A chance encounter

CONSUMING INTERESTS

At first glance, home raffles would seem to be win-win. But take a second look.

August 17, 2008|By DAN THANH DANG

There are no such things in life as a free lunch, or a $100 house.

Yet there seems to be a growing number of ever-so-tantalizing home raffles popping up, as more homeowners embrace innovative ways to beat the housing slump. Two are running in Maryland right now. For $100 a pop, you can try your luck at scoring a $550,000 home in Dunkirk or a $186,000 home in Owings Mills.

It sounds like a win-win for all involved. Ticket buyers get a chance at a realty gold mine, homeowners unload property in a down market and a charity gets a slice of the pie. But be warned that this little adventure is not for the faint of heart or the ill-prepared.

First, realize that you can't just wake up with a hankering to hold a lottery and start selling tickets. You must find a reputable nonprofit group registered with the state to partner with you.

"Lotteries or raffles are generally illegal," says William Gruhn, chief of the state attorney general's Consumer Protection Division. Charitable organizations that raffle off real property are an exception to this law, he said.

Should you decide to take this route, prepare yourself for the time and energy involved to make the raffle a success. If you're looking to sell quickly, a raffle might not be your answer.

First, you and the charity have to file for an application to run a raffle. Then you wait for the state to approve your request.

The Maryland secretary of state's office will want to know the date and time the charity will hold the raffle; the location of the drawing; the amount to be paid for each ticket; a good-faith estimate of the fair-market value of the property to be raffled; an appraisal of the property; the amount of all liens or encumbrances; a good-faith estimate of the closing costs; and a contract of sale between you and the charity.

"We really had to spell it out for the state," said Trina Robison, owner of the Dunkirk home that's being raffled off by Food Link Inc. of Annapolis. "They check everything. We had to do proof of title and they did their own research to make sure our home was free and clear of any liens. It took us five weeks to get the state's approval."

Choosing a reputable charity with a history of good fundraising is key, since you'll both be responsible for selling thousands of tickets to meet your goal.

The homeowner is paid the appraised value of the home only after a sufficient number of tickets are sold. The charity gets to keep whatever amount is over and above the appraised value. If you don't sell enough tickets in time for the drawing, both sides can extend ticket sales for another 60 days if you've requested an extension from the state.

Should that deadline come and go, and enough tickets still aren't sold, you'll have to return the money to ticket buyers - minus 1 percent to cover administrative costs of the raffle.

"Keep in mind, you're still paying the mortgage on that house," says Michael Hamby, an agent with Champion Realty in Annapolis. "Understand how long your home is going to be off the market. If the raffle doesn't sell enough tickets, that could be 120 days or more."

Worst-case scenario is that you'll still be stuck with the house and mortgage payments, you'll have to invest more time and money into selling your home, and the charity will have the headache of meticulously crediting or sending money back to buyers.

If you're on the other end of this equation, you could end up taking an even bigger hit should you be lucky, or unlucky, enough to win. Whether it's the Food Link raffle or the Owings Mills home raffle run by the Poets Athletic Club Inc. of Baltimore, you should read the rules carefully before purchasing a ticket.

Neither of the Maryland auctions mention home inspections, but if you decide to play this game of chance, don't take a chance on what you'll get if you win. Ask the charity or the owner if a home inspection has been conducted. If not, ask if you can have someone inspect the home before you buy a ticket, Hamby advised.

Then prepare yourself financially if you're lucky, or unlucky, enough to win.

On a $550,000 house, you'd have a tab of $14,000 just to close, said Cathy Holstrom, Food Link executive director. Both raffles clearly warn buyers that they're responsible for closing costs, assessments, property taxes, and federal, state and local income taxes.

"Taxpayers must also report the 'fair-market value' of merchandise or products won as a prize or award, as taxable income," says James Dupree, an Internal Revenue Service spokesman. "In general, winnings from lotteries and raffles are considered gambling winnings."

That could bump you into a far higher tax bracket and cost you thousands of dollars come tax time.

"When we were speaking to people in the real estate profession, we were told that you could probably get a second mortgage or equity loan on the spot to cover your taxes," Holstrom said.

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