How Can I Avoid REIT Scams?
| November 18, 2019
REIT stands for real estate investment trust. While it sells like a stock, it is actually a security. Investors put money toward REITs to invest in large-scale real estate by purchasing shares from a corporation that manages the real estate property. REITs make investing in large real estate possible for the average investor because they don’t have to manage the property themselves.
Why Are Non-Traded REITs Risky?
If you’ve ever heard a sales pitch along the lines of “Get into real estate investment the easy way,” be wary. Fraudsters manipulate people into investing in non-traded REITs by claiming that the investors can earn more without concerning themselves over stock market volatility. In reality, non-traded REITs are still subject to the volatility of the stock market. The only real difference is that the investor doesn’t see the volatility firsthand. Non-traded REITs are illiquid, long-term investments. This type of investment is not suitable for many investors, especially retirees.
Another risk factor of non-traded REITs is the fees they can rack up. Many of these investments have on-the-dollar fees, ongoing fees, and commissions. Finally, many advisors and brokers don’t actually acquire the property until after they get investors to shell out the money. This might result in you getting back “returns” that are actually other investors’ money.
8 Things You Should Do Before Investing in an REIT
Investing in a real estate investment trust (REIT) can be a great way to diversity your portfolio. However, it is very important to understand REITs before you take the plunge. Taking your time to research and understand REITs can help you avoid common investment pitfalls.
Consider how the REIT in question has performed over time. The REIT you’re considering may have been on the market for some time. If so, look at historical data to see how it has performed as long as it’s been on the stock market. You can request this from your broker.
Don’t be afraid to ask questions. As investment fraud lawyers, we cannot overstate this point. Investors who ask questions usually uncover more, and can bring potential red flags to the surface. Ask your broker questions about the REIT before you invest in it.
Understand the valuation and liquidity issues. Since non-traded REITs do not trade on a national exchange, they can be very difficult to sell, and the share price may be difficult to determine. Be sure to read the prospectus carefully and ask questions.
Be aware of fees. A lot of non-traded REITs will include various fees that you may not be aware of, and they can add up fast. Front-end fees could be as much as 15%, which reduces the amount of capital actually available to be invested.
Understand the tax consequences of the REIT. Taxes on REITs don’t always work the way you suspect. Consider speaking with your tax advisor about it before you invest.
Research the borrowing policies for the REIT. Some REITs may be funding distributions with cash that does not actually come from real estate sales, but from investor capital and other sources. The REIT could even allow borrowing beyond 100% of net assets. Additionally, depending on the REIT, distributions could be suspended or stopped.
Understand the redemption restrictions. Many non-traded REITs have strict limitations on when shares can be redeemed. Be sure to take this into account.
Talk with a securities attorney. We invite you to contact Meyer Wilson if you would like an investment fraud lawyer to review the REIT language before you invest.
3 Possible Red Flags for REIT Scams
Sometimes warning signs are subtle, especially if you are just starting out. Other times they seem obvious.
You may have cause for concern if any of these are happening concerning your REIT:
The details are fuzzy. You should be able to do detailed research. If you cannot find this information and your broker cannot or will not provide it to you, this may be cause for concern.
You can’t find much information about the broker selling the REIT. Stockbrokers and financial advisors should have ample information about them online. If you can’t find information about the REIT broker, you may want to stay away.
Details come after the REIT purchase. Your broker or advisor should be candid with you about the investment before you commit. If you are just learning things about the REIT now that concern you, it may be a scam.
In general, remember that it pays to do research before putting your money into any investment. Although REITs are often painted in a high-yield and low-risk light, they are by far more complex than some sales literature would have you believe and not suitable for every investor.