A $150 raffle ticket for a $1.5 million beach home in sunny Santa Cruz, CA, sounds like the dream deal of a lifetime, until you look at the real costs -- an amount approaching three quarters of a million dollars.
After state and federal taxes, property taxes and the cost of homeowners' insurance, chances are you can't afford to win such a home and the cost is a big reason property raffles often fizzle.
Mount Madonna School, a private college preparatory day school in Watsonville, just south of Santa Cruz (which is 30 miles south of Silicon Valley), is hoping to erase new construction debt by netting $2 million of the $4.8 million it hopes to raise from what could be considered the mother of all school fund raisers.
There are hundreds of cash prizes from $300 to $25,000, but the grand prize is a nearly-new, contemporary, two-story, 2,800 square foot home on Oregon Street, in Santa Cruz, just a three-block walk to the Pacific Ocean.
The home was donated for the luck-of-the-draw event by a private family that wishes to remain anonymous, but the school says a real estate attorney advised the school the home is worth $1.8 million.
However, recent Santa Cruz market conditions are crashing like the surf. Flat and falling prices and the move toward a buyers' market, reveal the raffled home's value could come in closer to $1.5 million, which is also the amount of an optional cash grand prize the winner can opt to choose instead of the home.
The home's location alone -- within earshot of the soothing sea and ocean wildlife -- is to die for, but the three bedroom, two-and-a-half-bath, two-story home would be considered a "gem" just about anywhere.
Custom built in 2004, the home is a vision of California Sleek, surrounded by low-maintenance landscaping on a corner gated lot. Below multiple pitched roofs, the home includes an additional 700 square feet of walk-in attic space (not included in the 2,800 square foot measurement), a computer alcove in the kitchen, two covered patios, one with an outdoor shower, a first-floor master suite, universally designed zero thresholds throughout, a spa and steam room, walk-in closets (including the linen closet), a laundry and an oversized two-car garage (which allows doors on both cars to be opened simultaneously).
Amenities include French entry doors, marble, maple and slate flooring, a fire sprinkler system in every room, seismic engineering, roof gutter-to-street gutter drainage, sump pump, insulation in walls and ceiling exceeding code requirements, water resistant exterior stucco coating and sealed skylights that let in the sun but blocks ultra-violet rays.
The halogen lighted kitchen comes with a Bosh dishwasher and a Bosh convection/conventional oven combo with child proof controls. The sink and cook top are flush mounted into granite along a 23-foot expanse of counter space. Cabinets include, pull out drawers, built in organizers, oversized pot drawers, recycling center and a wine rack.
Unfortunately, winning this beauty won't be a walk on the beach.
The odds on winning the top price aren't bad, about 1 in 32,000, should all the tickets be sold, but by the time the final drawing rolls around on June 2, 2007, you'd better have enough cash to claim your prize.
Here's the tally.
Sunnyvale, CA certified public accountant Leonard W. Williams says the home win will be considered ordinary income and boost you into the tax bracket of the stars -- 35 percent for Uncle Sam's take and 9.3 percent for California, for a total of 44.3 percent.
Because of the graduated tax brackets in both jurisdictions, not all the home's value will be taxed at the highest rate, but most of it will.
Based on 2005 tax law, the lower rate is applied until your income reached $326,450 for federal taxes and $85,000 for the state. Everything else was taxed at the higher rate. But even the lower brackets of 28 percent, federal and 6 percent, state, say "ouch".
Bottom line, the tax on the $1.5 million home or cash would amount to about a $502,000 federal tax bill and a $137,000 levy from the state, Williams calculates, for a total of about $640,000.
Don't close your wallet yet.
Add another $15,000 to the cost of winning.
However, San Francisco, CA-based A. Mason Blodgett, listed with the JurisPro Inc's. Expert Witness Directory as an insurance forensic, attorney, and managing broker for 12 insurance companies, obliged -- with some disclaimers and limitations.
Based on information he could glean from the fairly extensive details on the home raffle website, cursory research through his rate-making database for the Santa Cruz market and some arbitrary assumptions, he estimated it would cost from $3,750 to $4,200 a year to insure the $1.5 million home with contents valued at, say, $700,000.
"Contents coverage is typically half the home value," he said.
The policy would include replacement cost coverage and $300,000 in liability protection, both with a $1,000 deductible. If the deductible was raised to $5,000, he estimated, the premium would cost between $2,750 to $3,200.
"Keep in mind, there are many other factors that could impact the price. If we found there had been previous losses (for example) that would have an impact," Blodgett said.
An average of the four figures comes in at about $3,500, bringing the total-after-win cost to $658,500, but you still aren't finished.
Grand total in costs for winning the grand prize?
About $673,500.
Don't have that much pocket change?
"As a practical matter, if the winner already has a house to sell, and wants this house, then selling the already-owned house might produce enough cash to pay the tax on winning this one, but that gets into a chain reaction," said Williams.
If the capital gains on the old house exceeds the $500,000 or $250,000 capital gains tax exclusion, taxes will be due on the excess, but those taxes will be relatively small. The winner will still have to determine if the take on the old home is enough to cover the cost of winning.
"If the winner doesn't already own a house that he or she can sell, and has few assets, then the winner will be better off to just take the $1.5 million cash, pay the tax, and buy a more modest home for cash," Williams suggested.
Another option, which will cost even more over time, is to finance the $673,500 using the grand prize as collateral.
Still, the question of affordability remains.
A $673,500 loan is a jumbo loan, which costs more in interest than a conforming loan of $417,000.
BankRate.com, on Sept. 5 put the average rate for a 30-year, fixed-rate jumbo mortgage (FRM) at 6.22 percent. (BankRate.com's conforming loan average was 5.93 percent.)
A cheaper hybrid jumbo -- it's fixed for five years and then converts to an adjustable rate mortgage (ARM) -- carried an average 5.82 percent starting rate.
At the more expensive rate, the monthly payment, including only principal and interest, would be about $4,133 a month. For the first five years with the cheaper rate, you'll pay less, but not much, $4,007 per month.
But that just might be your bottom line.
