Last week’s Weekend Investor section of the Wall Street Journal featured an article titled “The Most Dangerous Investments.” Number one on their list? Nontraded Real Estate Investment Trusts – REITs!
We understand that REITs are one of the hottest things on the market today. Investors dissatisfied with low interest rates and returns have been flocking to REITs. Like automobiles, handbags and houses, not all REITs are alike however.
The riskiest of the REIT family are nontraded REITs. They are also unsuitable for most investors.
Congress passed the Real Estate Investment Trust Act in 1960. That law allowed ordinary investors to pool their monies and invest in large real estate projects such as shopping center and office buildings. Prior to that, only institutional investors and the very wealthy had these opportunities.
Investopedia defines a REIT as follows: “A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.” Nontraded REITs are not liquid, however.
What does that mean? Most REITs can be bought and sold like stocks. Purchase a non traded REIT, however, and you might be stuck with it for 7 years, maybe even longer.
Why? Because nontraded REITs generally must be held until the promoter decides to have a “liquidity” event. Until that happens, there is no ready market for nontraded REIT shares. This means if you need your money for retirement, down payment on a new home or for an emergency you are simply out of luck.
Unfortunately, many stockbrokers fail to inform investors of these risks. We know of one 92 year old man who invested in a nontraded REIT on the recommendation of his broker.
Another problem with nontraded REITs are the high commissions typically associated with them. They often also carry higher than average fees and charges.
Notwithstanding these serious problems, investors continue to invest billions of dollars in nontraded REITs. The Journal reports that they raised $19.6 billion last year.
Often investors learn that their REIT is worth far less than they thought when they go to sell, if they can sell. Stockbrokers have a legal duty to properly educate their clients and insure that they understand the liquidity limits on these investments. Many do not. Brokers also have an obligation to only recommend investments suitable for their clients. If you need access to your money or are nearing retirement, nontraded REITs are probably not for you.
Investors who find themselves stuck with a nontraded REIT or other bad investment may be able to get back their money. Both stockbrokers and the firms that employ them can often be held responsible for unsuitable investments or for failing to explain the risks associated with illiquid investments.
Recovery is generally through an arbitration proceeding before the Financial Industry Regulatory Authority. These arbitrations are generally quick and inexpensive.
Need more information? Contact the REIT loss recovery lawyers at Chapman LLC at 877-410-8172. Cases handled anywhere in the United States.