What is a Land Flip
A land flip is a fraudulent real estate practice, in which a group of colluding buyers comes together to trade a piece of undeveloped land between one another to inflate the property’s price beyond the market value.
BREAKING DOWN Land Flip
After manipulating the market price of a property, land flip perpetrators sell it to an unsuspecting outside buyer at a highly inflated price. When a buyer attempts to resell the land, its value returns to normal market levels, because it either has no real value or has hidden legal issues, such as toxic pollution, liens or easement problems. The net result is a large, unrecoverable loss for the buyer.
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 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 50% down payment for undeveloped land to protect against the risk of default.
Example of a Land Flip
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.
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 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, it 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.