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.
- 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.
- These transactions can be done to hide various issues with the property, such as hidden legal issues, toxic pollution, liens, or easements.
- 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. 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.
Financial institutions face the risk of a land flip when making loans for the purchase of an 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 50% down payment for undeveloped land to protect against the risk of default.
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.
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.