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C.  REAL ESTATE RIP-OFFS

Vast acreage of unimproved land is being subdivided and offered for sale as homesites and retirement spots. You have probably seen slick advertisements proclaiming the advantages of accessible leisure communities and urging people to purchase "a place in the sun." These come-ons are often misleading. The out-of-state purchaser is unfamiliar with the topography, and parcels are frequently overpriced. Despite such ads, it is often untrue that water is available, or that the land is furnished with adequate sewage disposal, road maintenance, electricity, gas, and accessible transportation. In many cases, developers abandon projects before completing elaborate facilities.

Question the accuracy of all promotional claims and advertising literature. The following advertisement is typical.

LOOK AT THE FOLLOWING FACTS:

1. Nevada's free land is being bought up at an alarming rate.

2. Land values in Nevada are rising rapidly.

3. During the last ten years, Nevada's population increased by 240 percent.

4. The climate is spectacular-no smog or snow, only sun.

5. Each ranch is located near major highways; electricity and water are also provided.

6. The developer is about to complete a fabulous 18-hole golf course and clubhouse.

7. Title guaranteed by warranty deed and title insurance.

Although some states require developers to submit advertisements for approval before they can be released to the public, promoters still manage to disseminate false and misleading advertising.

Scrutinize all claims before speaking to a developer or the sales staff. Unscrupulous developers use a variety of tactics to induce you to buy. One is the "rush game"-"the price will go up tremendously on October 1, so buy now." Another is the "free inducement offer"-if you travel to their development site, they will pay your lodging expenses while you are there. Customers who travel to the site are often manipulated by fast-talking salespeople. Some promoters renege on their promise to pay for lodging; others house prospective buyers in inadequate facilities.

Ask for written documentation to support advertising and promotional claims. One of the best ways to determine if you are dealing with a legitimate land developer is to request copies of documents that are required to be filed by law. Review these documents before you travel to the development site or sign the contract.

The following documents must be filed with appropriate agencies under many state and federal laws:

• purchase agreement embodied in the sales program

• county engineer's report that describes the physical characteristics of the land proposed for development

• title insurance policy

• certificate of registration

• deed and opinion of title

• reports by licensed engineers regarding drainage, accessibility to roads, and availability of drinkable water

• schedule and timetable of all improvements to be performed by the developer

• report from the county stating that the streets and other public places in the subdivided plot will be maintained

• proposed offering statement

According to the federal Interstate Land Sales Full Disclosure Act, developers must file a Statement of Record and Property Report with the Secretary of Housing and Urban Development (HUD) in Washington before large subdivided plots can be sold to the public. In order to be approved by HUD, all statements contained in these documents must be substantiated by supporting affidavits and exhibits. Once approval is obtained, a copy of the property report must be given to each prospective purchaser. If you are not given a copy of the property report before signing the contract, the law allows you to rescind the transaction or sue for damages.

Investigate the developer. Inquire into the financial resources and reputation of the developer. Start out by asking what associations, if any, the developer belongs to. Contact these organizations to learn about the qualifications for membership and how long the developer has been a member. Call the attorney general's office in the state where the land is located to find out if the developer has ever been charged with land fraud or other illegal practices.

When you meet with the developer or his or her representative, ask the following questions before beginning serious negotiations:

• Has a performance bond or other security been posted to assure the completion of facilities or improvements? With whom? Request a copy.

• Who is the lawful owner of the land? If title is held by a corporation or limited partnership, who are the partners? Are there any judgements, liens, or encumbrances against the owner of record?

• What is the track record of the developer? Has he or she completed other developments? (Investigate them.)

• Who are the authorized sales agents? Where are they located? How long have they been in business? Have they worked with the developer on past projects?

Investigate the land. Once you are satisfied with the developer's reputation, familiarize yourself with the physical characteristics and other features of the land. For example, you should know the amount of yearly property taxes and whether there are any hidden costs. The following are important points to consider:

• What is the total purchase price?

• How much money is required as a deposit? Is it refundable?

• What is the down payment?

• What kind of deed and other assurances are you receiving from the seller?

• What are the monthly payments and financing charges?

• Is time of the essence? If the land is supposed to be built on or developed within a certain amount of time, this should be specified in writing.

• Has the land been zoned for special use?

