Buyer (and seller) beware of home giveaway contests

In every real estate downturn, some home owner whose having a hard time selling their home has what they think is an original (and brilliant) idea: Hold a sweepstakes and raffle off the house! Just charge $1,000 a ticket and require that at least 300 of them be sold before you turn over your keys, you've in essence, sold your house for $300,000 -- right? Not so fast, Einstein.

For one thing, it isn't legal. When the state runs a raffle -- like the lottery -- that's legal. When you do it as a private citizen, it is not. Nonprofits may hold raffles but despite your dwindling savings account, you likely aren't a nonprofit except in the eyes of your mother-in-law. No matter how you cut it and despite those who try each year, an individual homeowner can't legally print up raffle tickets and advertise his home as the prize.

Nevertheless, people have found a couple of ways to get around this whole nonsense of legality -- or lack thereof.

Tests of Skill
While a straight-out raffle is considered gambling and hence, a no-no, if you make it a contest for which a skill can be judged, then you are mowing a greener legal lawn. For example, an essay contest where participants write six words describing why they are worthy of owning your home -- and pay you a contest entry fee of $100 -- that would be legal. The law will insist that those essays are judged fairly and impartially, of course, and if you read the fine print, it undoubtedly says that the contest will be canceled unless a minimum number of entries are received. It should also say that the entry fees will be returned if that happens.

As for contest winners, this is truly a case of being careful what you wish for. If you've won a prize -- say a house valued at $300,000 -- you are responsible for paying income taxes on that prize. Just ask game show winners who figured out that they didn't love those new living room sets so much that they wanted to pay taxes on them. When that wheel of fortune spins your way, it comes with a tax bill. It is not a gift; it is taxed as ordinary income.

Have a Nonprofit Do the Dirty Work
The second method is to sell your home through a nonprofit. And a cottage industry of services have sprung up to help you do that. They exist to help people stay on the right side of the law, although their web sites are filled with cautionary warnings that they are not responsible if things don't work out.

These companies connect you with a non-profit organization that agrees to raffle off your home. You sign a contingency agreement that says the nonprofit will buy your house from you once they have sold a set number of tickets. The nonprofit will buy your home at its appraised value -- not the market value and not the amount you owe on your loan -- meaning you could still owe money on your loan, the bank would still have to approve a short-sale, and you probably shouldn't expect untold riches from this plan.

What some intermediary companies do is charge you a $50 fee to list your house on their website in the hopes of attracting a non-profit to take it and offer it as a prize in a raffle. If there is some reason you can't legally find a nonprofit on your own, it eludes me. And listing it with a company doesn't guarantee that a nonprofit will pick it up. Other companies work for the charities, offering to market the homes -- and cars and boats -- that are being raffled off.

But home sellers, creative lot that they've been forced to become, keep hanging onto the misguided notion that they should be able to raffle off their home. The latest effort that made news came out of Oregon, where a chap named Theodore Zennie held an essay contest with $99 entry fees to win the deed to his Seaside beach house -- a former motel with three stand-alone studios. He launched a web site explaining the simple rules: Write your essay, pay your $99 and as soon as 4,000 contestants entered, a winner would be picked. When interviewed by a local TV station, he even sweetened the deal and said part of the money from the raffle would be donated to a breast cancer charity in memory of the girlfriend he had lost to the disease.

But Zennie's plans changed when he was charged with possession and distribution of a controlled substance. Tom Bergin, sheriff of Clatsop County, Ore. said the contest was a scam and the money Zennie collected went for drugs.

In most states, activities that involve "prize, chance and consideration" are viewed as gambling and fall under that state's laws for licensing and regulation. Purely raffling off a home would be outlawed because it is based strictly on chance. Same thing for lotteries. What a homeowner needs to prove is that their contest was based on skill, not chance. It is recommended that three "professional people and clergy" be used to serve as judges. Relatives of the homeowner are frowned upon as judges, nor should they enter. It gets dicier with friends and co-workers entering; how suspicious will the contest losers feel when they learn your best friend won the grand prize?

The contest concept for selling a home seems to surface every few years. Maybe we can blame Hollywood for this too? The idea was featured in "The Spitfire Grill" film that starred Ellen Burstyn who tried to sell her Maine cafe in an essay contest.
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