Avoiding Land Fraud
The easiest way to become the victim of land fraud is to purchase land under an unrecorded land contract. While the majority of sellers who utilize land contracts are honest, there are many who are not. Fraudulent land transactions commonly involve one or more of the following:
- The seller offers land for a nominal down payment and an unrecorded land contract with payments to be made over 10 to 15 years.
- The seller offers the land with either no closing costs or a nominal fee. This usually means there will be no escrow and title insurance policy to protect the buyer.
- The buyer does not receive a deed to the property. The buyer receives a land contract in which the seller promises to provide the buyer with a deed when the property is fully paid for in 10 to 15 years.
- The buyer generally does not understand that he or she is at risk for 10 to 15 years because the seller may not be able to transfer marketable title when the land contract is paid, or the seller may simply not perform.
- While it is a criminal act to do so, the seller is in a position to “sell the property” to multiple buyers using unrecorded land contracts and then collect payments from each of them over 10 to 15 years.
- While it is a criminal act to do so, the seller is in a position to encumber the property with loans in an amount exceeding the balance of the buyer’s land contract.
- After selling the property using an unrecorded land contract, the seller may fail to pay the real estate taxes on the property, and/or any loan payments on any mortgage encumbering the property.
- Assuming no fraud, after making payments for 10 to 15 years, the seller may not be able to convey clear and marketable title to the buyer because of intervening liens or judgments that have been recorded against the property.
- The seller may die before transferring title creating legal complications.
- After making payments for 10 to 15 years, the seller may convey title by means of a quit claim deed, rather than a grant deed, making it extremely difficult for the buyer to obtain a policy of title insurance.
- The land may not have been surveyed prior to the date of the land contract resulting in future difficulty in obtaining a title policy.
- Upon a payment or non-monetary default, the buyer may forfeit his or her rights in the land contract with all prior payments being characterized as rental payments. Under such circumstances, buyers are forced to resort to litigation to protect their interests and may not be successful in doing so.
- Without obtaining a policy of title insurance at the time of purchase, the buyer is likely to be unaware of the following possible problems:
- A deed or deed of trust in the chain of title may be a forged document;
- A deed or deed of trust in the chain of title may have been signed by a legally incompetent person;
- A deed or deed of trust in the chain of title may have been signed by a minor;
- A deed or deed of trust in the chain of title may be voidable because it was signed while the grantor was in bankruptcy;
- A deed or deed of trust in the chain of title may have been executed under duress;
- A deed or deed of trust in the chain of title may have been executed as a result of fraud;
- A claim may exist or arise due to legal issues concerning marital status or the validity of a divorce;
- A deed or deed of trust in the chain of title may have been signed by a person under a power of attorney where the validity is disputed; and/or
- A deed or deed of trust in the chain of title may have been signed by a person other than the owner, but with the same name.
- The land contract may provide that the buyer’s interest cannot be transferred to another person, thus making the seller the only possible buyer.
- The seller may assign the land contract to a third party including someone in another country and then offer to purchase the buyer’s interest at a bargain price.
- The seller attempts to convince the buyer that a land contract is the same as a deed of trust or mortgage when it clearly is not.
- The seller tries to convince the buyer that land contracts are standard form documents when clearly they are not.
- The seller represents that the land contract can be recorded by the buyer after the purchase is completed, when in reality, the land contract will not be accepted by the county recorders office due to technical reasons.
- The seller may represent that he or she will “guarantee good title” when in fact a policy of title insurance would disclose defects in the title that will make the property difficult to sell to a knowledgeable buyer.
- The seller attempts to make the buyer feel safe by pointing out that their record on eBay and/or other auction sites includes no complaints. What they often do not point out is that it may take years for a buyer to learn he or she has victimized. Also, many sellers enter into many land contracts within a very short period of time through the auction process. This has the effect of allowing the seller to report “no complaints” from a large number of buyers suggesting that many sales have been transacted over a long period of time when this may not be the case.
- Many auction based land sellers insist on receiving a cash down payment before the buyer has an opportunity to see the terms of the land contract.
- Don’t be misled. Following are the minimum requirements for purchasing a land investment safely:
- Always insist on purchasing with the protection of an independent licensed escrow company and deposit all funds into the escrow;
- Always insist on a policy of title insurance;
- Always insist on utilizing a note and deed of trust as opposed to a land contract;
- Always determine how long the seller has owned the property. If the seller has owned the land for less than 5 years, determine how much the seller paid for the land before you make an offer.
- Consider acquiring the land with an experienced, knowledgeable joint venture partner.
- Determine the fair market value of the land either by obtaining a formal, written land appraisal, or through comparable sales data.
The land experts at Pacific-Realtors.net can assist you acquiring land anywhere in California and will consider joint venturing the acquisition of land where we are the broker and perform our customary due diligence investigation. Always keep in mind that the seller of land is interested in protecting his or her interest and buyers should do the same.