Beware of land banking investment schemes

July 13, 2010 The Ontario Securities Commission is cautioning investors about companies that promise high returns on investments in land development projects.

Known as “land banking”, an individual or company will buy vacant or underutilized property in anticipation of making a significant profit when the land is eventually developed. In some instances, promoters who want to make a quick profit will buy cheap land and sell it at a high price to investors. They will typically do this through a limited partnership.

Investments in these types of limited partnerships are risky. Companies may be allowed to sell these investments to “accredited investors” without a prospectus. Accredited investors are usually wealthy, and can afford professional advice and the higher risk. They generally have fewer legal rights if something goes wrong.

Be wary if you receive an unsolicited offer to invest in a land development project. You may be told that this investment is only available to very wealthy people, but an exception can be made for you—all you have to do is sign some paperwork. This paperwork may involve lying about how much money you make or whether you are an accredited investor.

If this is the case, you may be taking on more risk than you can afford. Investments in land can be speculative and very risky. Despite what the promoter may tell you, the land may never be developed, and you could lose all of your investment.

Below are some tips to help you protect your money:
  • Do a background check. Check registration to find out if the individual or company you’re dealing with is registered to sell investments or offer investment advice in Ontario. Find out if the company is on the OSC’s Investor Warning List. See if the individual or company has ever been involved in an OSC proceeding. Search the Disciplined Persons List to find out if the individual has ever been sanctioned by a regulator.
  • Research the investment. Be cautious about investing in land in an area that is unfamiliar to you. Ask for information about the property and a history of its ownership in writing. Research zoning by-laws and find out if there are any future plans for the area from the local planning department.
  • Don’t give in to time-limited offers and high-pressure salespeople. Be suspicious if the person giving you the information is a stranger or offers you a one-time chance to get in on the deal. Get a second opinion from a registered financial adviser, lawyer or accountant.
  • Question guarantees of high returns and low risk. In investing, the higher the potential return, the higher the risk. There’s no such thing as a high return, risk-free investment. While investing in land can be lucrative, there are no guarantees that land will go up in value.
Never invest in anything that you don’t fully understand. If you have questions or are suspicious about an investment opportunity, contact the Ontario Securities Commission for assistance.