Foreclosure funds: Sunbelted

Foreclosure funds are tempting — until you ask questions

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by

From the November 2008 issue of the magazine.

  46

You may have seen sales pitches for investment funds that hope to make money by swooping in on foreclosed properties in the U.S. sunbelt. At least half a dozen of these foreclosure funds have sprung up across Canada.

Our advice? Be wary.

A typical case is Arizona Acquisition Fund of Alberta, offered by CBI Group Investments of Calgary. It plans to buy homes in the Phoenix area, rent them out, then sell them when real estate prices rebound — which the fund figures will happen within five years. The fund promises to pay investors 6% a year on the money they invest, as well as give them 60% of net profits when the homes are sold.

Problem is, the returns aren’t guaranteed. In fact, the fine print in CBI’s marketing material states that “the funds [sic] actual results performance or achievements could differ materially from those expressed by us.”

“That’s a red flag,” says Mark Dickey, senior communications adviser for the Alberta Securities Commission. “It’s easy for them to say, ‘It didn’t work out the way we thought.’ If that happens, you could lose your money.”

Before investing in any fund make sure it’s registered with the securities commission in your province. If not, that’s a red flag. If it is registered, see if it’s been involved in any violations you should know about.

For instance, if you look up CBI’s executives on the Alberta Securities Commission (ASC) website, you’ll find that Keystone Real Estate Investment Corp., owned by the same group that manages CBI, recently ran afoul of regulators. This past summer Keystone reached a $250,000 settlement with the ASC after the company admitted that Keystone advertising included untrue claims about past projects and that it provided investment advice when it was not registered to do so. (CBI says this was because of faulty legal advice.)

Even if a fund’s background checks out perfectly, investors should ask questions. The biggest question, of course, is whether U.S. real estate prices will quickly rebound.

Many observers think not. “The Phoenix market in particular still has 20% to 30% to fall,” says Robert Campbell, a real estate economist in San Diego.

Tsur Somerville, director of the UBC Centre for Urban Economics and Real Estate in Vancouver, is also skeptical. If you still want to bet on a rebound, he suggests you simply buy a house or condo in an area of the U.S. that your family enjoys. “You’ll need a 30% down payment but you’ll have control,” says Somerville. “And your family can enjoy the property for a few years, even if real estate prices don’t bounce back soon.”

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