There are more
than five thousand land developers in the United States, ranging in
size from "Mom & Pop" developers to corporate giants. They are
engaged in the sale of land for a variety of purposes, including
resorts, theme parks, vacation retreats, second homes, new and
retirement home sites and recreational camp sites. Much of this land is
undeveloped and most of it is purchased primarily for investment
purposes.
The vast majority of developers and land sales companies are
honest, reputable businesses. Nevertheless, while all industries have
some unscrupulous firms and individuals, the land development industry
has attracted more than its share. This is due to the characteristics
of land itself. No two pieces of land are exactly alike...the location,
physical features, soil composition and zoning make each lot, tract, or
parcel unique. Additionally, the present value is normally not known by
the prospective purchaser. It is often impossible to know when a
salesperson is exaggerating or lying outright. Prospective purchasers
of any type of land should always
INVESTIGATE BEFORE YOU INVEST.
Can You Afford to Buy Land?
As fundamental as this question appears to be, it is far too often
overlooked. A study of case histories reveals that the inability to
continue to make monthly payments and the need to raise cash to meet
financial crises are the two major causes of complaints. If you
purchase land, plan to be prepared financially to keep it for a long
time.
Choosing A Developer
Dealing with a developer who is well regarded and financially sound is
of critical importance. Unfortunately, the size of a developer is not a
good yardstick for measuring reliability. The fact that a company is
large, well known and even publicly held is no guarantee that it is the
right company for you to buy from...or even that the company is a good
land developer. Regardless of the developer's size, one of the best,
cheapest and easiest ways to determine its reliability is to talk to
people who have done business with it.
It is the practice of many developers and builders to perform basic
engineering and survey work, install certain preliminary improvements
throughout a portion of the subdivision, and a lot the first phase of
the development. Then, sales programs commence in anticipation of
success and continued favorable financing, which in turn permits the
further planning and completion of the various phases of the
development. You should be aware that errors in judgment and/or factors
beyond the control of the developer might preclude the continuation of
planning and development. This is especially important when you
consider that many developments consist of thousands of lots, and the
prospects of substantial development in the near future are remote.
Don't Be Rushed!
Land developers use a variety of techniques in order to have an
opportunity to show you their developments. Some give lavish dinners or
get-togethers, some solicit by telephone, some send salespeople to your
home and some offer free gifts or reduced rate "vacations" to attract
you. There is certainly nothing dishonest about any of these approaches
(unless they are presented in a deceptive fashion), but the fact
remains that some are often conducted in a high pressure atmosphere.
NEVER sign a contract if you feel pressured. Any reputable company
wants you to know exactly what they offer. So when you receive the
promotional materials, a copy of the contract and a copy of the
Property Report or offering statement (which in most cases must be
filed by the developer with the federal government), tell the
salesperson that you want to study the documents at your leisure. Don't
fall for the common salesperson's ploy: "What are you going to know
tomorrow that you don't know today?" You may learn enough from a
careful reading of the documents to prevent you from making a costly
mistake. Remember, if it is really a great deal today, most likely it
will still be a great deal next week.
Recreational Facilities and Other Amenities
The existence or even the promise of golf courses, tennis courts,
swimming pools, equestrian trails, etc. are often major selling points
of land in many developments. There are a number of things you should
consider in evaluating such facilities. Specifically, do such
facilities already exist? If not, what assurances are there that they
will be built? Will they be adequate for all the people who are
expected to live in the community? What provisions are there for
expanding and adding new facilities and who will bear the costs? If you
intend to build, will a septic tank or private well be permitted by
law? What will be the "hook-up" or connection charges for electric,
gas, water and phone service? What is the developer's past performance
on completing promised improvements? What will be your legal
liabilities with regard to future assessments? Are there any dues or
fees for using the facilities? To what extent will you be paying some
of the cost of amenities that will be of little or no value to you
personally? Remember, particularly if you are living on a fixed income,
an increase in membership dues or association fees might force you to
give up your membership in and enjoyment of the facilities.
Land as an Investment
In recent years the most frequently cited complaint against land
developers has been alleged misrepresentation by salespeople of the
quick and substantial profit to be made from the purchase of land.
