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the project has been in question since its inception, and it was only

the combined efforts of the Federal Trade Commission and several Florida

agencies that managed to rein in this massive problem.

Again, Horizon Corporation is selling a project called Rio

Communities in New Mexico, which it advertises as a "carefully planned

cluster of communities growing so rapidly that they seem like a mirage."

A mirage it may in fact be: There are only 800 homes in these 7 comunun itics,

despite the fact that 170,000 lots have been sold. If construction at

Rio Communities continues at its past rate, Rio Communities will not be

fully occupied in less than 3600 years.

The second major problem we uncovered is the installment contract. All the companies we studied were selling lots via installment contracts generally extending over 10 years, and installment contract sales are characteristic of the industry. Many purchasers think they are buying a

lot when they sign a contract, but, in fact, the installment contract is

not a deed. Nor is it similar to a conventional mortgage, whereby a

purchaser may live in a house while he is paying for it.

An installment

contract purchase agreement doesn't transfer ownership of the land, and

it doesn't transfer the right to use the land.

It simply gives the

purchaser the right to make monthly payments for five or ten years, at

the end of which the company promises to turn over the land and whatever improvements it has agreed to furnish. Under this sort of contract, the

purchaser has virtually no rights or protections. Should a purchaser

ever fail to make the monthly payments for the lot, he in most cases will forfeit everything, both lot and all prior payments. Should the company go bankrupt in the course of the ten years and be unable to provide

promised improvements, there is usually little the purchaser can do.

Finally, the contract is often used by the developer as a source of

revenue, either as commercial paper discounted to a bank, or as collateral

for loans.

The holder of the paper is not necessarily liable for the

developer's obligations.

We also found abuses in terms of the product that the land sales

companies are selling. All of the companies we looked at sell lots

either implicitly or explicitly as homesites or as investments; yet,

all too often they do not provide the basic services that make the lots

usable and saleable.

INFORM found that only 5 of the 19 projects we looked at had most

necessary basic services such as water supply, sewage system, clectricity, and telephones, adequate drainage available. The others lacked these services, do not guarantee installation by the time the purchaser has

paid for his land, have not set aside any funds for installation, and

do not offer a refund if land is not usable.

This can prove very costly to purchasers of lots in these communities.

At Rio Communities, for example, if a purchaser wants to use his plot of sparsely vegetated desert grassland, he has to pay up to $11,000 for a

Well, a septic tank, a radio-telephone, and a generator; or he can pay local utilities up to $12,000 a mile to extend electricity and tclcphone

service to whatever part of this vast 400-square-mile site he is located

in; or he may be able to trade the land for a lot in the core development

area. However, there are no guarantees that any land will be available

for trade, and to get it he will have to pay considerably more money and

he will have to build immediately. His original lot, which he has paid

33-716 0.78.7

for over 10 years with 30 percent interest, is virtually useless, except

as an option to buy a conventional home on a conventional-mortgage basis.

The problems do not end with lack of basic services. The condition

of the land itself is often a problem. INFORM found that subdivisions

are frequently located on land prone to natural hazards such as flooding,

landslides, earthquakes and hurricanes. Marco Beach and Cape Coral,

to take two Florida subdivisions as an example, are in the coastal

hurricane flood zone, a fact which is not necessarily apparent to the

naked eye even during an on-site inspection. Lake Havasu City, located

in the dry and barren Arizona desert, has experienced flash floods in

which three people died. Many California subdivisions are in earthquake


Is such land a good investment? Companies claim it is, or at least

that they are providing land cheaply to people who otherwise could not

afford it. However, INFORM found that lot prices are actually the

opposite: inflated and fraught with hidden and/or unanticipated costs,

disguised by the elaborate wording and long duration of the payment


Lots sold on the installment plan at the projects we

looked at ranged from $1000 to $60,000. On top of this, purchasers must

pay a finance charge of 4 to 9 percent annually, which adds $200 to $28,000

to the price. They must also pay property taxes, although they do not

own the land; special service district assessments; bond reduction

charges, recreation fees, property owners' association dues; and often,

improvement fees or betterment fees. At the sites we studied these

additional charges added up to $26,000 to the lot price over ten years.

In the end, the purchaser usually receives a bad bargain. We

polled local rcaltors to see if any of the lots were an adequate

investment. We found that at virtually all of the projects, lots can be resold only at hardship prices, that is, at less than what the purchaser initially paid. At several of the projects local realtors reported that it was virtually impossible to unload a lot at any price.

The problems I have described do not respect state boundaries. They , endemic to land sales transactions conducted in the absence of substantive regulation. They are as likely to occur if the subdivider is on the eastern shore of Maryland selling to Baltimore residents, in the Poconos selling to Philadelphians, in the Nassanut ton Mountains

selling to Washington Suburbanites, or in northern Wisconsin selling

to Milwaukee residents, as they are if he is in New Mexico or Florida

selling to New Yorkers.

If the problems of consumer abuse are so endemic to the industry,

the question arises then as to what the existing laws do.

To answer

this question, INFORM analyzed the laws of five states which are the

sites of intense subdivision activity and a sixth statc, New York,

where many of the lots are marketed. We also analyzed the laws of the

Federal Government.

We found out that regulation of this industry is

not adequate. What little protection now exists is embodied in the

Interstate Land Sales Full Disclosure Act. This Act requires sub

dividers to register with OILSR, and to prepare a property report

disclosing important information to consumers.

It also gives purchasers

and the government the right to sue for damages on the basis of misstatements of fact in the statement of record or property report.

Beyond OILSR's registration and disclosure requirements, only

20 states have their own laws requiring subdividers to issue property

reports to lot purchasers.

And only a very few states

actually have substantive regulations to require a central

water system, for example, or escrowing of funds for refund


Both INFORM and the President's Council

on Environmental

Quality, which has also studied this industry, sound disclosure to be inadequate protection for consumers. But, weak as it

is, it is a vital and necessary minimum.

I would now like to turn to the various legislative

alternatives pending before this Committee.

I would like to

start with the Nelson amendments, which are now part of the

Senate version of the Housing and Community Development

Amendments of 1978.

This would exempt certain types of

land sales operations from having to register with OILSR and give consumers a Property Report, although the companies could

still be sued for fraud under the Interstate Land Sales Full

Disclosure Act (ILSFDA). Companies marketing to residents of

the same

state would be exempt.

Companies marketing to

people who live within a 100-mile radius of the subdivision

would also be exempt, provided the lot purchaser has inspected

the lot before buying.

Finally, companies selling lots having

certain kinds of basic services, who deliver a deed, who do


use elaborate sales techniques, and who require an on-the

lot inspection would also be exempt.

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