The Many Problems Associated With Nontraded REITs

NEST EGGAs lawyers that assist investors who were defrauded or misled by stockbrokers and investment advisors, we hear horror stories every day. Many of those stories center on illiquid or nontraded REITs These stories include elderly investors whose brokers told them to invest in thinly traded REITs, people who can’t redeem or sell their REITs despite the need to access their capital and people who have watched their investment plummet in value overnight. 

A Real Estate Investment Trust (REIT) allows ordinary investors to participate in large real estate projects. Many of these investments are publicly traded and listed on major stock exchanges. Others, however, are not listed on an exchange making them difficult to sell. These nontraded REITs offer a higher yield but at the price of little or no liquidity. Because of that feature, they are not recommended for anyone who may need sudden access to their money.

Regulators have warned brokers to be especially careful when recommending these investments. Many otherwise reputable brokerage firms have been fined millions of dollars because some of their brokers are improperly selling REITs. Because of all the controversy and REIT fraud within the industry, we thought it would be helpful to list the most common causes of REIT losses.

Liquidity! There is no ready secondary market for these investments. That means you can’t easily sell them in an emergency. With many REITs lasting 8 to 10 years, it could be a long, long time before you can access your funds.

Valuation Issues. Because there is no secondary market for these investments, it is hard to know what they are truly worth. Many REITs carry an artificial price per share on their books that has no basis in reality. In our opinion, an investment that can’t be sold when you need money is worth nothing!

Retirement Accounts. It is hard to think of why anyone would want these investments in their retirement account. Yet we routinely hear and see brokers recommending these investments for people in their 70’s and older. In many cases, investors will die before they can access their money.

High commissions. With so many online trading options these days, brokerage commissions are razor thin for most investments. While a traditional blue chip stock might net a broker a 1% commission, nontraded REITs often carry commissions between 10 and 15%! Unfortunately, for some brokers, the temptation is simply too great and they wind up making recommendations based on their bottom line (high commissions) instead of the customer’s financial future.

Misrepresentations. The risks and lack of liquidity associated with REITs are often never explained to investors. Some brokers suggest that REITs are liquid because they are publicly registered. While REITs must make certain filings with the SEC, public registration does not mean publicly traded, something that many brokers gloss over.

Suspended Distributions. Many people invest in REITs because they make regular distributions. IRS rules say that REITs must payout most of their earnings but that doesn’t guarantee their will be earnings to distribute. The real estate market has been very volatile in recent years making these investments riskier than many investors understand.

If you suffered a REIT loss or can’t sell your REIT investment, you may have a claim against your broker and the brokerage firm she or he works for. In most cases, these cases can be handled on a contingent fee basis meaning no legal fees unless your money is recovered.

Post by Brian Mahany, Esq, author of Due Diligence.


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