Indeed, much of the fantastic growth in the sale of subdivided lots has
been generated by the claims of many developers that buying land on an
installment basis provides an opportunity for people of average means
to get in on a "piece of the action." Tens of thousands of lots have
been sold on the premise that they can be held for a few years and then
sold at a big profit. With few exceptions, this premise is wrong. It is
true that many have made fortunes from buying and selling land.
However, most of the big money in real estate has been and continues to
be made by developers who acquire large tracts of land and then
subdivide them into smaller lots, or by investors who can afford to buy
large tracts of land to hold for a long period of time.
If you are considering purchasing land from a developer primarily for investment purposes, keep in mind the following:
-
You usually pay a premium price for the lots because they are now part of a development, usually with promised improvements.
- If
you purchase land by means of an installment contract, you will be
paying interest for the life of the contract as contrasted with
receiving interest, which some alternative investments would provide.
- Developers
must pass along their promotional costs to buyers. These promotional
costs may add 40% or more to the price of a lot. Therefore, it may be
difficult for you to net from the resale of your lot as much as you
paid for it.
None of this is to say that there are not a number of developers
selling land on an installment basis which might result in a good,
long-term investment for you. But you should proceed with caution
because there are hundreds of developers selling subdivided land today
as an investment, which will result in disillusionment and monetary
loss for buyers at some future point in time.
Property Reports
The Property Report is based upon and is part of a detailed filing
called a Statement of Record filed by the developer with the Office of
Interstate Land Sales Registration (OILSR) of the Department of Housing
and Urban Development (HUD) in Washington, DC. This filing is required
by the Interstate Land Sales Full Disclosure Act, a Federal law passed
by Congress for the protection of lot purchasers. The reports contain
detailed information on the availability of such basic necessities as
electricity, water, gas, waste disposal system and telephone service.
The reports also tell you how far it is to the nearest hospital, to
public schools and to shopping facilities. The Property Report can tell
you more about what your property is like now and what is likely to be
like in the future than most salespeople will.
But you must read it! No salesperson is going to stress the negative aspects of buying property from him or her.
A land buyer who looks to OILSR for protection or assistance should understand clearly what the agency
does not
do. It does not pass judgement on the quality of land offerings or the
fairness of the selling price. It does not inspect subdivisions or
verify statements made in the Property Report unless it believes them
to be inaccurate. It does not require subdividers to post bonds
guaranteeing improvements. Except in cases where subdividers fail to
register or otherwise comply with the law, OILSR cannot prohibit sales
of land no matter how overpriced or unfair the offering may seem.
Finally, the agency does not approve advertising.
When you buy property registered with OILSR, you must be given a copy
of the Property Report. If you do not get a copy before you sign the
contract, you can cancel the contract and get your money back. If you
are not given a copy of the Property Report at least 48 hour before you
sign, you may still be able to reconsider your decision and get your
money back (as long as you did not waive this right when you signed the
contract). Of course, the best procedure is to get the Property Report
beforehand and carefully study it at your leisure.
Checklist
- Never
rely on the oral promises of a salesperson. If oral promises are not
written into the contract, the developer is not bound by them.
- Take your time. Do not allow yourself to be pressured into signing a contract without reading and studying it thoroughly.
- Read
the Property Report. If one part is particularly technical or difficult
to understand, you should get it clarified, but do not let this keep
you from reading the rest of it. It contains vital information!
- Prospective
purchasers are urged to visit and inspect the property before entering
into any agreement to purchase. You should ascertain for yourself
whether or not the property meets your personal requirements for the
desirability of the property. However, you should not forget that there
are a number of important things that a personal inspection will not
reveal. It will not tell you if the property is fairly priced, nor will
it reveal problems such as building restrictions, zoning regulations,
or title clearances.
- Consider retaining a lawyer knowledgeable about real estate if you are planning to make a sizable financial commitment.
- Evaluate recreational facilities and other amenities: their development, obligations, and costs.
- If
you are buying land primarily as an investment, you should compare the
risk factors and profit potential with other investments such as
stocks, bonds, mutual funds, or savings accounts.
- Check
on the reliability of the land development company by writing directly
to the Office of Interstate Land Sales Registration, Department of
Housing and Urban Development, Washington, DC 20410.
