A federal government's lawsuit alleging a land shark bilked $25 million out of mostly older investors should send a message to others looking to cash in on dirt -- it most often isn't the deal it's promised to be.

Learn how not to be buried by land deals.

Late last month, the U.S. Department of Housing and Urban Development announced a lawsuit charging developers calling themselves "Buyers Source" with using a fraudulent land sales scheme.

The U.S. Justice Department's civil complaint filed in the U.S. District Court for the Eastern District of Virginia, alleges Buyers Source violated the federal Interstate Land Sales Full Disclosure Act and is seeking an injunction to shut them down.

The complaint alleges the Tidewater, VA-based umbrella company and its affiliates sold more than 1,000 parcels of land located in Florida, South Carolina, Ohio, Arkansas, Texas and Missouri at bloated prices exceeding true value by as much as 3,000 percent. The company allegedly targeted older, existing timeshare owners and offered to purchase their shares in exchange for timeshare owners' purchases of land at the inflated prices. The company promised tremendous profits and even gifts, the complaint says.

"Many of these victims worked their entire lives to build security for their later years," said John C. Weicher, HUD's Assistant Secretary for Housing.

"Now a company with a fraudulent scheme is attempting to take all that away. HUD, in conjunction with the Justice Department and State Attorneys General, will do everything it can to protect consumers from those who would steal their share of the American Dream," he added.

Why use land as bait?

A home's real value is in the dirt.

When you purchase a home, you actually buy real estate, a combination of dirt -- the land -- and anything affixed to it, such as your home, the garage, a swimming pool, fences, septic tanks, sidewalks, driveways, and the like.

Land is real estate's most valuable resource because Planet Earth provides only a fixed supply. You can't move it and you can't manufacture more of it. Your house is little more than an improvement upon the land.

It's the "real" in real estate. The gold that makes the American Dream really shine.

The law of supply and demand appears to dictate that land is a risk-free, easy-money investment. Sitting on a cheap parcel on the outskirts of a building boom, waiting for dwindling supplies, encroaching development and rising prices to turn you into a land baron seems like a no-brainer of an investment with guaranteed returns.

It's only theory.

If you decide to stake a claim on undeveloped land, proceed with caution, not with stars in your eyes. When it comes to investing in land, costs, zoning, rules for developing, topography, land condition, land sharks looking to unload on you and other factors complicate the theoretical supply and demand equation.

Land costs

Experts say until you turn a profit -- if you do -- expect your land to be a money pit.

Just as with any real estate purchase, get preapproved for what you can truly afford, not what the lender is willing to lend.

During preapproval, you'll learn lenders consider land investments speculative and charge extra for their risk. Even if you manage less expensive seller financing, you don't have the same income or tax benefits to offset your expenses as you would with a property investment. You must, however, pay property taxes.

If you plan to develop the land, rather than sell it later, don't stop at construction and financing costs. Environmental impact studies, researching the local general plan, the building permit process and related infrastructure development requirements are only a few of the additional financial obstacles you must hurdle.

Some communities only allow you to purchase land you plan to develop within a few years or so, adding the pressure of time to your depleted cash flow. You also may have to pay off the land loan before you can acquire a construction loan.

And if the cost of buying land forces you to forego, say, a tax-sheltered retirement account, add those lost tax benefits to the cost of owning land.

Land conditions

You can reduce your risks and costs by working with a licensed real estate agent who specializes in land. That doesn't mean a property agent who moonlights in land sales. Hire an agent who only sells land in the area where you are shopping.

He or she can help you find the ideal plot -- land in an area of rapidly expanding commercial and retail activity with a shortage of housing and developable land. Such a parcel gives you two options, to sell later at a profit or to develop the land and create income producing property.

The agent can also help you obtain topographical maps to learn about the terrain and features of the land. If it contains major slopes or is in a wetland, for instance, development may be too costly and resale to someone with deeper pockets questionable.

You can also learn of the land's potential by contacting local government offices to learn of any zoning restrictions, historical preservations or environmental or species habitat issues.

If you make an offer, a title search will provide additional information specific to the ownership of the land. You'll need to learn about liens against the property, easements, access, gas, oil or mineral rights and any other unexpected encumbrances that typically don't come with a home purchase.

The current owner likely will have a professional survey of the property to determine legal boundary lines. If not, hire a surveyor to be sure.

Land value

To be sure the land is worth the asking price requires the same effort as determining the value of any piece of real estate -- with or without property.

Obtain prices of other, recent, comparable land sales in the area. Check the classifieds for land sales to determine asking prices. Visit land sale events to obtain more cost information. Local builders and developers also have pricing information.

Land caveats

Above all, avoid get-rich-quick land-sale schemes, gimmicks, hard sell tactics and pressure to quickly close a deal. Disregard statements designed to induce you to purchase, including promises of future appreciation. If it sounds too good to be true, it probably is.

Along with an experienced land sale real estate agent, hire a real estate attorney experienced in land sales to go over the sales contract and all other documents related to your land purchase.

Take questions and complaints to HUD.

Published: September 5, 2003

Use of this article without permission is a violation of federal copyright laws.

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.