May 9, 2010 in Business

Internet fuels latest edition of the home essay contest

Tom Kelly
 

There have been several different methods used to advertise home sales via an essay contest – neighborhood fliers, church bulletins, newspaper classifieds. But the latest example was truly a sign of the times.

A man in Seaside, Ore., used the lure of a peaceful retirement and relaxing vacation time on the Oregon Coast to mount an online campaign ( www.win99dollarbeachhouse.com) to sell a beach cabin. Theodore Zennie capitalized on the power of the Internet to spread the word that for $99 and a short essay of “six lines or less explaining why you wanted or needed the cottage,” entrants could buy a chance to own the property free and clear. The contest drew not only cash-strapped first-time homebuyers, but also retirement folks and second-home investors.

Zennie was later arrested for selling drugs to undercover agents and confessed that the contest fueled his drug habit and trade. He probably spent less on his campaign and received greater exposure – his scheme was picked up by Midwest television stations – than other contests conducted in recent years where the essay prize was a home. Zennie was desperate for drugs while the others were desperate to get rid of mortgage payments they no longer were able to make.

In one instance, a couple completed an extensive remodel on the multilevel view home when the wife’s physical condition limited her ability to climb stairs. The couple placed the home on the market but found no takers. The woman lost her job and the couple used the essay contest as a last resort. They were hoping to pay off their mortgage from the entry fees paid by contestants.

The couple appeared genuine in their efforts. They stated to contestants that if the contest were cancelled for any reason, all entry fees would be returned, less a 10 percent fee for contest, escrow and processing costs. All entry fees were held in a registered escrow account until the winner had been notified. Title insurance was provided on the property. When the number of entries did not meet the amount of the mortgage, the couple returned all entry fees.

Law enforcement officials are familiar with home-sale contests. The attorneys general in many states have scrutinized similar contests when consumers began to question the legitimacy of the operation.

In most states, any activity that includes “prize, chance and consideration” is gambling and must be properly licensed and regulated. For example, raffling off a house would be prohibited because it is based on chance. A lottery is similar. Some skill may be involved in choosing the numbers, but it’s mostly chance or luck.

The controversial step that the man behind the contest needed to prove was that the contest was based on skill, not chance. The man said he would choose three “professional people and clergy” to serve as judges.

How do you know the judging is independent? Who are the judges, and who picked them? Relatives of the homeowner can’t enter the contest, but what about friends and acquaintances and co-workers? How do you know they won’t win the house?

Another critical piece to the puzzle was the tax question. Would the IRS consider the house a gift, taxable to the winner?

A real estate tax attorney said the gift question was definitely a gray area that would probably be up to a court to decide. If it were not a gift – if there was no gratuitous intent – it would be taxable to the person receiving the home. It would be taxed as ordinary income.

The essay contest concept seems to surface every few years. The idea was the focus of a film, “The Spitfire Grill,” which generated a wave of home essay contests. The movie starred Ellen Burstyn as the owner of a café in a small Maine town who was getting on in years and tired of the early preparation that came with daily breakfast. She was persuaded to hold an essay contest with the grill as the prize. Entrants paid a fee to enter their essays.

Perhaps Theodore Zennie caught a late-night rerun of “The Spitfire Grill.”

Tom Kelly is a former real estate editor for the Seattle Times. His book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore of Stewart International.

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