A few months ago, a friend of mine was approached by a family mortgage fund that made real estate investment by pooling money from individual investors. Most of the investors are from the Chinese community who have limited knowledge or experience in the real estate industry. The company head boasted assets in tens of millions and a highly successful track record. “We are continuing to grow and the projects we are aiming to invest are getting bigger and bigger!”
At the time when interest rate hits historic low, stock market struggles with volatilities but home prices have soared through the roof, real estate industry seems to be the only sector that paves a steady and secure path to prosperity. The industry particularly appeals to Chinese Canadians who are keen on investing real estate and eager to get a much-coveted piece of pie. But apart from flipping a home with the property deed changing hands, individual investors are offered plenty of other opportunities to get involved.
Among many choices, mortgage investment stands out. Mortgage investment funds pool money from many small retail investors to lend to a variety of real estate borrowers – including syndicated mortgages that targets a single project developer only. In return, investors are promised a stable rate of return that beat most investment products in the market. Instantly, mortgage investment firms, from big players to family shops have flooded the market, targeting investors across the country – including the Chinese community.
Amid a fierce marketing campaign advocating enticing rate of return for pre-constructed condos and townhomes, promotion materials, seminars and ads flooded the community newspapers and social media.
“We are thrilled to bring our brand with this exciting project. The development is a proposed 45 story tower with 350 units, located in the bustling hub of the city. With unique features, the investment opportunity provides a secure rate of return as high as 16 per cent!”
“Our realty firm has completed over $8 billion on condo sales over the past 20 years with an immaculate track record for success!”
But the market schemes have overstressed the high rate of return and inflated property values while ignoring the risks involved. Risks and high returns come hand in hand. The fact that borrowers offer double digit return while banks offering prime rate below 3, has perfectly highlighted the risks involved. The construction loans are extremely sensitive to economy downturns, and belong to the riskiest loan categories. Amid 2008 financial meltdown, many construction developers in Ontario are in financial troubles, landing their mortgage lenders in hot water.
But above all, a risker factor lures behind syndicated mortgages, which has never been explained to naïve and unsophisticated investors. These mortgage loans are often sold in tiers that decide the order of getting repaid in the event of default. Investors of syndicated mortgage loans often end up third or fourth inline for repayment, only to share a leftover pie after earlier tire investors were paid in full.
按揭投资业的商业模式极不稳定，其中风险危机四伏。这些因素导致这个看似利润丰厚的行业的迅速衰退，使得许多公司陷入财务困境或是被监管部门下令关门停业。比如曾要求投资者对一个开发项目至少投资$2.5万元，并因此集资高达$1.1亿元的多伦多Tire 1 Transaction and Advisory Services公司在被FSCO颁布禁止令后，面临死亡之厄运。另一家曾是业内翘楚的多伦多地产贷款公司至少面对三起集体诉讼，投资者纷纷指控遭公司误导而对安省三个高危公寓项目进行了投资。
The shaky business model and hidden risks has led to the rapid decline of a seemingly lucrative industry, leaving many companies in financial troubles or facing regulatory orders to shut down. Toronto’s Tire 1 Transaction and Advisory Services, which had raised $110 million from investors who are required to put down a minimum of $25000 for a development project, has met its fate of demise after having been issued a “cease and desist “order by FSCO. A Toronto area based firm -- a big and high profile player in the industry face at least three proposed class action lawsuits from investors, who allege that they were misled into making three Ontario troubled condo projects.
The dark reality of the industry may only accelerate the mass exodus of the mortgage companies including the mom and pop mortgage firm that approached my friend. The big project that the firm invested in has failed, leaving him joining a group of investors crying foul over the lost of our hard-earned retirement fund. But a mistake made is a lesson learned. Indeed, amid a flood of aggressive marketing schemes and inflated promotions, only knowledge and risk awareness can help us steer away from financial disasters and investment nightmares.
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