State Calls Real Estate Lotteries Illegal : Santa Clarita Valley: Some agencies are holding drawings in which agents can win up to $50,000.
Whopping sales commissions are apparently not enough to satisfy some Santa Clarita Valley real estate agents.
As an added incentive, some agencies are holding drawings in which prizes ranging from $10,000 to $50,000 are given away to agents who sell participating houses. The prizes are funded by homeowners eager to sell their properties and by real estate brokers representing sellers.
But they also are against the law.
Prompted by complaints from competing real estate agencies, the state attorney general’s office has classified the drawings as illegal lotteries and is warning the sponsors to cancel them immediately or face prosecution.
“All lotteries in California are illegal except for the state lottery, and these are clearly lotteries,” said Assistant Atty. Gen. Herschel Elkins, head of the office’s consumer law section.
The lotteries are also unfair to consumers, because instead of showing houses based on their merits, a real estate agent might be tempted to push ones that offer a chance of winning a prize in addition to commissions, Elkins said. In typical real estate deals, home sellers are charged a 6% commission, which is divided between the agency representing the buyer and the one representing the seller.
But in a $10,000 real estate lottery, for example, a homeowner or agency representing the homeowner is encouraged to pay an additional fee of $250 to be entered in the drawing. Although the fee is not mandatory, many homeowners appear to believe it will motivate brokers to show their property more often. In Santa Clarita, small signs that say “10K home” are ubiquitous in affluent neighborhoods, such as the Summit.
After the sponsoring real estate agency collects $11,000 from the sale of 44 houses, the proceeds are used to pay for an elaborate luncheon in which the 44 agents who sold the houses have their names picked from a hopper, Santa Clarita Valley real estate agents said. The last person chosen wins the prize money.
Local real estate agents who asked not to be identified described the drawings as exciting and suspenseful.
Elkins and local real estate officials said the practice is rare.
“I’ve never heard of it,” said Jim Link, executive director of the San Fernando Valley Board of Realtors. “If I did, it would raise a red flag and our board would investigate it as a possible ethics violation.”
But a spokesman for the Santa Clarita Valley Assn. of Realtors called the practice “a marketing tool” and said it was not within his association’s purview to decide whether it was legal.
Elkins said he has already warned some Santa Clarita Valley companies that have sponsored lotteries, including Remax of Canyon Country and Valencia. He said he is also sending warning notices to Realty Executives of Newhall and to companies whose agents entered the drawings.
The sponsors must return any fees that have not already been given away in prizes, Elkins said. A homeowner who paid an extra fee to enter a lottery may sue the real estate company in small-claims court to recover the fee, he said.
Prosecutors are not requiring the companies to return more than $60,000 in prizes that have already been dispensed because the state Department of Real Estate, which licenses real estate agents and regulates the industry, failed to warn real estate agents that the practice was illegal when it came to that agency’s attention earlier this year, Elkins said.
The real estate department received an anonymous letter in May asking if Realty Executives’ lottery was illegal, but the agency does not act on anonymous complaints, department spokesman Steven Ellis said.
Remax, which has already been warned by the attorney general’s office, has mailed notices canceling its $50,000 lottery to many of the 950 real estate agents in the valley who were aware of the practice. Company officials did not answer repeated phone calls Tuesday from The Times.
A spokeswoman for Realty Executives President Richard E. Grommon said state prosecutors have not yet ordered him to stop the lotteries and refused to comment further.