Land swap is a fraudulent real estate practice where land is sold at an artificially high price by a group of colluders. The land is sold multiple times to inflate the price, and lenders and buyers are at risk of falling victim to the scam. Land exchange schemes are illegal, and buyers can protect themselves by doing a thorough title search.
A land swap is a real estate sales practice where people work together as a group to defraud unsuspecting buyers and lenders who are tricked into entering into transactions where land is sold at an artificially high price. Land investing is distinct from home investing, a real estate practice that is not necessarily fraudulent in nature. In the case of land exchange, the transaction is inherently fraudulent due to the way it is set up.
Land exchange begins with the purchase of land at a low price. The original buyer sells to a colludor at a slightly higher price. The property may be sold multiple times to different members of the group to inflate the price. When the participants in the fraud are ready, they may obtain 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 not be able to recover the cost of the land loan. This puts lenders at risk, and is one of the reasons why lenders are very careful when evaluating loan applications, as they want to confirm that the land they are lending money on is appraised properly and is not being used in a land exchange scam. These scams can sometimes be very elaborate and loan officers may have to do a thorough investigation to discover the presence of fraud.
When buyers fall victim to a land swap, they purchase land at a price much higher than its true market value. They may have difficulty obtaining loans for the land, and will also have trouble recovering 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 exchange schemes are illegal, and people can be penalized for participating in them. People buying 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 for potentially fraudulent transactions. The investigation may also uncover liens, easements, and other restrictions on the land or title that could become a problem if the buyer tries to develop it.
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