Non-traded REITs (or Real Estate Investment Trusts) have caused unsuspecting investors to lose millions of dollars in recent years. The Financial Industry Regulatory Authority (FINRA) has issued strong warnings about the dangers of investing in non-traded REITs, which are especially unsuitable for seniors, retirees, and conservative investors. In fact, it’s not entirely clear how anyone could benefit from these often deceptive investments.
Securities laws prohibit Wall Street brokerage firms from recommending investments that don’t benefit investors. If you are retired, a senior citizen or a conservative investor and your stockbroker told you to buy nontraded REITs, you may be able to receive full or partial compensation for your loss.
How Real Estate Investment Trusts Happens
On the surface, non-traded REITs seem like a promising way to generate stable investment income. However, they are very unsuitable for many investors because of hidden risks and the way they lock away your money for many years.
Non-traded REITs are so complicated that most consumers don’t have the background to understand the risks involved. However, two things are exceedingly clear:
- Non-traded REITs are highly inappropriate for conservative investors, retirees, seniors and anyone else who can’t afford to lose a large percentage of their investment.
- Non-traded REITs are illiquid, meaning they lock up your money and you won’t have access to it for a number of years without paying penalties and fees.
- Non-traded REITs pay extremely high commissions to the brokers who sell them.
The reason non-traded REIT fraud happens is that of the high commissions they pay to the stockbrokers who sell them, often as much as 6 percent. If a stockbroker sells $200,000 of a nontraded REIT to you, he could instantly generate $12,000 of commissions for himself.
Because so many fees are associated with the purchase of REITs, often only 85 percent of an investor’s purchase price actually goes into real estate investments. The rest goes to fees and costs paid to trust managers and brokerage firms. Because of this, if investors want out early, they’ll get hit with enormous fees, making non-traded REITs extremely illiquid and particularly unsuitable for retirees.
Many stockbrokers push high risk and illiquid REITs onto retirees and conservative investors for the sole purpose of generating commissions and fees for themselves without any regard for the welfare of their clients.
Wall Street brokerage firms also profit heavily from the sale of non-traded REITs. In fact, your brokerage firm might have pressured your stockbroker into selling these inappropriate investments to you.
Bringing Real Estate Investment Trusts into Perspective
REITs are typically marketed as a way for consumers to invest in real estate without actually buying property. Many REITs maintain a portfolio of real estate holdings in order to generate rent income, which is paid in dividends to the shareholders. In other cases, REITs invest in risky mortgages, mortgage-backed securities or other real estate investments.
It’s not uncommon for REITs to suffer from poor management decisions. Sometimes there’s little incentive for REIT managers to invest in profitable properties or investments. REIT managers frequently invest in anything just to keep things going. For this reason, a lot of REITs are not profitable.
An unprofitable REIT will try to pay investors their promised dividends for as long as possible. According to a tip sheet published by FINRA warning investors about nontraded REITs, some non-traded REITs will pay dividends to investors by using the influx of cash from new investors:
Unlike interest from a CD or bond, REIT distributions may be funded in part or entirely by cash from investor capital or borrowings—leveraged money that does not come from income generated by the real estate itself.
As you may be aware of the Bernie Madoff scandal, this is how a Ponzi scheme operates, by paying dividends to current investors, not with investment profits, but with cash from new investors. Just like a Ponzi scheme, when a REIT exhausts its cash reserves, it may suspend dividend payments completely. It could even go bankrupt – at which time investors could lose a large percentage or all of their initial investment.
Discovering the Real Estate Investment Trusts Fraud
Most investors don’t discover the true risks involved with non-traded REITs until after they have suffered a devastating financial loss. And once they discover how inappropriate the investment was, consumers have a very hard time getting out of it.
Non-traded REITs are not sold on the stock exchanges and investors can’t redeem them early without paying extremely high penalties and fees. In the worst cases, a struggling REIT will revoke its investors’ ability to liquidate, even if the investor is willing to pay the fee.
Countless investors have gotten their money tangled up in bogus REIT investment scams and lost millions of dollars because of them. Meanwhile, Wall Street brokerage firms, stockbrokers, and REIT managers are filling their pockets with cash from commissions and management fees.
State and federal securities laws exist to protect investors from situations like this. However, you need to take action and protect your rights if you want to get your money back.
Know Your Rights
The Financial Industry Regulatory Authority (FINRA), which holds stockbrokers and brokerage firms accountable for unsuitable investment advice and fraud, issued a warning to consumers about non-traded REITs. FINRA has also published a valuable tip sheet about non-traded REITs. FINRA’s warnings clearly state that these investments contain hidden risks and liquidity problems, making them inappropriate for unsophisticated, conservative and/or long-term investors.
When an investor files a claim for non-traded REIT fraud, the unsuitability of the investment advice is a major issue. Therefore, FINRA Rule 2111 and FINRA Rule 2090 will apply to most REIT fraud claims. To learn more about the doctrine of suitability, and unsuitability claims in general, you can read about this important legal issue here.
Do you suspect that your stockbroker fraudulently or negligently recommended non-traded REITs to you?
Try and Get Your Money Back
If you lost money because your stockbroker inappropriately bought non-traded REITs for your accounts or because he failed to disclose the true risks involved with REITs, you can make a claim for damages and try to get your money back.
The financial injuries resulting from investment fraud can be crippling, but the realization your stockbroker neglected your account or purposefully lied to you can be overwhelming. If you have fallen victim to this kind of fraud, it’s important to remember this is not your fault!
Pursuing a stock fraud claim will teach big banks and Wall Street brokerage firms that it’s unacceptable to prey upon innocent consumers and completely disregard their best interests and needs. Your claim may even prevent others from suffering as you have by forcing Wall Street brokerage firms to conduct business with honesty and integrity.
You may be eligible to receive compensation regardless of whether you sold or continue to hold the REITs at issue. Contact us today to set up a free consultation. We will listen to your story, answer any questions you may have, and discuss your legal rights and options.