Story Serves as Cautionary Tale Against Nontraded REITs
This woman’s story is a cautionary tale against nontraded REITs when her investment broker pushed her into a nontraded REIT as part of her IRA.
The story of Susan Fox, a 63-year-old woman whose broker sold a second nontraded REIT to her after she expressed concerns over the first’s double-digit decline in value, should serve as a cautionary tale for all.
In Sunday’s InvestmentNews article, Fox is quoted as having said, “My recollection was that he deflected talking about Inland [the first nontraded REIT]. He was talking over my head and said that [Cornerstone, the new nontraded REIT] was a better investment with a better, reputable company, and it would pay dividends. He had a lot of paper spread out on the table. He had all the documents ready for me to sign, and I signed them.”
Just a few years after Fox purchased the second nontraded REIT, she learned the product’s value had declined 72%. Unfortunately, when she wanted to sell the investments, she learned she couldn’t – a fact she said her broker failed to mention when he sold her the products as part of her Independent Retirement Account (IRA).
Fox’s case brings to light many of the problems associated with nontraded REITs. They’re highly illiquid, often for periods of more than eight years; they carry hefty fees that erode their long-term values; and the early redemption of shares is usually very limited. Additionally, they carry limited diversification, lack clear and simple valuation processes, and have potentially significant tax consequences.
In an investor alert issued late last year, FINRA warned investors of these and other risks saying, “Non-traded REITs are rarely, if ever, suitable for short-term investors and even long-term investors must be willing to bear the risks of illiquidity.”
Unfortunately for Susan Fox and other investors like her, many brokers don’t seem to care that these risky products are unsuitable for their clients. For now, the best thing investors can do is to avoid purchasing a nontraded REIT unless they fully understand all of the associated risks. If you are considering investing or changing investment brokers, you can learn how to select the right broker for you to avoid common investment mistakes on this site.