Buying land and building your own home can be an exciting prospect. When buying land or lots for future home building, there are some red flags to watch out for – practices that are avoided by reliable sales operations. Issues like these are why we always recommend that you use the services of a licensed REALTOR® for any real property sale or purchase.While such a land purchase will be made long before you need a construction/phase home inspection, we want you to be aware of some of the more unscrupulous practices so that you can protect your investment and have peace of mind:
1. Concealing or misrepresenting facts about current and resale value.
Sales agents may present general facts about the area’s population growth, industrial or residential development, and real estate price levels as if they apply to your specific lot. You may be encouraged to believe that your piece of land represents an investment which will increase in value as regional development occurs. A sales agent may tell you that the developer will re-sell the lot, if you request. This promise may not be kept.
Future resale is difficult or impossible in many promotional developments because much of your purchase price — sometimes as much as 40% — has gone for an intensive advertising campaign and commissions for sales agents. You are already paying a top price and it is unlikely that anyone else would pay you more than you are paying the developer. You may even have to sell for less than the price you originally paid for the lot.
Furthermore, when you attempt to sell your lot, you are in competition with the developer, who probably holds extensive, unsold acreage in the same subdivision. Remember, the elements of value of a piece of land are its usefulness, the supply, the demand, and the buyer’s ability to re-sell it. The Urban Land Institute estimates that land must double in value every five years to justify holding it as an investment. In some areas, the cost of holding the land, such as taxes and other assessments, can run as high as 11% a year.
2. Failure to honor refund promises or agreements.
This one is hard to know before the sale, but one that some buyers have run into. Some sales promotions conducted by mail, email or long-distance telephone include the offer of a refund if the property has been misrepresented, or if the customer inspects the land within a certain period of time and decides not to buy. When the customers request the refund, they may encounter arguments about the terms of the agreement. The company may even accuse its own agent of having made a money-back guarantee without the consent or knowledge of the developer. Sometimes, the promised refund is made, but only after a long delay.
3. Misrepresentation of facts about the subdivision.
A sales agent may offer false or incomplete information relating to either a distant subdivision or one which you visit. Misrepresentations often relate to matters such as the legal title, claims against it, latent dangers (such as swamps or cliffs), unusual physical features (such as poor drainage), restrictions on use, or lack of necessary facilities and utilities.
This is where the property report offers an added measure of protection. Federal law requires that you receive this report prior to signing a contract or agreement to buy or lease a lot in this subdivision. However, no federal agency has judged the merits or value of the property.
Read the property report carefully with an eye to omissions, generalizations, or unproved statements that may tend to mislead you. If you are concerned about overlooking something important, discuss the report and the contract with a lawyer who understands real estate matters.
The developer also may use advertisements that imply that certain facilities and amenities are currently available when they are not. Read the property report to determine whether these facilities and amenities are actually completed, or proposed to be completed in the future. If the company advertises sales on credit terms, the Truth in Lending Act requires the sales contract to fully set forth all terms of financing. This information must include total cost, simple annual interest, and total finance charges.
4. Failure to develop the subdivision as planned.
Many buyers rely upon the developer’s contractual agreement or a verbal promise to develop the subdivision in a certain way. The promised attractions that influenced your purchase (golf course, marina, swimming pool, etc.) may never materialize after you become an owner. If they are provided, it may be only after a long delay.
If you are planning on immediate vacation use of the property, or are working toward a specific retirement date, you may find that the special features promised of the development are not available when you need them.
5. Failure to deliver deeds and/or title insurance policies.
Documents relating to the sales transaction may not be delivered as promised. Some sales in the promotional land development industry are made by contract for a deed to be delivered when the purchaser makes the last payment under the terms of the contract. A dishonest developer may fail to deliver the deed, or deliver it only after a long delay. A sales agent may offer false or incomplete information.
6. Abusive treatment and high-pressure sales tactics.
Some sales agents drive prospective customers around a subdivision in automobiles equipped with citizen band radios which provide a running commentary on lot sales in progress.
The customer may be misled by this and other sales techniques to believe that desirable lots are selling rapidly and that a hurried choice must be made. Hurrying the buyers into a purchase they may later regret is only one ploy of high-pressure sales agents.
More offensive is abusive language used to embarrass customers who delay an immediate decision to buy. In some instances, hesitant buyers have been isolated in remote or unfamiliar places where transportation is controlled by the sales agent or the agent’s organization.
7. Failure to make good on sales inducements.
Free vacations, gifts, savings bonds, trading stamps, and other promised inducements are used to lure people to sales presentations or to development sites. These promised treats may never materialize.
Sometimes, special conditions are attached to the lure, or a customer is advised that gifts go only to lot purchasers. A “free vacation” may be the means of delivering the prospective buyer to a battery of high-pressure sales agents in a distant place.
8. “Bait and switch” tactics.
Lots are frequently advertised at extremely low prices. When prospective buyers appear, they are told that the low-priced lots are all sold and then are pressured to buy one that is much more expensive. If the cheaper lot is available, it may be located on the side of a cliff or in another inaccessible location. If accessible, it may be much too small for a building or have other undesirable features.
The buyers may be lured to the property with a certificate entitling them to a “free” lot. Often, the certificate bears a face value of $500 to $1,000. If the buyers attempt to cash it in, the amount is simply included in the regular price (often inflated) of the lot they choose.
Often, this so-called “bait and switch” technique has a delayed fuse. Buyers who purchase an unseen lot for later retirement use may be unpleasantly surprised when they visit the development. The lot they have paid for may be remote from other homes, shopping and medical facilities. It may be insufficiently developed for use. When the buyers complain, sales personnel attempt to switch them to a more expensive lot, applying the money paid for the original lot to an inflated price for the new one, and tacking on additional financing charges. If the unhappy purchasers lack sufficient funds to accept this alternative, they are left with an unusable, unmarketable first choice.
9. Failure to grant rights under the Interstate Land Sales Full Disclosure Act.
Purchasers may not be given copies of the property report before they sign a sales contract. Some sales agents withhold this detailed statement until customers choose a specific lot. Sometimes, the buyers receive the report in a mass of promotional materials and legal documents. Unaware that the report is in their possession, they fail to read and understand it before signing a sales contract.
The Interstate Land Sales program protects consumers from fraud and abuse in the sale or lease of land. In 1968, Congress enacted the Interstate Land Sales Full Disclosure Act, which is patterned after the Securities Law of 1933, and requires land developers to register subdivisions of 100 or more non-exempt lots with HUD, and to provide each purchaser with a disclosure document called a property report. The property report contains relevant information about the subdivision and must be delivered to each purchaser before the signing of the contract or agreement.
Information courtesy of InterNACHI
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