Home Lotteries Illegal in United States

A recent MSNBC report about how Austrian Traude Daniel was able to unload her million dollar Austrian villa by raffling it off for roughly $131 per ticket has unleashed a new wave of inquiries from American homeowners saddled with houses that won't sell at any price. Daniel was able to collect about $1,100,000 on a home that wasn't moving at one million through conventional means.

Unfortunately, raffling off a house is illegal in almost every state in the U.S.

Why? That's what frustrated sellers want to know.

Actually the reasons for prohibiting lotteries of property by private owners in the U.S. are pretty sound. The main problem is the potential for fraud. No agency currently exists in the U.S. to broker homes by means of a lottery and to thereby provide the necessary oversight to insure that 1) the house is really worth the amount advertised, and 2) the owners actually do award the house to someone regardless of how many tickets are purchased.

Even in Europe, reports are coming in of homes up for raffle with values attached that far exceed what is accurate or sane. If a seller can get people to purchase lottery tickets at over $100 a pop in large enough numbers, there's really nothing stopping that person from taking the receipts, leaving the country, and defaulting on the unsold property.

Trying to conduct a home lottery presents problems even when the buyer is sincere. What do you do, for instance, if you don't get enough tickets sold to match what you need out of the house? A home that is not selling usually is not selling for a good reason, or many good reasons. If you put your $200,000 home up for lottery and sell 100 tickets at $100, then what? Do you return the tickets and the money? Do you sell your home for $10,000? What do you do if there is a mortgage? Do you just leave that pesky bank out of it?

The most compelling reason, however, for foreign investors to run from home lotteries in the U.S. is not that they are illegal 98% of the time (they are), and it's not that the homes may be overvalued or the sellers dishonest (both likely), it's that entering any kind of lottery is a fool's game, and it's especially foolish in a market in which even banks will deal with you at this point.

Why throw away $100 on a lottery ticket when, under the right conditions, you actually can pick up a luxury home at a fraction of its real value through conventional means? One famous quote explains that lotteries are an ignorance tax charged on people who don't understand statistical probability.

There are exceptions however.

One exception is the tax sale or foreclosure lottery. These are real events and are perfectly legal ways of getting repossessed properties off the books of banks and cities. HUD (the Department of Housing and Urban Development) also regularly sells repossessed homes through a type of lottery in which you place a bid on line and days later the winner is announced. You have to bid something remotely close to what HUD is looking for most of the time, or you won't get the property. It's kind of like eBay, only with houses and done through the government.You can find more information on how to do this, as well as a listing of homes, at the HUD website www.hud.gov.

Never go through a third party to find a HUD house. It just is not necessary. You will need to submit your bid through a licensed realtor however.

Another exception is the dollar auctions run by some larger American cities that are run to entice people into buying run down homes in depressed areas in exchange for a promise to rehab the home and live in it. You can't just promise to rehab and then never do it. You have to present proof of funds or financing and usually a limit exists on the amount of time you have to finish your project--typically one to five years. You must also promise to live in the home for a set amount of time, which is generally not terribly long--again, one to five years. The idea here is to bring horrible neighborhoods back to life by getting individuals to re-gentrify them with a bit of incentive.

The $1 auctions for rehab can be a good deal for people who work at home or work online through virtual commuting. Some neighborhoods in Detroit are so depressed you can buy a nice home for a fraction of its actual value without promising to do anything to it. The problem here (with both the $1 auctions and buying a home in Detroit outright) is that you have to be prepared to keep the home forever, because that's how long it might take for the market in these areas  to return. But for people who are just looking for affordable housing and can stay in an area long term, there are some fabulous deals to be had.

Finally, sometimes builders, TV stations, and environmental groups will hold contests with a home as the main prize. These can be totally legitimate, but again, the problem here is what are the odds? Forgive the pun, but they are always with the house, not the contestant.

So if you come across a great U.S. property that is supposedly being raffled off, don't bite. It's completely unnecessary, and the odds that you will end up with anything more than an emptier wallet are not good.

For more information about how to invest in property in the  U.S., visit our article on United States Real Estate Prospects for 2009.