Buying land in another state is less risky now than several years ago, but consumers still risk developer fraud, the Department of Housing and Urban Development has reported to Congress.
Weaknesses in the 1979 amendments to the Interstate Land Sales Full Disclosure Act, changing registration and advertising rules, hold the potential for developer abuse, says HUD's Office of Interstate Land Sales Registration (OILSR). That finding has prompted an inquiry into the extent of current violations and the need for additional congressional or administrative action.
The HUD report, required by the 1979 law, analyzes the success of rule changes in reducing industry and consumer complaints. The report finds the new exemptions from sales registration are difficult for HUD to police, so many developers may be selling land outside federal restrictions. OILSR also notes a loophole in rules preventing developers from advertising facilities they don't intend to provide, and the office says this loophole may allow widespread use of misleading promotions.
The revised antifraud provisions say any developer must include in the sales contract whatever amenities he promises in his advertising to prevent a misleading sales offer.
"The intention of the amendment may be lost entirely," OILSR says, following an administrative law judge ruling that the disclosure provision does not apply to amenities a developer says he may complete. In a recent case, a HUD judge found that the Dorvine Land Corp. of Kenner, La., was not bound by contract to its "tentative plans" to build a golf course and country club in the Lake Timberland Estates.
The judge said that the country club and golf course could be advertised if the developer has "realistic plans" to complete them but for "business reasons" did not wish to be contractually bound to provide them. The decision allows OILSR, however, to request clarification of any contract provisions it finds vague as to the developer's intent.
"Our 11 years experience with disclosure requirements leads us to believe that in those situations where purchasers need protection, many developers will equivocate and hedge, outright committing themselves to as little as legally possible," the HUD report says.
Because both registered sales and sales exempt from registration are affected by the advertising rule, "the problem could be very widespread, as exempt developers are not required to define themselves," the report adds.
One third of the 1,800 consumer complaints HUD received between 1979 and 1980 claimed developers had failed to provide the facilities they had promised. Another 23 percent reported sales abuses such as misrepresentation and high-pressure sales pitches, and 6 percent complained of misleading advertising.
The complaints have spawned a preliminsry OILSR investigation into developers' advertising practices which focuses on subdivisions promoted through mass mailings, WATS line operations or free dinners and gifts. These types of advertising, HUD feels, are more prone to misrepresentation than promotions through other media.
Where "there is reason to believe there may be a problem," officials say, the department will ask consumers who have bought land in suspect subdivisions whether they have any complaints about their purchases. OILSR informs consumers the inquiry is part of a "routine survey," following industry complaints that the investigation might maligan innocent developers.
Of 40 subdivisions HUD will study, half now have responded to a survey of advertising practices the department mailed in September. In eight cases there was enough uncertainty about the legality of developers' promotions to open active investigation files. One of these has been closed for lack of substantial consumer complaints.
Other complaints HUD received include the failure of developers to convey property deeds or to deliver required property reports. In some cases, purchasers signed for the report when they signed the sales contract, but did not receive it until after the mandatory "cooling-off" period, during which they could get out of the contract.
Because developers now determine themselves whether they are exempt from sales registration, it is difficult for OILSR to locate developers making fraudulent sales offers or failing to provide property reports and deeds, HUD says. Only when the department receives a formal complaint does the problem become evident.
The grievances may be a long time in coming. Over 70 percent of the complaints HUD gets are made three or more years after the land was purchased, since problems such as incomplete facilities or faulty deeds aren't obvious right away, the report finds.
OILSR says that given its limited resources and staff, "There's virtually no possibility of any type of review or inspection to determine whether developers theoretically operating under the exemptions actually qualify for them."
By May HUD will complete a survey of 65 subdivisions, to determine whether they qualify for the exemptions developers may be claiming. Field personnel will make on-site inspections and may request written proof of the exemptions. Officials say, however, they'll maintain a "low profile," as developers are not required by law to prove they qualify for the exemptions. OILSR says it only wants to determine whether ineligible developers are intentionally evading sales registration or simply have misunderstood the law.
In 1979 Congress simplified the registration procedure by allowing more exemptions to be determined by developers themselves, and by consolidating the exemptions into fewer categories. During public comment on the new rules, the land sales industry complained the changes could cause developers to inadvertently fail to register and so face administrative discipline.
OILSR promised new rule interpretation by last August, which would detail the circumstances under which exemptions could be claimed and give examples of when a subdivision is exempt from antifraud and contractual provisions or merely from sales registration. The rules were delayed while HUD gathered additional public comment and now await a final review by the new administration. If the OILSR survey of exemption claims points to widespread noncompliance, the department might be encouraged to move on the guidelines more quickly, officials say.
Developers are upset by the number of "misconceptions" the HUD report contains, says American Land Development Association spokesman George Potts. Developers question HUD's figures on consumer complaints, noting there is no distinction between minor and major grievances.
The report's claim of 17 industry complaints is "absurd," Potts says.