Winning a house may seem like a dream come true,
but the windfall comes with a price.
By TJ Sullivan
Los Angeles Times
Few 24-year-olds living with their parents would have to think twice about their next move if they won a $1.38-million house in Palos Verdes Estates with sprawling decks, floor-to-ceiling windows and magnificent ocean views. It's a good bet many would fall all over themselves booking the moving van.
But Bhavesh "Bobby" Bhagat isn't among them.
The 24-year-old Downey resident is one of the few Southern Californians who have won a house in a raffle during the last two years. And he did the unexpected when he claimed his Palos Verdes prize two weeks ago: He chose to continue living in his childhood home in Downey with his mother and father, honoring an east Indian tradition of the youngest son remaining home with the parents.
Bhagat, a 2001 graduate of Cal State Fullerton, held the winning ticket to this year's grand prize in the Palos Verdes Art Center's annual "Win Your Dream Home Raffle," a competition that began in 2003 and has since been imitated as a fundraiser by several nonprofit organizations in Southern California.
Three weeks ago, Los Angeles resident Roy Decauwer was the winner in the "Irvine Public Schools Foundation House Raffle" and claimed the $670,000 condominium in the Quail Hill area of Irvine. And the Fender Center for the Performing Arts in Corona has delayed its drawing for two months, until July 17, to allow more time to sell tickets for its "Rock the House Raffle," which features a $600,000 home, or $300,000 in cash. In each contest, the winner has the choice of accepting the house or taking a cash prize of lesser value.
Those lucky enough to have that choice sometimes find meaning in the saw about being careful what you wish for, especially once they learn about the tax bill.
Whether they take cash or the house, the federal government wants its 28% share of taxes immediately, and it must be paid for the prize to be awarded.
"My experience has been … the majority of people would take the cash without going through the issues of dealing with a house," said Robert Yassin, the Palos Verdes Art Center's executive director, who brought the idea for the raffle from Tucson.
The house is, in some ways, a gift that keeps on taking. After settling with the federal government, the property tax bill eventually comes around, as does a bill from the state Franchise Tax Board. The extra expense may total hundreds of thousands of dollars. Nonetheless, few consider that when buying a ticket.
Bhagat spent $150 for one chance in the 18,000-ticket drawing, which sold out in 34 days to purchasers from as far away as Tennessee who hoped to win a four-bedroom house by the sea or $1 million in cash.
He opted for the hillside home on a cul-de-sac but has decided to rent it out, adding "landlord" to his list of job titles, which also includes owner of two Anaheim motels, real estate agent and investor. He recently purchased the motels, following his father's footsteps into the business.
Bhagat, who was born and raised in Downey, said he never considered moving away from his immigrant parents. Moving them to the peninsula wasn't an option either because it would take too long for him to travel to work in Anaheim.
"My parents took good care of me, so I want to take good care of them," said Bhagat, youngest of four children and the only son born to Vinod and Niru Bhagat, who left India to settle in the United States in the 1960s. "If I leave, my parents will be alone. They'll be like, 'Wait, we did all this hard work to raise all these kids … and we're just alone now?' I don't want to abandon them."
It was the second year in a row that Bhagat had purchased a single ticket for the raffle, which boasted grand-prize odds of 1 in 18,000, far better than the California Super Lotto's odds of about 1 in 41 million numerical combinations.
In addition, the art center raffle awarded $157,500 in other prizes, including a couple of early-bird drawings. On the day of the grand-prize drawing there were 180 prizes up for grabs, which meant each ticket had a 1-in-100 chance of at least winning a $300 cash prize, double the cost of a ticket.
Some purchased dozens of tickets to increase their chances of winning.
One man bought 110 tickets and another snapped up 86. Both failed to win a single prize, said Kathy Shingle, public relations director for the art center.
Mike Orkin, a professor of statistics at Cal State Hayward, and author of the book "What Are the Odds," joked that there's only one cost-effective way to gain the advantage in this game — "bribe the people running it."
"You just have to get lucky," he said.
The beauty for the Palos Verdes Art Center is that the nonprofit wins too. The center netted about $1 million this year to help fund expansion efforts, as well as the center's mission of providing art instruction to children in Palos Verdes schools.
