What it is:
A land flip is an act of fraud whereby a group of people buy a piece of land and then profits by continually reselling to each other for more than its actual value.
How it works (Example):
In a land flip, several buyers purchase land for a given price. These buyers then resell the land to each other in succession. This inflates the price well beyond the actual value. Ultimately, this group makes an ill-gotten profit by selling the land to an unrelated buyer at the inflated price. Once the price of the land corrects itself in the market, the buyer sustains substantial losses.
For example, suppose a group of five people purchase a piece of land for $10,000. Each member of the group sells the piece of land to another at a slightly higher price each time. Once the fifth and final member has purchased the land from the others, its price has risen to $14,000. At this point, the group manages to sell the land to an independent buyer for $15,000 and generates a fraudulent profit of $5,000.
Why it Matters:
Successful land flipping can defraud banks and investors out of tremendous sums of money with little or no prospect of recouping losses. In a measure to avoid such losses, banks take a direct stake in pieces of land that have yet to be developed.