• If the property to be acquired is income producing, do existing leases comply with all federal and state regulations?

• Have special assessments been imposed for local improvements?

• Does the seller have legal authority (power of attorney) to sign the contract if he or she is not the real owner?

• Have you as the buyer received a detailed description of the premises? Have you reviewed it to be sure it is accurate?

• What is the range of selling prices within the development?

• Does the community offer potential for future growth?

• Are there provisions for water, drainage, electricity, gas, telephone lines, and sewage disposal?

• Is there access to main roads?

• Are there recreational and common facilities?

• Are there municipal services such as fire and police protection, medical and dental facilities, public transportation, schools, and shopping?

• Are the premises sold subject to an existing mortgage or can you obtain your own mortgage?

Consult a lawyer to review all documents and represent you at the closing.    If you are satisfied with the developer's reputation and the land you are about to purchase, discuss the deal with a lawyer. This is essential in any large real estate transaction.

An increasing number of complaints are being recorded regarding illegal practices of brokers, agents, and salespeople. Some realtors are engaging in misrepresentation. For example, prospective buyers visit houses and learn that advertised bedrooms are only walk-in closets, or that a den is really a small foyer. Others are victims of discrimination. The following strategies may reduce your chances of being exploited.

Avoid signing binder agreements. Binders set forth key terms of the proposed sale, and they have legal consequences: They obligate sellers to pay realtor commissions when the broker produces a willing, able, and ready purchaser, even if the deal fails to go through. Many sellers of homes and other real estate have been held liable for the broker's commission after the transaction has fallen through,

If an agent insists that you sign a binder, you may wish to insert language similar to the following for your protection:

"The full brokerage commission to be earned shall be $XXV. However, said commission is not to be considered earned until the full purchase price is paid to the seller and the deed is delivered to the purchaser. This is not accomplished for any reason whatsoever, the broker shall have no claim for commission or compensation in connection with this transaction and shall promptly refund all money held on deposit."

This clause may protect you from paying a commission on a sale that is not finalized, and some brokers may agree to it.

A couple was sued for $8,000, which represented the broker’s commission on a deal that was never consummated. The couple signed the broker's standard hinder agreement, which stated that they agreed to sell their home for $120,000. A day after the agreement was signed, the broker located a suitable purchaser. However, the couple notified the broker that day that they had second thoughts about selling and wished to take their home off the market. The couple was sued by the broker and lost the case.

Deal only with a reputable broker. About 600,000 of the 2.5 million individuals licensed to sell real estate are members of associations such as the National Association of Realtors (NAR). Local chapters of the NAR police their members and conduct formal hearings on complaints. Realtors who misappropriate money or engage in illegal practices are subject to disciplinary sanctions, including removal from access to multiple-listing services, fines, and suspension from the association. By dealing with a realtor who is a member in good standing of a similar organization, you may avoid problems. (Some states have licensing boards that oversee and police activity. Research the law in your state for more information.)

Interview the broker before hiring him or her. Select an experienced broker with a good reputation. You may be able to negotiate the amount of commission and the length of representation. Many independent brokers will reduce their fees when they don't have to share commissions with other brokers, so don't hesitate to ask for a reduction of the broker's commission before agreeing to representation. Confirm the terms of your arrangement in writing to avoid misunderstandings (see Figure 2.1).

Deal with real estate brokers rather than salespeople if possible. In order to qualify as a broker, an individual must have a certain amount of classroom instruction and actual selling experience, and must pass a state exam. Salespeople usually must pass a less rigorous exam and are restricted to working under a broker's supervision. Thus, real estate brokers are typically more knowledgeable than salespeople. Nevertheless, an accountant or attorney specializing in real estate law may provide the best information about which mortgage is right for you.

Understand that realtors often promote their exclusive listings that maximize sales commissions even if such listings are not in your best interest. In an open listing, all the agents in an area have access to the property and the commission goes to the agency that produces the buyer. In some cases, the original listing agency splits the commission with the agency that produces the buyer. In an exclusive listing, one agency is the sole marketer of the property for an agreed-upon period of time. If you are the seller, consider a multiple listing service immediately. Offering an agency an exclusive can limit prospects and leave you open to some abuses-i.e., the agent could sell to a crony and cheat you. However, it is a good idea to retain the right to show and sell the property yourself (in effect, competing with the agency) and not be obligated to pay a commission to the agency if you bring about the sale.

