Editors Note: This is part of a series outlining practical survival tips for investor protection. The series is guest-authored by John Hollander and Harold Geller, they are lawyers with Doucet McBride LLP and they specializes in Personal Injury, Financial Loss Recovery and Wills and Estates. They also authored the articles listed at the bottom of this page.
Like all investors, seniors search for good returns. Many recall the days of 10% GICs. In todays low-interest environment, 5% seems a wonderful return, especially if guaranteed. Seniors should beware advisors who approach them with promises of 5% or more. Guarantees are only as good as the person who gives the guarantee. If a chartered bank says it will pay only 3%, then why is 5% from an unknown party a safe return? It is not. An advisor who recommends such a risky product is likely earning a big return, but at the risk of big losses to the investor. The risk can be hidden behind an impressive sounding name.
Look, for example, at syndicated mortgages. In this arrangement, a broker puts together several investors (the syndicate) into a single mortgage to secure loans on real estate often development land. The rate of interest seems wonderful, 8% or 10% or higher. The borrower may be the land developer or a company set up only to borrow money on behalf of the developer. As a further enticement, this company may agree to pay a bonus, so the return is even higher.
Sounds too good to be true? Well, it often is. There are many things that can go wrong the land is worth less than appears (even with an appraisal). Market conditions may change. The borrower may be an asset-less numbered company. The mortgage may be on land that is different than that promised. There may be other lenders who rank ahead of this mortgage.
You should get what you pay for. In the semi-regulated world of syndicated mortgages, this is often not the case. You seem to get something safe, but in fact you get something very risky. If you are asked to participate in a syndicated mortgage, speak with your lawyer before you invest. Your money many be at risk.
More Articles by these Authors:
- Ask an Expert: Why Consult a Financial Advisor
- Ask an Expert: Red Flags to Look out for when Investing