Real Estate Newsletter
Land Sale Scams Covered by ILSFDA
Prompted by an increase in land sale scams in the 1960’s, Congress passed the Interstate Land Sales Full Disclosure Act (ILSFDA) in 1968. Administered by the Federal Department of Housing and Urban Development (HUD), the ILSFDA regulates transactions involving the sale or lease of undeveloped land through the U.S. Mail system or through any advertisements in interstate commerce. Some states have adopted measures similar to ILSFDA and/or impose additional, state-specific requirements regarding land sale contracts.
ILSFDA Applicability and Requirements
Developers and promoters that advertise over 100 lots are required to submit a “statement of record” to the Office of Interstate Land Sales Registration of HUD (OILSR). Those that sell between 25 and 100 lots need not register, but must still comply with ILSFDA anti-fraud requirements. The anti-fraud requirements forbid anyone from knowingly making false statements regarding land for sale. For example, a developer or promoter may not advertise that a parcel of land has a utility service where they know it does not.
Those who engage in the sale or lease of fewer than 25 lots of land are exempt from ILSFDA provisions. However, HUD may still aggregate sales from a single seller that are part of a “common promotional plan,” which could then equal 25 lots. For instance, if an individual attempts to sell lots in a single area, then suspends sales to avoid compliance, they must comply with ILSFDA rules if their sale plan totals 25 lots or more.
Statement of Record Requirements
The “statement of record” that must be filed with OILSR generally requires the following documentation:
- A copy of the seller’s corporate charter and financial statement
- Information about the land: title policy and attorney title opinion
- Facilities in the area (hospitals, schools, etc.)
- Available utilities, water, and sewer
- Development plans for the property: roads, streets, etc.
- Other supporting documents
Printed Property Report
All buyers protected by ILSFDA must receive a printed property report at least 48 hours before signing the land sale contract. The report should include the following:
- Distances to nearby communities via paved or unpaved roads
- Existing mortgages or liens on the property
- Present and proposed utility services and charges
- Soil and foundation conditions
- Availability of recreational services
- Availability of sewer and water service or septic tanks and wells
- Number of homes currently occupied
- Whether contract payments are placed in an escrow or special fund
- Type of title the buyer will receive
Potential buyers must be wary of inaccuracies within the property report, since such documentation is typically not reviewed or verified by any government entity. Moreover, HUD does not inspect the lots.
Remedies for Violation of ILSFDA
If the sale is subject to ILSFDA and after the buyer has seen a property report from the seller, the buyer has seven days to cancel the contract after signing for any reason. If the seller fails to give the buyer a copy of the property report before the contract is signed, the buyer has up to two years to cancel the contract and obtain a refund.
Those who believe they have been cheated in an ILSFDA transaction may file a complaint with HUD. If there have been material misrepresentations, the buyer may take legal action and seek reimbursement. ILSFDA authorizes the court to also award interest, court costs, reasonable attorneys’ fees, and the costs of travel to and from the lot.
Such actions must be brought either within three years of signing the contract or within three years after discovery of the ILSFDA violation (whichever is shorter). Further, claims will also be barred if the court finds that three years have passed from the time the ILSFDA violation should have been discovered (with reasonable diligence).
Penalties for Violation of ILSFDA
Developers and promoters that violate the ILSFDA may be subject to monetary sanctions/fines and/or imprisonment. An example of the possible magnitude of ILSFDA penalties involves a recent 2003 case against a land-sale company called Buyers Source. In that case, HUD filed a lawsuit against Buyers Source for engaging in a land sale scam, in violation of the ILSFDA, which spanned six states including Florida, South Carolina, Ohio, Arkansas, Texas, and Missouri.
In the 2004 Buyers Source ruling, a Virginia federal judge ruled that Buyers Source had scammed more than $30 million dollars from over 500 senior citizens by using hard-sell pressure tactics to convince them to purchase lots of land for more than 3,000 percent above actual market value. The judge found that these actions, in addition to the failure to provide property reports to the buyers, violated the ILSFDA. Buyers Source was ordered to pay more than $31 million into a compensation fund that would help reimburse buyers for their losses. The owners, operators and some agents of Buyers Source, as well as other individuals and companies which took part in the scam, were also either ordered to pay additional fines or settled out of court.
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