Are Syndicated Mortgages a Safe Investment?

Are Syndicated Mortgages a Safe Investment?

As the real estate market fluctuates, the people who invest in it come up with different ways of profiting during the times when it experiences a much-needed boom. Those investors can renovate houses, then sell them, or simply buy up empty property lots and develop on the land. Whatever project they decide to undertake, affordable housing is always in demand in Canada, and there are ways of cashing in on that fact. The key to profiting from a real estate investment, like with any form of investing, is being able to get back whatever money might have been put into the project in the first place, and more.

This is where “syndicated” mortgages, sometimes known as “pooled mortgage investments”, can come into play. With the recent surge of housing developments in cities all over North America, condominium high-rises, in particular, syndicated real estate investments are becoming more and more common. However, just how trustworthy are those investments for the people investing their hard earned money? Every form of investing comes with its fair share of risks, and for every investor willing to dish out some cold cash, there’s someone else trying to scoop it up.   

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What is a “Syndicated” Mortgage?

You might hear the word “syndicate” and think of the term the F.B.I. uses to label James Gandolfini’s operation in late, great HBO gangster drama, The Sopranos. However, a “syndicate” actually refers to a group of individuals or other organizations that form a party for business purposes or a shared interest, most likely in the hopes that their business will result in a profit. Essentially, a syndicated mortgage is when two or more people get together and start investing in a single, or multiple real estate properties. The most common example of a syndicated real estate investment these days would be the condominium high-rise. However, apartment buildings, housing communities, single houses, cemeteries, any mortgageable property can be mortgaged by multiple investors.

The process begins with that group of investors pooling their resources and buying up one or more properties. They’ll each invest a portion of their money, working alongside a developer, who will help them build on that land. Instead of borrowing from a lender, the investors themselves become the lender. Once they’ve constructed whatever project they planned, the properties will then be sold, hopefully for a decent profit.

For example, let’s say 20 investors each put in $200,000, they’ll have gathered $4 million to put towards their investment. A single decent, luxury condo unit typically costs $100,000 – $200,000 to build. If the building has just 20 units, that puts them right on par with their budget. Now, that might seem like a lot of money to fork over for an investment that isn’t necessarily guaranteed a return. However, if they manage to build a luxury condo building in a sought after location, selling each of the 20 units inside for upwards of $500,000 (more than twice that amount in Canada’s most expensive cities, like Toronto or Vancouver), and they could see their investment bouncing back quickly. Then again, for larger projects, $4 million is not a lot of money at all. In fact, those millions might only begin to cover primary costs, such as architecture fees, zoning permits, consulting expenses, marketing, etc. So, for upscale developments, more investors and much more money are usually needed.

The Problems and Risks Involved With Syndicated Mortgages

Now, for those who can afford it, investing in syndicated mortgages might seem like a sure thing, provided the project is appealing to both investors and future buyers. The problem with syndicated mortgages, however, is that they can be extremely risky investments in a number of areas.

No Guarantee

Firstly, as we mentioned earlier, there’s no guarantee that the project will pay off. Millions of dollars can go into a development, only for the investors’ money to run out and the project to go bankrupt.

Increased Likelihood of Scams

Then there’s the trust factor. Like with many different kinds financial decisions, it’s extremely important to know who you’re cutting deals with. Unfortunately, investing means lots of money is flowing, and money flowing means that there will often be scam artists trying to get that money from those who are too trusting or inexperienced to realize who they’re signing contracts with.

According to an article on the CBC News website, more than $1 billion has been lost to syndicated mortgage scams over the last few years in Ontario alone, a large part of it because of real estate fraud. Would-be investors become involved in shady deals with unlicensed developers and scam artists posing as private mortgage brokers. Eager to make a decent profit, they sign contracts without reading the fine print properly. Sometimes the contract will negotiate a payment for the developer that is far too large for the investors to afford, leaving them out of money and their project unfinished. The scam artist promises a return but simply steals their money altogether. Since syndicated mortgages are legal, all the fraudster has to do is draw up a clever enough contract and hire the right lawyer to oversee it. All this leads to a slew of lawsuits, where even more money is lost on legal expenses and the investors are now hundreds of thousands of dollars in the hole. Because of situations like this, in Ontario specifically, new rules and regulations are being put in place that should protect investors from real estate fraud, but they might not come to fruition for several years.

For more examples of Canadian financial scams in recent years, read this.   

Are All Syndicated Mortgages a Scam?

Of course not. All this isn’t to say that syndicated mortgage investments are always a scam or bad deals. In fact, there are plenty of these kinds of projects that work out well for everyone involved. Housing developments, retail locations, condo high-rises, trailer parks, and apartment buildings are being built all the time, most of them not by single investors. So, if you’re thinking of investing in a syndicated mortgage project, it’s essential to be wary of anyone you do business with and take the time to hire a lawyer or consultant to review every shred of paper involved for any discrepancies. Remember, if the deal sounds too good to be true, it probably is.       

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