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Land flipping is a fraudulent real estate practice where a group buys land at a low price and sells it multiple times to inflate the price, defrauding buyers and lenders. It puts lenders and buyers at risk, and conducting a thorough title search can help protect against fraud.
A land flip is a real estate sales practice in which people work together as a group to defraud innocent buyers and lenders into transactions in which land is sold at an artificially high price. Land flipping is different from home flipping, a real estate practice that is not necessarily fraudulent in nature. In the case of land flipping, the transaction is inherently fraudulent due to the way it is set up.
The land flip starts with buying land for a low price. The original buyer sells to a collusionr at a slightly higher price. The property can be sold multiple times to different group members in order to inflate the price. When fraud participants 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 sale price.
If the group takes a development loan and then defaults, the lender will be unable to recoup the cost of the loan from the ground. This puts lenders at risk and is one of the reasons lenders are very careful when evaluating loan applications, as they want to confirm that the land they are lending on is valued appropriately and is not being used a land flip scam. These scams can sometimes be very elaborate and loan officers may need to do extensive research to uncover the presence of fraud.
When buyers fall victim to a land flip, they purchase land at a much higher price than its true market value. They may have difficulty obtaining land loans and will also have difficulty recouping the cost. If they develop it, the money available for development will be limited due to the high price paid for undeveloped land, and if they try to sell the land, they may not find willing buyers.
Land flip schemes are illegal and people can be penalized for engaging in them. People buying land can protect themselves from fraud by conducting a thorough title search. This will reveal if the property has been sold multiple times in recent history, a warning to potentially fraudulent transactions. The search can also uncover liens, easements, and other restrictions on the land or title that could become a problem if the buyer attempts to develop it.
Smart Assets.
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