MONEY Magazine identifies nontraded REITs as very risky investments that should be avoided. In the last 10 years, the number of nontraded REITs has exploded into a $9 billion dollar market, as yield hunters piled in. Unfortunately, many investors including, most recently, investors in Behringer Harvard Opportunity REIT I have learned about the problems with these investments the hard way.
The risks and problems associated with nontraded REITs are legion. They are illiquid, meaning they cannot be readily sold if you need to cash out. Redemptions are restricted, and investors who need to cash out have to try to sell to people who generally think the shares are only worth a small fraction of the seller’s purchase price.
Large upfront fees and expenses cause the investment to suffer an immediate loss. If the purchase price is $10 per share, and $1 of that goes to fees and expenses, the investor has a 10 percent loss at the outset. That is typically what happens. And that is before factoring in the fact that the REIT has not purchased any investment properties yet, and likelihood that they will overpay for and mismanage the assets.
The Financial Industry Regulatory Authority (FINRA), the securities industry’s “self-regulatory” arm, has issued investor alerts warning that the distributions paid by these nontraded REITs, at least initially, do not come from income produced by properties, as there aren’t any properties; rather the distributions are simply a return of investors’ purchase prices or come from borrowed funds.
Another problem with nontraded REITs is that selling brokers usually do a great job of selling them but a terrible job of disclosing the associated risks and problems that the law requires them to disclose.
J. Boyd Page, senior partner of the investor law firm Page Perry, said, “We expect to see many nontraded REITs implode in coming months.”
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.