Definition: Land flip is a deceitful real estate practice, in which a property owner sells an underdeveloped piece of land at a higher price to another investor who turns around and does the same thing.
What Does Land Flip Mean?
What is the definition of land flip? Land flip occurs when several buyers are interested in buying land at a given price. The buyers resell the land to each other at an inflated price with each transaction, thereby realizing a profit. In the end, the group sells the land to a third party at a highly-inflated price, so when the price returns to its normal levels driven by the market, the end buyer sustains huge losses.
The land is a particular niche that differs from conventional Single Family Residences (SFR), and, often, people, need a lot of time to understand how investing in land works and capitalize on it. A flip may take place when a bank seeks to buy a property. Therefore, to anticipate this risk, banks and financial institutions invest directly in the property by taking equity positions.
Let’s look at an example.
Example
Adam, John, Alex, Mary, and Jonathan purchase a piece of land for $25,000. Adam sells the piece of land to John for $28,000. John sells to Alex for $32,000, and so on. Once Jonathan purchases the piece of land, the price is at $45,000. Hence, the price of the land is inflated by 80%.
The group of investors finds Jeremy, an independent buyer, who is interested in the land and sells it for $45,000, although the real value of the land is $25,000. So, the group has made a fraudulent profit of $20,000. When the value of the land corrects itself in the market, the independent buyer will lose $20,000.
Real estate flip works because, in general, land sells more easily than securities as people can see what they are buying and envision what they can do on a piece of land.
Summary Definition
Define Land Flipping: Land flip means a fraudulent activity in the real estate market where investors sell undeveloped land at huge markups.