With dough like that, who needs bake sales? Cake can't compete with the desire to live large, which is one reason the house raffle is catching on as a fundraising concept among eligible nonprofit organizations in Southern California.
The center's raffle last year, which Yassin said was the first of its kind in the state, was similar to fundraisers he conducted while serving as executive director of the Tucson Museum of Art.
However, the concept was new to California nonprofits, and the practice wasn't even legal until state legislation was enacted in 2001.
"There are a lot of provisions to it," said Bob Snyder, a Southern California attorney with 35 years of experience in gaming law. "For one, the lottery can't be done in any way over the Internet. The funds have to be used in California."
Most any group can conduct a game of skill for a fee, such as an essay contest, and award a prize like a house, but once an element of chance enters the picture the game becomes a lottery, and only certain nonprofit, tax-exempt organizations can conduct them, Snyder said.
Since the art center's success in 2003, at least three Southern California nonprofits have used this fundraising technique, which can be a complicated real estate transaction for them.
With the Palos Verdes house, the art center took the risk of buying the property outright with no mortgage — using discretionary funds — before a single raffle ticket went on sale. Photos were taken while the house was in escrow and a pamphlet was produced to coincide with the closing to show contestants what they might win. As a courtesy to the neighbors, the address of the house was not released to the public.
The title to the house will be transferred to Bhagat after he pays the required federal taxes as well as real estate-related fees, which winners are generally required to pay in all house raffles.
The Irvine Public Schools Foundation structured its contest differently, working in concert with a builder, John Laing Homes. The foundation was not obligated to purchase the grand-prize condominium until 4,000 of the $200-a-piece tickets were sold. That guaranteed the raffle would be profitable, and minimized the financial risk to the foundation.
Once the ticket-sale threshold was crossed, John Laing Homes agreed to maintain ownership until the drawing. Because the winner chose the condominium, the foundation used discretionary funds to pay the predetermined price of $500,000 for the property — prices in the new community have shot up $170,000 between raffle preparations and the drawing.
If the winner had chosen the cash prize instead, the builder would have put the house on the market.
The foundation sold 10,000 tickets and netted $1.4 million, said Tim Shaw, its chief executive. The money will be used to provide educational and child development programs in the Irvine Unified School District.
This raffle, the organization's first, was so successful that Shaw said he's gearing up to launch next year's within 45 days.
"We had a waiting list approaching 1,000 … when we cut it off," Shaw said. "We've got this built-in group of people who are ready to do it again."
Like Bhagat, the Irvine contest winner had the choice of taking the house or a cash prize, in this case $400,000.
Yassin said the appeal of the cash prize is its simplicity. Some people don't want to mess with the real estate process, particularly the hundreds of thousands of dollars in taxes and fees that must be paid to transfer property ownership to the winner.
Other factors play into it too, as it did last year when the art center winner found the commute to be too great between the new home and work in La Habra. That winner, John Moungian, took the cash prize of $800,000. He netted $584,000 after federal taxes.
The house fees can be substantial.
Bhagat said his federal tax bill alone would probably be $385,000, plus another $1,500 or so for title insurance, and other closing costs. There's no commission to pay a real estate agent, so that helps keep some of the cost down.
Bhagat said he'd borrow the money to pay the federal taxes. Other fees, such as state taxes and property taxes, won't come due for several months, and by that time Bhagat hopes to have a renter. He plans to rent out the house for $4,500 a month after its current tenants leave.
Had he opted for the cash prize, the center would have put the home back on the market, as it did last year. In fact, the center made more money that way in 2003, because the house sold for about $50,000 more than its original purchase price, money that was added to the fundraising total.
Discussions about next year's raffle have already begun.
Yassin said the raffle isn't risk-free. The center still has to buy a house before the tickets go on sale — people who pay $150 for a ticket tend to like to see what they might win.
"If we were to buy a house now for the project next spring … and the market were to drop, we'd have a loss … so there's a risk there," Yassin said.
Nonetheless, there's no doubt there will be another one. The art center already has people sending in their names for the mailing list.
Bhagat said he's ready to go again. "I might buy more than one ticket."
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