Real estate prices in British Columbia, and particularly those in Metro Vancouver, have been on a steady rise, causing many people to consider investing in real estate. High real estate prices have also driven the popularity of investing in securities that that are connected to or secured by real estate.
Examples of real estate securities include investments in real estate investment trusts and mortgage investment corporations (MICs), among others. There are risks associated with investments in real estate securities, just like there are with any investment.
With this in mind, the British Columbia Securities Commission (BCSC) has created a useful acronym to help you find out what’s REAL when it comes to real estate investing:
- R – Read and understand the disclosure and/or sale documents
- E – Evaluate the risks
- A – Ask for clarification
- L – Look for advice
Read and Understand the Disclosure and/or Sale Documents
Public and private companies offer investments in real estate securities. They offer these investments through the private placement market, relying on prospectus and registration exemptions to sell these securities to investors who meet certain criteria.
Private companies are not required to give the same ongoing disclosure (such as financial statements or press releases) as public companies. If you are considering investing in a private company, it’s important to understand that in the exempt market, investors lose many of the investor protections offered to investors in the public capital markets when investing in a public company.
Some exempt market securities are sold under the offering memorandum (OM) prospectus exemption. OMs provide specific information about the investment, but unlike prospectuses, the BCSC does not review or approve them. Additionally, the standard of disclosure in OMs is lower than that required for a prospectus.
With this in mind, it is important that you read and understand the OM, and any other information about the investment. It is vital that you read the “risk disclosure” in the OM and understand what it means.
Evaluate the Risks
Investing in real estate securities doesn’t mean you’re safe from risks. Once you have read and thoroughly understand the nature of the investment, as with any other type of investment, it’s important to evaluate the risks associated with the investment.
When you evaluate the risks, be sure to consider the disclosures made, the risks identified, the timeline for the investment to mature, and whether the investment is sufficiently liquid to pay you out if you need to redeem all or part of your investment.
Ask Questions for Clarification
It’s easy to get lost in the jargon when it comes to researching and evaluating whether an investment is right for you. Before you commit to participating in an investment in real estate securities, be vigilant and ask questions along the way.
Read any documentation you receive thoroughly, and make sure you understand it. If you don’t have a good understanding of the investment and its risks, you should take the time to ask questions and get clarification from your registered investment advisor. Don’t make any investment decision or sign any forms until you have clarified what they mean.
Look for Advice
If you’re considering an investment in real estate securities, ensure that you purchase them through a dealer that is appropriately registered with the BCSC.
A registered dealer must provide an independent assessment of whether the investment is suitable for you, and will provide clarification about the investment and answer any questions you may have. Before you take advice, it’s important to know if the advice you are getting is coming from a qualified source. Conduct a background check to ensure your investment advisor is registered.
You can also seek advice from someone who is independent of the investment, such as a lawyer or accountant.
For more information on how you can find out what’s REAL in real estate investing, visit our Private Real Estate Investing page.
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.
In November 2012, the British Columbia Securities Commission issued one sanction decision and one settlement agreement. During November 2012, IIROC released one settlement agreement, one liability decision, and one decision rejecting allegations relating to BC registrants. The MFDA released one decision against a BC registrant last month. We’ve included a summary of a […]