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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.
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
The holder of the paper is not necessarily liable for the
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
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.
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
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
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
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.