The housing market crash has left many buyers deeply regretting their “pre-
The federal law the buyers are relying on is the Interstate Land Sales Full Disclosure Act (or ILSA). This statute was originally enacted to protect buyers of out-of-state land from unscrupulous developers. Often times, these out-of-state buyers didn’t have a chance to inspect the land before purchasing it. When they did manage to venture out on the land after buying it, the property would turn out to be relatively cheap or worthless for any development.
However, the buyers relying on this statute today have been adequately informed about their property. The reason this statute still works for them though, is because courts have been increasingly stretching the anti-fraud provisions of this statute to include almost any omission by the seller. Many courts have now been holding that simple omissions in the contract or other paperwork constitute fraud. These include simple omissions that were often overlooked by real estate professionals in the real estate boom, such as failing to include a legal description of the property in the contract.
So how exactly does ILSA work today? The statute is rather complicated and technical, but below is a quick overview of how ILSA works today:
1. The original wording of the statute has it applying to property with subdivisions of 100 or more lots. Today, this includes condominiums in a condominium building, homes in a community, apartment units in an apartment complex, and any other subdivision of land sold pursuant to a common plan.
2. The regulations apply to both in-state and out-of-state purchases. Although the statute was originally enacted to protect buyers from out-of-state sellers, the regulations still apply if the seller used interstate commerce to market the property. This means the statute applies to sellers who mailed a letter, used a telephone for marketing purposes, or even advertised over the internet.
3. If the statute applies, then sellers are required to register the property with the U.S. Department of Housing and Urban Development. Furthermore, they must give prospective buyers a pre-approved “Property Report.” Many sellers are adamant about providing a Property Report, which is a fairly long document, so check to see that the seller has complied with these requirements.
4. In addition, sellers may not use fraud or make misrepresentations in the course of selling the property. As I mentioned earlier, courts have been increasingly lenient in interpreting what constitutes fraud. Many cases of fraud include, for the most part, simple and harmless omissions. But the consequences are enormous; if courts find that ILSA has been violated, then the penalty is usually recession of the contract.
5. There is one notable exception to these rules: if the seller agrees to build the property within two years after the buyer signs the purchase agreement, then ILSA does not apply.
In any case, the statistics show the increasing relevance of ILSA today. Traditionally, only about 10 to 20 ILSA court decisions would come out a year. However, last year there were 69 court decisions around ILSA, and for this year, at least 50 court decisions so far. Furthermore, in a recent report by a New York real estate organization, buyers of 131 New York City condominiums (with a net worth of 132 million dollars) were trying to use ILSA to get out of their contracts.
There is no doubt in my mind that courts have been influenced by the housing crisis, and have used the statute as a way to help buyers out of a financial mess. Personally, I believe if we really want to help buyers get out of their contracts, it’s the legislature job to do something about it, and not necessarily the courts. But as long as courts seem to be favoring buyers in this respect, it’s one more tool for buyers to be aware of and store away in their arsenal for future use.