The world of private real estate REITs (Real Estate Investment Trusts) is enticing for investors seeking diversification and steady returns. However, significant dangers inherent in this investment class can have severe consequences for those who are unprepared. This blog aims to illuminate the critical risks associated with private REITs, particularly in due diligence, financial transparency, and share pricing, while emphasizing the importance of obtaining legal counsel if you’ve fallen victim to investment fraud.
Understanding the Basics of Private REITs
Private REITs are vehicles through which investors can gain exposure to the real estate market. Unlike publicly traded REITs listed on stock exchanges, private REITs are not required to register with the Securities and Exchange Commission (SEC). Instead, they sell shares directly to accredited investors through broker-dealers and other financial intermediaries. The nature of this direct selling leads to several fundamental issues investors should be aware of.
1. Due Diligence Concerns: Conflicted Interests and Vendor Reliance
When a broker-dealer or financial advisor presents an investment opportunity, they must conduct thorough due diligence on the product. This process ensures the advisor fully understands the associated risks and can match the product appropriately to the client’s financial situation and objectives. Unfortunately, in the case of private REITs, many broker-dealers often rely on third-party due diligence vendors for their assessment.
Here’s where the problem lies: these third-party vendors are often compensated by the REIT itself. This arrangement can create an inherent conflict of interest where the vendor, motivated by maintaining a good relationship with the REIT, might be incentivized to deliver a favorable report. Such compromised assessments may downplay the risks, giving investors a skewed picture of the investment. Consequently, broker-dealers might unknowingly recommend products that carry significant undisclosed risks.
2. Unaudited Financials: A Red Flag for Financial Transparency
In the realm of private REITs, unaudited financials are commonplace. Publicly traded companies undergo rigorous independent audits to ensure their financial statements accurately reflect their financial health. Private REITs, however, are not bound by these requirements. The absence of audited financials means that investors receive information that hasn’t been scrutinized by independent auditors, raising concerns about the reliability and accuracy of the data.
Without independent verification, there’s a potential for misrepresentation or errors in the financial statements, which can mislead investors about the REIT’s profitability and overall stability. This lack of transparency should act as a red flag, prompting investors to be extra vigilant when assessing private REIT investment opportunities.
3. Phantom Share Pricing: Misleading Valuations and Liquidity Risks
One of the most challenging aspects of private REITs is their lack of liquidity. Since these securities are not publicly traded, investors cannot readily sell their shares on the open market. Instead, private REITs determine their own share prices internally, often on a monthly basis. This valuation method is based on the REIT’s internal appraisal process and may not accurately reflect fair market value.
This internal share pricing creates the risk of “phantom pricing,” where the stated share value is higher than what the asset would fetch in an actual sale. This inflated valuation can mislead investors about the true worth of their holdings. If a downturn in the real estate market occurs, or if the REIT faces financial difficulties, investors may find themselves unable to sell their shares at the stated value or even at a reasonable discount. This illiquidity can result in significant losses, particularly when investors urgently need access to their funds.
4. Legal Recourse: Bakhtiari & Harrison, P.C. – Protecting Investor Rights
If you’ve been affected by misleading information or deceptive practices related to private REITs, you may have recourse through the legal system. Bakhtiari & Harrison, P.C. is a law firm specializing in representing defrauded investors. Their expertise in securities litigation and arbitration makes them a strong ally for those seeking justice.
Ryan Bakhtiari is a nationally recognized securities attorney with a distinguished career in arbitration and mediation. He served as President of the Public Investors Arbitration Bar Association (PIABA) and has been quoted in major publications like the New York Times and the Wall Street Journal. Bakhtiari was nominated to serve as a public member on both the Nasdaq Arbitration Committee and FINRA’s National Arbitration and Mediation Committee, underlining his deep understanding of securities law and dispute resolution. He also lectures frequently on the topic and is consistently listed among the top-rated securities attorneys​.
David Harrison is an accomplished securities attorney representing clients in FINRA arbitrations and state and federal courts. His experience includes clerking for the Honorable Joseph Reichmann in California’s District Court and serving as an in-house attorney at Morgan Stanley Dean Witter, resolving allegations of stockbroker misconduct. His insights into the intricacies of investment fraud make him a knowledgeable advocate for investor rights​.
Together, the firm’s attorneys leverage their vast experience to help investors recover losses from private REITs and other complex financial products. They understand the nuances of securities law and the unique challenges private REITs pose. If you or someone you know has been affected by private REIT fraud, Bakhtiari & Harrison offers a free consultation to assess your case and discuss your legal options.
Conclusion
While private real estate REITs can seem like a lucrative investment opportunity, they carry significant risks that can easily overshadow potential rewards. Investors should be particularly mindful of due diligence concerns, unaudited financials, and phantom pricing when considering these investments. For those who have suffered losses due to deceptive practices, seeking legal assistance is a crucial step toward recovery.
Bakhtiari & Harrison, P.C. stands ready to represent investors who have been misled or defrauded, offering comprehensive legal support backed by their deep knowledge of securities law. Contact them for a free consultation at www.bhseclaw.com, and take the first step toward protecting your financial future.