REIT Risks: Why Not to Invest in REITs?
Many investors have reported feeling mislead or deceived when investing in non-traded Real Estate Investment Trusts (REITs). While many REITs are marketed as low-risk, high yield investments, some investors have described losing significant amounts of their REIT investment, being unable to redeem their shares, or losing vital investment income from suspended distribution payments. Following these complaints, the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) have increased scrutiny into a number of brokerage and investment firms that market and manage non-traded REITs.
- Unsuitability:
Due largely to a lack of liquidity, many REITs, especially non-traded REITs, are rarely suitable for short-term investors according to FINRA. Short-term investors who were sold on these investment products may have been misled.
- Illiquidity:
Non-traded and private REITs are typically not easy to sell because they are not publicly traded on a major exchange. This puts investors at a significant risk of losing their money should the REIT lose value.
- Up-Front Fees:
According to FINRA, the fees associated with non-traded REITs are typically much higher than those associated with traded REITs, causing investors to lose up to 15 percent of their principal before it is even invested. Brokers may commit non-traded REIT fraud by failing to disclose accurate information about up-front fees.
- Uncertain Valuation:
Since shares of private and non-traded REITs are not sold on any exchange, the value of a share can be hard to determine. Often sold as an answer to volatility, one SEC attorney noted in the New York Times that the SEC objects to “the suggestion that they are eliminating volatility simply because they don’t tell you what the value is,” adding “It’s not that it’s not volatile. It’s just that you don’t know.” This means that some investors may not even know that they are taking losses in their investment.
A good stockbroker or investment advisor should disclose all of the risks and fees associated with REITs before placing investors in these uncertain investments. If your broker or advisor failed to provide you with the proper information, you may have a REIT Fraud claim.
Topics: Real Estate Investment Trust, Securities Exchange Commission
Work cited: Gibbs Law Group, 2020
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