Many of you making your initial journey to this blog may be wondering: “What is the Interstate Land Sales Act?” and “Why should I care?” Most blogs cover the act solely from the purchaser’s perspective. However there are those individuals, usually real estate agents, who unwittingly get caught in the middle of the ILSA. Whether the Act or these regulations apply to a particular development is beyond the scope of this post. Suffice it to say that if you are selling in a preconstruction development with more than twenty-five homes you should be aware of the regulations discussed herein. The Act itself and the regulations adopted by the Secretary of HUD make it clear: that selling preconstruction units in a large development can be hazardous. The pertinent ILSA regulations can be found at 24 C.F.R. s. 1710, 24 C.F.R. s. 1715, and 24 C.F.R. s. 1720. In addition there are many practical explanations, and examples provided by HUD concerning these regulations. See: 61 FR 13596 (1996). There are two major areas in the ILSA regulations that can trap an agent trying to make a sale: (1) future monetary or investment value; and (2) promises that a unit can be resold prior to closing. While some promises of future value may be written off as mere “puffery,” (i.e panaramic views, a tropical paradise, best clubhouse around, etcetera) representations related to the future monetery value may violate ILSA. Also, telling a potential purchaser that you can assign the contract to a new buyer and have the unit resold at a profit before the required closing can violate the Act. The regulations promulgated by HUD define the following practices as “unlawful sales practices” violating ILSA as set forth in 24 C.F.R. s. 1715.20:
. . .
(h) Use, as a sales inducement, any representation that any lot has good investment potential or will increase in value unless it can be established, in writing, that:
(1) Comparable lots or parcels in the subdivision have, in fact, been resold by their owners on the open market at a profit, or;
(2) There is a factual basis for the represented future increase in value and the factual basis is certain, and;
(3) The sales price of the offered lot does not already reflect the anticipated increase in value due to any promised facilities or amenities. The burden of establishing the relevancy of any comparable sales and the certainty of the factual basis of the increase in value shall rest upon the developer.
There is a subtle point that many people overlook when dealing with this regulation. It is not the representation; it is an omission that constitutes a violation of ILSA. In other words, failing to provide the prospective purchaser with written documentation of the underlying facts that supports a representation that the unit “will increase in value” is the violation. The representation itself is not unlawful if accompanied by the proper documentary backup. This distinction is important as many sellers attempt to employ a defense with the boilerplate disclaimers that “no oral representations” prior to the contract may be relied upon. A purchaser cannot “rely” on an omission, and ostensibly this would fall outside such a provision. In addition, 15 U.S.C. §1712 specifically states that ILSA compliance may not be waived by contract. This particular area of ILSA is not well-settled under existing case law. However, it seems to be the most frequent mistake sales agents make. Only a small minority of purchasers I have spoken with state that they were not promised that their purchase would prove to be a good investment.
Second there is the matter of the resale program. This promise is often accompanied by a written resale agreement that supplements the purchase contract. In 24 C.F.R. s. 1715.25(o) it states that is a “misleading sales practice” to make, any representation that implies that the developer or agent will resell or repurchase the property being offered at some future time unless the developer or agent has an ongoing program for doing so. This means you may not be allowed to abandon a resale program, even in a dismal economy, without violating ILSA.
Be aware. Be careful. You may face individual liability for these violations of the Act. With so many developers going bankrupt, purchasers are increasingly turning to individual liability to ensure recovery of their deposit.
This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.