we were accomplishing 3 goals: 1) Allow people a hyper local classifieds resource with the flexibility to search beyond their local community; 2) avoid duplicate content 3) positively influence link building.

Of course we want to add to this network as demand grows with each new site having its own domain name and branding.

Is that the case or did we just inadvertadently create a link farm that's about to be heavily penalized by search engines? http://en.wikipedia.org/wiki/Link_farm

If so, what is a strategy to avoid this, or better yet, help us appropriately structure our content for both a positive user experience as well as seo value?

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In that case I would suggest to make the link no follow.

Also check out the below link, it is about interlinking your sites.

http://www.seomoz.org/blog/interlinking-your-sites-whiteboard-friday

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