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?
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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.
