When it Come to Investing...
It's All About Transparency
This is the first in a series of articles written by Shirley Ju, President of 1031 Investment Solutions, LLC., for the sole purpose of educating investors and their professionals to make wise investment decisions.
Top Ten Questions to Ask a Registered Representative
Before Purchasing a TIC (Tenant in Common investment).
Previously, countless investors were exchanging their rentals or other investment properties for an interest in a professionally managed property known as a TIC. This allowed 1031 exchangers to defer taxes by staying in the real estate game, but afforded them a passive investment that provides a monthly stream of income. However, the purchase of TIC replacement properties has been at a stand still since the current recession began around the end of September 2008. The inability of the banks to lend has been a major factor. However, as in all real estate cycles, we are about to begin moving back into a more comfortable position. I would like to address the current state of the TIC industry and give you some input on what I feel are the most important questions you or your clients can ask when considering a TIC investment. In the TIC industry, there are certain words that are used ambiguously. In an effort to clarify some of this ambiguity, these are the questions your clients must ask the registered representative selling the TICs:
- Foreclosures: If you ask the registered representative if they have had any foreclosures on properties they previously sold, most likely they will answer "No." The better question to ask (because of a possible play on semantics) is, "Have you had any foreclosures or deed in lieu of foreclosures?" Most banks are taking back the deed in lieu of foreclosure because of the astronomical fees relating to a foreclosure; and it also saves face for the lender, and saves the credit of the TIC owner.
- Ask the registered representative what other products they sell. If they sell oil and gas, REITs, mutual funds, insurance, etc., they most likely do not specialize in TIC programs. TICs are very complicated and they need the full attention of the registered representative. It's difficult to be an expert in all product classes.
- Ask "who" does the due diligence on these TIC properties. Next, ask if he/she has a real estate license. Although these properties must be sold as a security, a current working knowledge of real estate is mandatory, hence a real estate license and a securities license is necessary to do the most stringent due diligence. The due diligence officer needs good quantitative skills to do proper evaluations of these properties. Also, are they using independent third party reviews?
- Ask the registered representative how many years they have been selling TICs, and have them break down the amount sold per year. This avoids being told that they have been selling TICs for 8 years, and they actually only sold one per year.
- Ask the registered representative how much equity they have placed. You want to avoid getting the equity numbers and the debt numbers at the same time. You need to know how much of the clients' money have they placed.
- Distributions: Ask if their clients are receiving cash flow from operations. This separates the programs that are sending cash flow out from reserves.
- Ask how many clients have had "cash calls" and "capital calls." They are different. A capital call is for capital improvements, such as roofs, driveways, etc. (A good program will already have this money in reserves.) A cash call is when the property is not doing well enough to pay for its taxes, expenses, mortgage, and repairs.
- Most importantly: get references, good and bad. You can have a property performing less than expected in a down economy, such as we have now. But if you have a good representative, they are still working for the client with the sponsors and are participating in the monthly conference calls with sponsors.
- Ask the registered representative if their firm is the managing broker/dealer for the TIC they are presenting. If it is, this is a product you need to run from. More than likely it"s a product that is being pushed because the firm is making an extra fee for selling it.
- Finally, ask about the representative's character. Ask what charity they are presently giving to, about their community involvement, or their current relationship with previous clients.
Coming Soon: Picking a Sponsor; Evaluating TICS - Apartments, Retail, Medical, Industrial, Hospitality & Office.
Shirley Ju is the President of 1031 Investment Solutions, LLC. Toll Free: 877-779-1031. Shirley is a registered representative with the firm: Steven L. Falk & Co., Las Vegas, Nevada