DID YOU KNOW?

You May Not Own It

In our Did You Know? blogs we provide readers with useful information that is generally not widely realized by inexperienced investors. In this edition we will discuss the concept that you may not “own” assets you think you have legal rights to.   

     When an individual/investor obtains an asset, including real estate, personal property, or even stock holdings, the general premise is that the buyer generally owns the rights to hold, utilize, and/or sell such asset, as it is under their “control” to do so, especially when “paid in full.” There are usually documents proving ownership, such as a receipt, deed, or stock certificate, which are recorded or provided with some type of institution, like a bank, taxing entity (city, town, or county clerk), or general seller.  

      However, there are inherent risks to owning some these assets, some more known than others. Generally, the public is aware when purchasing Real Estate, there are added costs and obligations that can potentially affect the ownership status. As discussed in our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon) a home or business can be in “default” if property taxes are not kept up to date, government regulations/codes are not met, or one simply does not pay the mortgage.

Single or Multifamily homes: 

As most know, property ownership comes with property taxes, assessed annually, which are usually formulated within the monthly mortgage payment by the lender. Others choose to pay these taxes separately, which are then due quarterly to the city, town, or county clerk’s office. If an owner falls behind, the taxing entity has the legal right to place a “lien” on the property, until the account is brought up to date. If it isn’t, they also have the legal right to sell the lien at a “tax auction,” usually held periodically, which allows anyone to pay the lien, receive interest (presently 10-12% average) during an allowed “redemption” period (usually 1 year), and potentially OWN your home for that small investment, if the property is not redeemed. There are other risks to losing one’s property including Title Theft, Creditor Corruption, Eminent Domain, and Immoral Investors, that will be discussed in this month’s Real Estate – Do I Really Own It blog, which will be posted next weekend.

Condominiums: 

Despite the fact that one may “own” a condominium unit, or units, there are additional conditions with these types of assets that sometimes fall under the radar. Condominiums often have HOA’s (Homeowner Associations) that charge monthly fees above and beyond one’s mortgage and property taxes. These fees are generally used for outside maintenance and repairs, for amenities enjoyed by all “owners.” When these fees are not paid, a “lien” can be placed against the unit by the association until the debt is satisfied. This can block the sale of the unit, and can disrupt the title. Condo owners are also at high risk of what is known as an “assessment.” Assessments are shared costs for any extra repairs or purchases by the HOA, that is not covered by the monthly fees, including new government regulations. Similar to sudden rises in property taxes, these charges can be very expensive and unaffordable. Additionally, should any unit owners in the building or complex fail to pay, the other owners are at risk of also having to “cover” their portion as well. This is a lesser-known hidden risk that many are not aware of.

Motor Vehicles: 

Dealership inventories can be used as collateral for lenders. The inventory serves as collateral for the loan, and the dealer can use it to generate sales. If the dealer is unable to pay off the loan, the lender has the ability to seize the inventory to cover the debt. 

Simply put, dealers can pledge their inventories to secure loans from their lenders. Generally, the dealer will pay their monthly loan obligation with the proceeds of the sales in that month, which falls within normal business practices. However, should the dealer default on the loan for any reason, ALL their inventory, including sold/leased/financed vehicles to customers! In short, the dealership may not own the vehicle they are selling you, and the lender may have the legal right to CONFISCATE your vehicle. This may not happen often, but beware of the possibility, and be sure to question your salesperson.

Stocks: 

You don’t technically own the shares you invest in. The nominee company (or custodian) holds securities in their own name, on behalf of the actual investors. 

Here is another example of a “purchaser” who doesn’t actually “own” the asset they believe they purchased. If using a “traditional” broker, the purchaser owns the shares through an HIN (Holder Identification Number) that is registered with the stock exchange. However, a “custodial” account’s shares are held with the in your behalf by the institution. Although you receive dividends, tax information, and settled transactions, your shares can be at risk if the entity were to become insolvent, claim bankruptcy, etc. The loss of capital would have to be recovered through lawsuit, and may not be fully recovered. Check a broker’s Product Disclosure Statement and/or Financial Services Guide for the custody structure, usually available on their website.

Precious Metals: 

With the recent increase in individual investor’s interest in purchasing gold and silver, there are the same precautions one should take, and knowledge one should have, with the manner in which they intend to “hold” this asset. If purchasing a metals stock or ETF, the same conditions generally apply to the previous paragraph. Those who choose to purchase through an IRA should be aware that their physical metal is reportedly held in a “vault” at a qualified institution. Technically, there is a certificate that states that the purchaser “owns” the asset, but again it is the institution that “control” it. Most of the U.S. gold reserves, for instance, are reportedly secured at Fort Knox in Kentucky. However, without “seeing” or “holding” your own asset, it is just a piece of paper that “verifies” your interest. Although these assets can be de- and re-valued at any time by the government (as it was in the 1970’s), it is likely a better idea to physically hold the asset yourself, if you have a secure place to store it. The physical entity is the actual proof, as paper receipts can be nothing more than an empty promise, should the institution not have enough to satisfy the request if everyone requested their holding all at once (similar to cash in the bank).

Whenever contemplating large purchases or investments, speak with someone who is experienced, do your own due diligence, and question everything the “seller” or “salesperson” pitches. Unassuming or trusting buyers often get taken advantage of, and can easily lose their hard-earned capital.