What Is a Land Flip?
A land flip is a fraudulent real estate practice where buyers and sellers collude to exchange a piece of undeveloped land between each other to inflate the property’s price beyond the market value.
While often associated with schemes, many times land flipping, like house flipping, involves legitimate investment in undesirable land priced below market value and improving it, later selling it at market prices for a profit.
- A land flip is a fraudulent real estate practice where buyers and sellers collude to exchange a piece of undeveloped land between each other.
- By transacting the piece of property between themselves, the property's value may inflate the price beyond property’s true market value.
- These transactions can be done to hide various issues with the property, such as hidden legal issues, toxic pollution, liens, or easements.
- The ultimate goal of a land flip is to deceive an independent third-party into buying the property in excess of it's true value, resulting in profit for the group of deceitful individuals.
- Financial institutions face the risk of a land flip when making loans for the purchase of undeveloped property, mostly because the value of and demand for an undeveloped piece of land is hard to determine.
How a Land Flip Works
After manipulating the market price of a property, land flip perpetrators sell it to an unsuspecting outside buyer at an inflated price. Companies who are perpetrating a land flip may approach potential investors by telephone, through ads in local media, and with attractive direct mail campaigns. These promotions promise huge profits and include gifts to lure investor commitment.
When that buyer attempts to resell the land at a later date, its value may be much lower than where they purchased it. Land flips can be done to hide various issues, such as hidden legal issues, toxic pollution, liens, or easements.
For example, a land flip group of five might purchase a piece of land for $10,000. Each member of the group sells the piece of land to another for a slightly higher price. When the fifth and final member has purchased the property from the others, its price has risen to $14,000. At this point, the group sells the land to an independent buyer for $15,000 generating a fraudulent profit of $5,000.
Because of the speculative nature of its price, land flipping is more likely to occur with undeveloped land.
Risk of a Land Flip
Financial institutions face the risk of a land flip when making loans for the purchase of undeveloped property. In large part, this is because the value of—and demand for—an undeveloped piece of land is hard to determine.
The lender may repossess the undeveloped parcel if a buyer defaults on the loan. However, it may be hard to resell the property, even at a break-even price. Many lenders require up to a 25% down payment for undeveloped land to protect against the risk of default.
Land flips leave the new buyer facing potential expensive or disruptive characteristics of the land. Consider a parcel with toxic groundwater pollution that must be remediated prior to development. In addition, consider properties with liens, title issues, or easement complications. All of these traits not only make the land less desirable but may carry operating obligations the new buyer must satisfy.
A buyer will often not be aware of the land flip until they try to sell the property at a later date. When they realize they are unable to resell the property for what they thought it was worth, they may realize a land flip has occurred.
Example of a Land Flip
In 2006, The Washington Post and other news agencies reported a considerable land flip scandal involving Total Realty Management. In this case, pieces of vacant land along the North Carolina coast selling for as much as $400,000 suddenly plummeted to $20,000 in value.
In some cases, properties were sold back and forth between employees of Total Realty Management. For example, TRM bought a property for $180,000 and sold it to an employee on the same day for $250,000. The employee sold the property back to TRM, which then sold it to another colluder for $310,000. Ultimately, the property sold to an unsuspecting couple for $354,000.
According to reports on the scandal, at least 1,500 investors involved lost hundreds of thousands of dollars each. Also, foreclosing banks lost tens of millions.
Is a Land Flip the Same As Flipping a House?
Though the terms are similar, a land flip and flipping a home are different. Flipping a home is a legitimate investment strategy in which a buyer receives the property, performs renovations, then sells the house for a profit. A land flip is often associated with a fraudulent transaction in which conspirators collaborate to inflate the true value of a piece of land.
Is a Land Flip Illegal?
There are several circumstances that make a land flip illegal. For example, some transactions occur when one party buys the land to inflate its value but has no intention of ever making a true payment. In addition, a land flip is often associated with a negative aspect of the property that the seller is trying to hide; attempting to deceive or conceal materially detrimental information from a real estate buyer is illegal.
How Can I Protect Myself From a Land Flip?
When considering buying undeveloped land, ensure you receive adequate information from independent or third-party sourced parties. This includes environmental reports, geological reports, and information on easements or liens. Consider pursuing an independent evaluation of the property as well.
The Bottom Line
A land flip is a deceitful transaction that dupes a buyer into paying more than a land's true value. The buyer pays more for the land because the value had been arbitrarily inflated by conspirators agreeing to buy and sell the land between them. Land flips often occur to make a piece of land worth more that might be hampered by easement, lien, environment, or geological issues.