Real Estate Term of the Day – Land Flip
A Land Flip occurs when a group of buyers comes together to trade pieces of undeveloped land between them. This inflates the property price beyond the market value, and it is considered a fraudulent practice. It is considered fraudulent because, after manipulating the market price of the property, the land flippers can then sell it to an outside buyer at an artificially inflated price. When a buyer attempts to resell the land, its value returns to normal market levels because the value has been artificially inflated, and the property often has hidden problems like pollution, legal issues, or liens.
To understand how this inflation occurs, you have to break down the actual land-flipping practice. Let’s say that a land flip groups purchases a piece of land for $10,000. Each member of the group then sells their piece to another person for a slightly higher price, until the last person is easily able to sell their piece of land for up to $15,000 because he can show what the other pieces of land sold for. When they sell to an independent buyer, they are able to make a profit of $5000 without any concrete work to improve the land from the original sale price.
Financial institutions can fall victim to land-flipping scams when making loans for the purchase of undeveloped property, largely because the value of an undeveloped piece of land is hard to determine. This is why many institutions put so many policies in place for the sale of undeveloped land in order to protect themselves. For example, many lenders require up to 50% down for undeveloped land to protect against the risk of default, and to make sure the developer is serious about the purchase.