What is a Land Flip?
Definition: Land flip is a fraudulent real estate convention that occurs when several buyers are interested in a piece of land that is undeveloped. In this case, the property owner can collude with one of the buyer’s and sell him or her piece of land at an inflated price.
In return, the new buyer ends up reselling the undeveloped piece of land to an unsuspecting buyer at a hyper-inflated price.
Understanding a Land Flip Transaction
In a landfill, the final buyer often ends up owning a piece of land or property with a questionable value. It’s only when the buyer tries to resell the piece of land that they often come to terms with what has actually happened. The value, in this case, goes back to the normal market value, because it didn’t have any real value in the first place.
The net result of a land flip in most cases is usually unrecoverable loss to the final buyer. The buyer might also end up with a string of issues on having in their possession an asset subject to toxic pollution let alone liens or easement problems.
Land flips occur because it is difficult to determine the actual value of a piece of property up for sale. Prices are usually determined by a number of factors key among them being proximity to a highway as well as development plans nearby. Similarly, government plans and policies that result in the launch new projects can significantly affect the prices of land nearby.
As land prices vary, buyers rely on their judgment to make purchasing decisions. In addition, most buyers rely on the last price that the piece of land sold at, to make their purchase decisions. Consequently, fraudsters often take advantage of this loophole to defraud unsuspecting buyers.
Land Flip Example
In 2006, Total Realty Management propagated one of the biggest scams when it comes to land flips. In one case, the firm bought a piece of property for $180,000 then offloaded it to one of its employees for $250,000. It is alleged that the employee then sold the property back to TRM, later that day, for $250,000.
TRM went on to sell the property to someone else who colluded with them for $310,000 who later on sold it to a third couple without any knowledge of the fraud for $354,000. The final buyer, in this case, ended up owning a property whose value was inflated by more than $170,000.
Financial institutions are the most affected by this deceitful real estate practice. This is in part because the value of the land is difficult to determine. Likewise, land sellers tend to inflate prices whenever they are dealing with institutions given their financial muscle.
Similarly, financial institutions often find themselves in possession of assets that have no value whenever they reposes land to settle defaults on loan. It’s only when they try to resell such properties to recoup loans issued that the financial institutions often realize they have on their hand assets that is hard to sell even at a breakeven price. Conversely, some financial institutions require lenders to place a 50% down payment on undeveloped land before issuing loans as a way of protecting themselves from the risk that the buyer will default.
Is Land Flipping Illegal
Property flipping is a controversial subject that often arouses mixed reactions. The practice while deceitful is many at times treated as a legal profit-making venture. it is often compared to when a buyer buys a property below market value, develops it a bit and then sells it at a much higher price consequently generating a significant amount of return.
Illegal land flipping occurs when property buyers purchase a property with the sole aim of flipping. Likewise, it is also treated illegal when people agree to purchase property in name only, without any intention of making actual payments.
Summary
Land flip is, in most cases treated as a fraudulent activity in the real estate sector whenever investors buy undeveloped property at much lower prices with the sole aim of selling at huge markups.