The Federal Interstate Land Sales Full Disclosure Act
BATTLECALL GUEST EXPERT: Robert J. Abalos, Esq.,
InvestingInLand.com
The Federal Interstate Land Sales Full Disclosure Act (15 United States Code
1701 et seq.) is a tough Federal law passed by Congress in 1968 after a long
series of high profile and simply outrageous land frauds that scammed thousands
of land lot buyers out of hundreds of millions of dollars. There is much
confusion among small and mid-level land investors and developers about the
Act's provisions, exemptions, and whether the Act itself really even applies to
them and their subdivisions. Here is a review of what the Act requires and some
basic advice for developers and investors involved in land sales either directly
or indirectly.
What the Act Covers
The Federal Interstate Land Sales Full Disclosure Act requires all land
promoters who offer TWENTY-FIVE or more UNDEVELOPED land lots for sale through
the U.S. Mail OR BY ADVERTISEMENTS OF ANY KIND IN INTERSTATE COMMERCE to comply
with the Act's anti-fraud provisions and/or submit a statement of record to the
Office of Interstate Land Sales Registration within the U.S. Department of
Housing and Urban Development (HUD) including information about:
- The owners and holders of title to the land being subdivided and sold
- The physical properties of the land
- The availability of utilities to the subdivision's lots
- The status of roads and other means of access to the lots and many other
matters.
If a promoter is selling less than 25 lots, they are exempt from BOTH the
Act's anti-fraud and registration requirements.
If a promoter is selling 25 to 100 lots, they are exempt from the
registration requirement but are bound by the anti-fraud provisions UNLESS there
is a specific exemption from the Act under 24 CFR 1710.5.
If a promoter is selling more than 100 lots, they are required to register
unless somehow exempted by the Act and in any case covered by the anti-fraud
provisions.
All potential buyers of land covered by the Act MUST receive a PRINTED
property report that has the complete registration statement or at least
excerpts from it AT LEAST 48 HOURS BEFORE they sign a contract of sale.
EVERY buyer given a printed property report also has a period of SEVEN DAYS
(called the "cooling off" period) AFTER SIGNING a contract to cancel the
agreement and get a FULL REFUND of any deposits or money paid under it.
If any buyer was not given a copy of the printed property report as required
by the Act, the buyer may completely cancel the contract AT ANY TIME WITHIN TWO
YEARS from the date the contract was signed.
Aside from the registration and disclosure requirements detailed above, the
Act also includes VERY STRICT anti-fraud provisions that resemble in great
detail the same prohibitions against making false and misleading statements to
buyers that the Federal Securities Act of 1933 contains. You cannot KNOWINGLY
make false statements, like say a land lot has utility service, when you know it
does not, without violating the Federal law.
It should be noted that nearly all state laws have registration and
anti-fraud statutes that mirror the Federal Act in some way, in fact, the Feds
will accept the state registration filings of four states (Arizona, California,
Florida, and Minnesota) as complying with the Act's registration
requirement.
Common Developer and Promoter Mistakes
In my years as a real estate lawyer and land investor, I generally find that
developers and promoters make three common mistakes when it comes to compliance
under the Act. This, of course, assumes they are honest and want to comply with
both the registration and anti-fraud provisions of the Act, an assumption which
unfortunately is not always true. While the Act certainly has tamed the Wild
West nature of land sales, land scams are still very common.
Common Promotional Plans and Assimilation
The most common mistake is failing to register due to a miscalculation of the
number of land lots being sold. The Act is very specific as to the number of
lots and moreover defines exactly what a "lot" is for the purposes of the Act.
The Act also speaks about a "common promotional plan" which leads to many
smaller land lot sales that would be legally exempt under the Act assembled or
assimilated under the Act's requirements into one large "plan" where
registration is required. Often a large tract of land is purchased and divided
into sections with each section subdivided and sold over a period of years, even
many years. While each section might be numerically exempt, the fact that a
"common promotional plan" as defined by the Act may exist means that even the
first small exempt section must be registered. Some of the factors defining
"common promotional plan" under the Act include:
- Are the land sections contiguous and adjoining?
- Are they owned and promoted by the same individuals or entities?
- Do they share common features like roads, parks, community centers, golf
courses, etc.?
- Was a single plan of development and promotion contemplated for all the
land?
- Does all the promoted land share a common theme of development, such as a
similar name or similar selling features?
There are many other factors and HUD and the courts really apply a "totality
of the circumstances" test to determining if a common plan existed or not.
While many unscrupulous promoters may try to circumvent the law and gain
exemption by piecemeal land sales, most cases brought here are against innocent
developers and land investors who aren't aware of the common promotional plan
requirements or do not realize how broadly they are construed.
Anti-Fraud AND registration requirements, not just one or the
other
The second most common mistake is not realizing that the Act has both
anti-fraud and registration requirements and that Federal jurisdiction under the
Act extends to most land lot sales made of 25 lots are more. Again, the law is
broadly construed towards jurisdiction in the range of 25-100 lots since these
provisions are anti-fraud regulations designed to protect consumers and who
really is going to be in favor of fraud? The law here is very wide and deep. If
you use the U.S. Mail in your land sales business OR if you use any sort of
advertising to promote your land sales that COULD involve interstate commerce,
you are covered by the Act UNLESS there is a SPECIFIC exemption and there aren't
many. I've seen all sorts of arguments made here over the years and none work.
