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A land flip is a real estate sales practice where people work together as a group to defraud innocent buyers and lenders who are tricked into entering transactions where land is sold at an artificially high price. Land flipping is distinct from house flipping, a real estate practice that is not necessarily fraudulent in nature. In the case of land flipping, the transaction is inherently fraudulent because of the way it is set up.
The land flip starts with the purchase of land at a low price. The original buyer sells to a colluder at a slightly marked up price. The property may be sold multiple times to different members of the group in order to inflate the price. When the participants in the fraud are ready, they can take out a development loan or attempt to sell the property to an unsuspecting buyer. In both cases, the inflated price they created is used as the basis for the loan or sales price.
If the group opts for a development loan and then defaults, the lender will be unable to recoup the cost of the loan from the land. This puts lenders at risk, and is one reason why lenders are very careful about evaluating loan applications, as they want to confirm that land they are lending money on is valued appropriately and is not being used in a land flip scam. These scams can sometimes be very elaborate and loan officers may have to do extensive research to uncover the presence of fraud.
When buyers are the victims of a land flip, they buy land at a price much higher than its true market value. They can have difficulty getting loans for the land, and they will also have trouble recovering the cost. If they develop it, the money available for development will be limited because of the high price paid for the undeveloped land, and if they try to sell the land, they may find no willing buyers.
Land flip schemes are illegal, and people can be penalized for engaging in them. People purchasing land can protect themselves from fraud by doing a thorough title search. This will reveal if the property has been sold multiple times in recent history, a red flag warning for potentially fraudulent transactions. Research can also uncover liens, easements, and other restrictions on the land or the title that could become a problem if the buyer attempts to develop it.
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