Owners of real property – ranging from luxury homes to country inns to movie theaters to yoga studios – sometimes offer their property as a promotional prize. The promotion often follows the owner’s unsuccessful attempts to sell the property in the conventional real estate market.
The owner’s hope is that aggregate entry fees will allow the owner to recoup the investment in the property. The winner receives a property at a cost far below the property’s value. While this result may at first glance seem like a win-win for everyone, it can cause legal and other problems for both owners and winners. I’ll briefly review some of the owner’s woes in this blog posting.
Lotteries Not Allowed
Charging an entry fee (known as consideration in promotion law lingo) is where the potential trouble begins. If the winner of the property is selected based on a random drawing or other chance-based method, the real estate promotion combines chance, consideration, and a prize, and is, therefore, a lottery. With few exceptions, private individuals and organizations are legally prohibited from operating lotteries. Inadvertently structuring a promotion as an illegal lottery is number one on my list of top ten legal mistakes for contests and sweepstakes promotions.
Promotion mechanisms that are legal, depending on the state, and that might allow a private individual or organization to charge entry fees include a non-profit raffle and a skill-based contest. There are several obstacles to both approaches.
The Non-Profit Raffle Approach
In most states, non-profit raffles are limited to non-profit organizations. Hence, to structure the real estate promotion as a non-profit raffle, the owner must first enlist a non-profit organization as a sponsor. Other potential obstacles to the real estate owner achieving his financial objectives through the non-profit raffle approach include the facts that
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non-profit raffle revenue is meant to benefit non-profit causes; not private real estate owners
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State real estate regulations might restrict awarding real property as a raffle prize
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Geographic and internet restrictions on raffle ticket sales might limit potential raffle revenue
The Skill-Based Contest Approach
With this approach, the owner awards the real estate based on the participants’ demonstration of a skill. One challenge to this approach is structuring the contest so it can withstand legal scrutiny. In some actual-world situations, state attorneys general have re-classified poorly structured real estate contests as illegal lotteries. Structural features for a real estate contest which I would label as mistakes and contrary to best practices include the following:
No Rules. Failing to have and publish well-drafted contest rules
Insufficient Judging Criteria. Failing to specify the skills on which the entrants will be judged and the winner will be selected. For example, in an essay contest, it is insufficient to indicate the real estate will be awarded to the writer of the “best essay”. What exactly does it mean to be the best? An attorney general reviewing the contest will be looking for clearly established and stated criteria used for evaluating the essays.
Insufficient Information about Judges. While the sponsor does not necessarily need to identify the judges by name, the better practice is to describe why the selected judges are qualified to judge the contest. Indicating merely that "an independent panel of judges" will review the essays by may be insufficient for a contest structure to withstand legal scrutiny.
No Stated Minimum. Failing to specify the minimum number of entries for the promotion to go forward. Ideally, entry fees should be placed in an escrow or trust account so that the funds can be promptly returned if there is an insufficient number of entries. Delays in returning money can trigger legal scrutiny and accusations of fraud.
Part Two of this blog posting series will briefly discuss why one might not want to be the winner of real estate awarded in a promotion.