You can't use Federal Express or some other private carrier and claim exemption.
Even the smallest newspaper ad in a local market theoretically affects
interstate commerce and any first year law student can tell you how broadly
construed the "commerce clause" of the U.S. Constitution is interpreted these
days. I don't see how any land sales business that uses the Internet in any way,
even for e-mail, can claim exemption. The bottom line here is that while a small
land sales operation of under 100 lots may not have Federal registration
requirements, it ABSOLUTELY does have Federal liability for fraudulent or
misleading facts which are presented to prospective buyers. While this might
trouble the honest land promoter, it should in reality because buyers have a
very broad definition of what is a "false" and "material" fact and even the most
innocent of errors can get a land promoter or developer in hot water.
Who really is a "developer" under the Act?
The third most common mistake I've seen is that people and entities sell land
lots and do not realize they are covered by the Act's provisions because they
are not "developers" or "promoters" as defined in common parlance. The Act is
very specific as to what persons or entities are covered by the Act, defining
"developer" for the purposes of the Act as "individual or a business entity
that, directly or indirectly, sells or leases, or offers to sell or lease, or
advertises to sell or lease lots in a subdivision." While most traditional
developers or land promoters would recognize they are covered by the Act, some
others simply do not such as:
- A bank that has REO land lots as the result of a foreclosure and is now
attempting to sell them with or without the aid of a real estate broker.
- A corporation that owns land lots completely unrelated to their primary
business operations that were acquired as of the result of a merger or other
corporate acquisition and is now attempting to sell them.
- An individual who buys land lots at tax sales or foreclosure auctions and
resells them to the general public.
In each case, the person or company is not a "real estate developer" as
normally defined but is acting as one as defined by the Act that imposes its
jurisdiction on the unwitting land owner or seller.
Advice for Developers and Promoters
My best advice as an attorney and land investor for anyone that may be even
remotely affected by the Act is to not play games with it and just comply with
the terms, even use your compliance as a selling feature for your land. Don't
attempt to avoid the Act's jurisdiction by devising numbers games for your land
lot sales or other twisted ways to create de facto exemptions. They do not work,
I've seen it tried many times. Unless you legitimately can claim one of the
Act's recognized exemptions, go ahead and comply with the Act.
First, you should not be committing fraud anyway with land sales. And the
Act's focus in on full and complete disclosure, something any developer or
promoter should be doing just to avoid routine state civil liability and tort
actions. As my philosophy teaches, it is better to overwhelm any prospective
land buyer with facts and give them everything you know and have than
selectively offer facts about the land they are buying. Inevitably, it is the
one fact you determine to be immaterial that they will claim (rightly or
wrongly) to be the most material of all.
Second, while the Act REQUIRES registration in certain cases, nothing
prohibits registration in all cases. Use the fact you are registered with HUD as
a sales device, again demonstrating your complete determination to disclose all
material facts about the land you are selling. The costs of registration with
HUD range between $800 - $1,000 and the preparation and printing of a
registration statement can be between $1,000 - $5,000 or more. Still,
registration does bring legitimacy to a project especially when it is not
required by law. If anything, registration forces a controlled discipline on the
promoter and developer, something that often is lost in the heated game of land
sales.
Third, comply with the Act's refund and disclosure provisions even if you
don't have to. Avoid the high-pressure tactics that so many land promoters still
resort to ("If you sign the contract today, you get this special price.") even
in this more enlightened age. Refunding the money of an unsatisfied customer
with cold-feet is just plain good business practice. Use the Act as a guideline
for your sales and marketing programs even if you aren't bound by its
provisions.
The Federal Interstate Land Sales Full Disclosure Act has curbed many of the
land scams of the past but not all. I see and hear about them still occurring
all the time. Still, it is a necessary consumer protection law and developers
and land promoters involved in the sale of ANY number of subdivision lots need
to have an understanding of the Act's requirements. As a land investor myself, I
just assume I am covered by the Act and structure my conduct accordingly, even
if I am exempt from the registration requirements in nearly every case.
Resources
The Federal government and HUD maintains extensive information about the
Interstate Land Sales Full Disclosure Act and a large number of very helpful
pages about the Act on HUD's website.
An excellent book about the land scams of the 1960s and even earlier that led
to the critical mass in Congress and passage of the 1968 Act is THE GREAT LAND
HUSTLE by Morton C. Paulson (copyright 1972, publisher Henry Regnery Company of
Chicago, Library of Congress Catalog Card Number 72-80936, no ISBN). The
outright fraud that took place before the Act was simply outrageous, often
unbelievable. Unfortunately, many of the scams detailed in this book continue to
this day. This book is literally an encyclopedia of land scams, how they work,
and sadly how profitable they can be.
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