Distributions and Non-Traded REITs
Brokers also use the promise of high income distributions as another selling point. Many brokers often “promise” investors they will see their investment returns through distributions paid to them over the life of the investment. However, many investors buy into non-traded REITs without fully understanding that these distributions are in no way guaranteed. These distributions are entirely dependent upon how successful the fund is doing.
Many non-traded REITs attempt to keep early investors happy through consistent distributions paid for by borrowed money or money brought in through new investors. Non-traded REITs are similar to Ponzi schemes in that regard.
Non-Traded REITs are Incredibly Illiquid
Publicly traded securities are accompanied by the logistics of a free market in which to redeem investments. This means that investors can exchange their shares and receive an amount of cash equal to what their shares are currently valued. This is not the case with non-traded REITs.
Those who manage these companies want to maintain operating capital for as long as they can. Because of this, they work greatly to deter investors from withdrawing early. Investors looking to withdraw from a non-traded REIT are usually only offered buyouts on a quarterly basis with a limited amount of buyouts offered each quarter. If the amount of investors looking to withdraw exceeds the amount of buyouts offered, there could be a lot of investors stuck in an investment they don’t want to be in.
On top of this, the amount these REITs’ managers offer to these individuals is often considerably less than what investors are told their shares are presently valued at. Non-traded REITs can often only operate for a finite amount of time until it either becomes publicly traded or its assets are liquidated. It is at that point in time that an investor can liquidate their assets for what they are told the shares are valued at; however, depending on how successful the company was, the shares may actually be completely worthless at that point.
Brokers Take Advantage of Investors By Recommending Risky Non-Traded REITs
Non-traded REITs are incredibly harmful to investors for many reasons. Despite this, they continue to be recommended by over-zealous brokers who receive excessively high commissions for recommending these products.
Broker commissions for non-traded REITs can be as high as ten percent of the investor’s principal investment. When an investor’s principal investment is lowered by that much, it makes it almost impossible for them to see long-term positive returns. These commissions create a very obvious conflict of interest when brokers recommend products that they know—or should know— are highly unsuitable for investors. These commissions, in addition to other up-front fees when purchasing these products, are just another reason these products are so unsuitable for investors.
Securities brokers like to take advantage of the complex nature of non-traded REITs and the fact that investors like the idea of investing in real estate. If it weren’t for these less than scrupulous brokers, investors might stand a better chance of learning the true nature of non-traded REITs. That they are risky, deceptive, and illiquid investments that are unsuitable for investors—especially those with higher liquidity needs and more conservative investment objectives.
If You Suffered Losses Due to a Non-Traded REIT – Contact Oakes & Fosher
Oakes & Fosher dedicates its entire legal practice to helping investors across the nation. If you believe that your securities broker placed you in a highly unsuitable Non-Traded REIT, you may be entitled to damages. Contact Oakes & Fosher for a free and private consultation.