Brad Maxwell, an estate agent, and his wife Janice who own the property through a family trust wanted prospective buyers to pay between $100 each for access to the internet auction.
They would then get a chance to win the $594,000 property in the Christchurch suburb of Redwood.
But the auction amounts to illegal gambling according to the Internal Affairs' gambling compliance manager Debbie Despard who urged people not to take part as participating in illegal gambling was a crimminal offence.
She said that under the Gambling Act 2003 the auction was illegal on several grounds.
'There is a huge element of chance in this so-called auction in which people pay to participate,' she explained.
'It is also online gambling, which the Act defines as remote interactive gambling. Gambling with prizes exceeding $500 can only be conducted by societies raising money for authorised charitable purposes but this sales scheme is conducted by a private person for personal profit and cannot be licensed by the department,' she added.
'Also, any sale and purchase agreement arising out of such an auction would be on shaky ground because the Gambling Act says contracts relating to illegal gambling would be illegal for the purposes of the Illegal Contracts Act 1970.'
The Maxwells had calculated that selling between 5000 and 6000 seats would bring in what they wanted for their home, and only then would the online auction run. They are trying to find a way to continue with their plans.
'This is a genuine auction. We are not here to rip anybody off. The intention of this exercise is to sell the property at market value,' said Mr Maxwell.
Several property owners in the UK have tried similar methods to sell their properties including selling raffle tickets and have also fallen foul of gambling laws.
