Nontraded REITs Investment Risks Highlighted by FINRA

In the wake of fraud investigations and substantial investor losses, a financial oversight agency is warning investors to be aware of the potential investment risks inherent in non-traded real estate investment trusts (REITs).

The warning was issued on October 4 by the Financial Industry Regulatory Authority (FINRA), urging investors to perform a careful review of the risks associated with non-traded REITs before buying into hype about their benefits.

FINRA warned that REITs have risks that may not immediately be apparent and may not be fully explained by some investment firms.

REITs take the money from a wide pool of investors and use that capital to buy a variety of real estate. They are known for being well distributed and having a good chance at capital appreciation, but they are often heavily subsidized by loans, have high sale fees and are hard to redeem early. Some REITs are publically traded on a national securities exchange, but the FINRA warning specifically addressed the risk of non-traded REITs.

The warning comes four months after FINRA filed charges against David Lerner Associates on May 31, accusing the company of targeting elderly and unsophisticated investors in order to sell them Apple REITsto cash in on lucrative commissions.

FINRA claimed that the shares were sold with little or no consideration for the welfare of the investors. The authority also claimed that David Lerner Associates failed to question why Apple REIT Ten unreasonably valued the shares at a constant price of $11, regardless of market fluctuations or actual performance, even during the rough economic times rocking the real estate industry.

The charges have sparked a number of FINRA investor arbitration lawsuits  and Apple REIT class action lawsuits by former David Lerner Associates clients who were sold Apple REIT Ten shares. The claims allege that unsophisticated clients of limited financial means were repeatedly told the Apple non-traded REITs were “safe and secure” and “would not lose money.”

FINRA is a non-governmental regulatory body that handles the resolution of disputes between investors and stockbrokers and other financial firms. It was created in July 2007 as a successor to the National Association of Securities Dealers, to arbitrate stock broker fraud claims that can include charges of breach of contract, breach of fiduciary duty, negligence, misrepresentation, unauthorized trading and other claims that investments were improperly handled.