Keep From Becoming a Victim of REIT Fraud
Updated: Oct 30
Fraud is likely to happen in Real estate investment trusts better known as REITs when bad actors try to sell REIT investments which on their face look good but in actuality are scams.
Those responsible for perpetrating such scams are usually fraudulent companies, misleading stockbrokers, even dishonest financial advisors. The “bad actors” as we refer to them often use deceptive tactics to persuade individuals to invest in risky REITs, promising low risks and high returns.
While REIT fraud can happen with any type of REIT, non-traded REITs are more susceptible due to the limited disclosures required for these investments. Below are things to know and some sage advice to be aware of before one gets involved.
The SEC reports that Non-traded REITs are typically sold by financial advisers. Non-traded REITs generally have high upfront fees that lower the value of the investment by a significant amount. They usually charge sales commissions and upfront offering fees of approximately nine to 10 percent. Investors should understand that a portion of the share purchase price represents sales commissions and that the amount actually invested in the company is reduced by these commissions.
Two Ways on How to Mitigate REIT Fraud Risks
Preventing REIT fraud or at least minimizing the investment risk should be of paramount importance when getting involved. Do your due diligence before investing and continue to exercise oversight as to the REIT’s actual performance.
Due Diligence: Implement comprehensive due diligence procedures such as performing extensive background checks before investing. Look especially hard at members of the management team. Do any of the members have criminal records or anything else in their past that would preclude them from a management role? Ask yourself, how have the REIT’s under the listed management team performed in the past? What have been the actual returns compared to what the management team proposed? Are reviews “good or bad” available and on-line? Be sure to verify the REIT is operating with proper securities registration.
Oversight: Once involved, insist on receiving periodic financial statements (as promised) on the REIT’s performance. Ask yourself, are payments or dividends being received and on-time and correct? In addition, is the REIT subject to audit and has it been compliant with SEC reporting rules?
Ipsen Due Diligence is available to perform due diligence and background checks prior to your involvement. In addition, we can further assist by providing services such as financial investigation and litigation assistance when needed in matters where suspicious activity has thought to have occurred.
To learn more about stopping REIT fraud may I suggest that you read the article “Real Estate Investment Trust Fraud” over at ComplyAdvantage.com