If you are a buyer. The broker represents the seller. Therefore, the agent may misrepresent the property, pretend there are higher bids to get you to increase yours, or practice racial discrimination by refusing to show you a house in a particular neighborhood or discouraging your interest.

Remember that it is illegal to be denied access to a house or rented apartment because of mental or physical handicap, national origin, sexual preference, or gender.

Take immediate action if you have been exploited. If you have a problem with a real estate broker, agent, or salesperson that cannot be resolved, contact the Regional Board of Realtors in your state as well as the local chapter of the National Association of Realtors. These boards may investigate your written complaint and conduct a formal hearing on your behalf (see Figure 2.2).

A jury recently awarded $15,350 in punitive and compensatory damages to a private fair-housing group that bad commenced a class action lawsuit against a realty firm. The group alleged that the broker refused to show rental apartments owned by a particular landlord to minority applicants. Nonwhite prospective tenants were repeatedly told there were no vacancies or that vacant apartments bad been rented. A1tbougb private discrimination is sometimes difficult to prove, numerous trained testers (ie., minority members working for the group who sought to rent apartments in the buildings) testified at the trial. The court is now in the process of determining if the landlords should pay $500,000 in legal fees for the many years of litigation. Moreover, the brokers may lose their real estate licenses and suffer fines and other penalties.

• Remember: The broker works for the seller.

• Do not agree to look at homes or property consistently above your maximum price range or not in your preferred location.

• Be wary if the broker offers you legal or tax advice.

• Do not let the broker argue with you about an offer you wish to make. It is the broker's responsibility to communicate all offers to the seller.

• If you are unhappy with a broker, switch to someone else. If you are assigned a salesperson at the agency and feel that the individual is not qualified or working in your best interest, demand to work with the president of the agency. You are probably under no obligation to stay with one broker at a firm even if that person or the firm has spent much time showing you homes or property.

• It is a good idea to work with a broker who is participating in a multiple listing service. You will have a wider range of properties to choose from.

• Inspect real estate before you purchase or make an offer. Hire an independent housing inspector or engineer to evaluate plumbing, wiring, heating, roofing, septic system, well, and foundation.

There are several areas where renters are often exploited. To guard against common schemes and abuses, make sure of the following:

• The broker, if you use one, works for you, not for the landlord.

• You deal only with a licensed broker.

• If you are the landlord, avoid giving the broker an exclusive right to rent the property; retain the right to rent it yourself or to allow other brokers to assist you. Carefully review any broker's agreement before signing.

• If you are a tenant, pay a broker's fee only after you rent an apartment found by that broker.

• Do not rent an apartment based on a floor plan. Inspect the apartment carefully--flush the toilet, turn on the oven, make sure the windows open, and so on-before you sign the lease.

• Take your time. Do not be pressured to make a snap decision.

• Always read the lease carefully before you sign. If you are leasing property on behalf of a business or company, avoid personal liability. Never personally guarantee payment of the lease if you can help it. For example, if applicable, always sign the lease in your official capacity (e.g., "John Smith, President, not "John Smith"),

Other terms to consider include negotiating for the security deposit to be placed in a separate interest-bearing account with you getting the interest on a yearly basis and negotiating for the right to lease with an option to buy the property after a certain period of time. This may substantially reduce the final purchase price. Negotiate for painting, upgrade, or replacement of old appliances. Avoid signing leases with clauses:

• eliminating the right to trial by jury

• forcing you to pay large attorney fees when the landlord commences legal proceedings

• giving large increases on top of the base rent (Hidden costs in leases often include tax escalation provisions, construction and alteration of the premises fees, insurance obligations, utility charges, and many other costs. Be sure you understand the total bill to be incurred before signing on the dotted line.)

• giving the landlord the right to evict you when the rent is not received within x days of the beginning of the month (Retain the right to be notified in writing before any legal action is commenced so you will be given additional time and the opportunity to cure any alleged violations or breaches of the lease.)

Leases are sometimes such complicated documents that you may want them reviewed carefully by an attorney or accountant before signing. If you use the standard type of form found in a stationery store, review it carefully: Such forms often contain clauses that can cause difficulty later.