How to evaluate a real estate syndication?
San Francisco, CA · Member since 2017 · 12 posts · 8 votes
How to evaluate a real estate syndication?
Most Popular Reply
Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes@Daniel Shafer, Practically every syndication/crowdfunding legal agreement has a section where you authorize that you were allowed to ask the questions you wanted to ask before investing. So, no question should be considered out of bounds, and if the sponsor makes you feel that way, then in my opinion that is a red flag.
To answer your second question: Every investor has their own process. Here's the process that I use. Background: I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are red flags for me may be fine for someone more aggressive.
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)
b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this
2) Sponsor quality check: (takes about 45 minutes per deal)
I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.
a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.
b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.
c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.
d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.
3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.
a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.
b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.
c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.
d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.
e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.
That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.
The Real Estate Crowdfunding Review
16 Replies
- Rental Property Investor · Miami, FL · Member since 2017 · 2k+ posts · 911 votes8y
Make sure to do your due diligence on the team members involved and see the past projects that they have done.
See if they have done similar projects and if they did they did they meet expectations or exceed them.
Also make sure the syndication is putting up some of their own cash. You don't want investors funding the entire deal.
@Daniel Shafer This topic has been extensively covered on these forums - multiple times. You can do a quick search and find multiple view points from different posters.
I wrote an article about on this exact topic which you will find useful: The Inside Track to Vetting A Multifamily Deal Sponsor
There are a lot of things you have to lookout for but the article above should be good to get you started.
Happy to answer any questions in detail.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes8yDaniel Shafer I look at a couple of these syndications a month. I’ll be honest you are going to have to take a few pitches before you should invest. Most likely a dozen or two.
- 8yIvan BarrattBusiness MemberInvestor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
@Daniel Shafer no question is out of bounds. I say underwrite/evaluate 100 deals before you invest if you are completely new to this space. After which; you'll have gut level of understanding of what a good deal looks like.
All the best dawg!
- United States · Member since 2015 · 401 posts · 394 votes8y
@Daniel Shafer, I agree with @Ivan Barratt that no question should be out of bounds. If any syndicator is vague in answering questions or seems hesitant to reveal too much, walk away. The only exception I see to this is being careful what they reveal to you about current deals while your relationship is still young - SEC rules surrounding pre-existing relationships come in to play here.
Happy to connect and discuss any questions you may have so don't hesitate to reach out!
- Member since 2018 · 1 post · 0 votes8y
@Omar Khan, The Inside Track to Vetting A Multifamily Deal Sponsor blog post is excellent. Thanks much for sharing it.
- Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes8y
- How long have you been actively engaged in real estate investing?
- How long have you been doing syndications?
- What locations do you invest in?
- Which asset classes do you invest in?
- Do you put any of your own money into your deals?
- Did you ever have a deal go bad? If so, how did you handle it?
- Are you sponsoring any other investments? If so, how many?
- Can you give me the name and contact information of your past clients?
- Do you mind if I speak to them about you?
- How do you structure your deals?
- Check online for complaints about the syndicator.
- Perform a background check on the syndicator.
- Look this syndicator up on social media.
- Try to find some of the syndicator's past or present colleagues and/or employees on your own, and ask their opinion of him.
- Ask for details about a past deal the syndicator had handled.
- When the legal documents for a deal arrive, make sure the legal paperwork is complete and accurate. Check that all documents are there, and that they look professional, and were prepared by a reputable syndication attorney – and not via an online tool.
@Daniel Shafer Welcome to BP family! Congrats on deciding to start investing in RE!
In terms of the questions to ask syndicator, I second the feedback you have received from @Ivan Barratt and @Michael Bishop. Here're a few more questions to consider:
Keep in mind, the list above is in no way all inclusive, rather it will give you a starting point to a conversation.
In addition to the above questions, here's a list of of tips and tricks that you should do to verify the information provided by the syndicator.
- 8yIan IppolitoBusiness MemberInvestor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
@Daniel Shafer, Practically every syndication/crowdfunding legal agreement has a section where you authorize that you were allowed to ask the questions you wanted to ask before investing. So, no question should be considered out of bounds, and if the sponsor makes you feel that way, then in my opinion that is a red flag.
To answer your second question: Every investor has their own process. Here's the process that I use. Background: I'm a very conservative investor and may look through a hundred deals a month, and at the end of the year only invest in 4-5. So things that are red flags for me may be fine for someone more aggressive.
1) Portfolio matching: (takes 30 seconds per deal)
a) Have an educated opinion on where you think we are in the real estate cycles (financial and physical market cycles)
b) Then only then pick the strategies, capital stack, and specialized asset subclasses that make sense for that opinion. For example, I think we are late cycle, so I lean toward the safest part of capital stack which is debt (or debt free equity). I won't go with the riskiest opportunistic strategies, and will stick to core and core plus mostly with some value-added. I won't be investing in the riskiest/most supportable asset subclasses such as hotels, and tilt my portfolio the ones that have historically been more stable such as multifamily and single-family housing. I also don't want refinancing risk, so any deals with only 3 to 5 year debt are out for me. For someone that's not as conservative, or a different view on the next recession, they might have a different opinion than me on all of this
2) Sponsor quality check: (takes about 45 minutes per deal)
I believe that a great sponsor can take an average looking deal and make it great, and that in mediocre sponsor can take a fantastic looking deal and make it bad (especially if there is a severe recession). So I start with the sponsor first. Again, others might disagree.
a) Track Record: Get the entire track record for the strategy. As easy as this sounds, it's not simple and usually like pulling teeth. Many times they will claim it's wonderful and then try to hide their worst deals by only showing completed deals. Make sure to get unexited deals. Or if they are doing value-added multifamily, they will show you their hotel experience. That doesn't cut it for me. I want a specialist that's an expert, and not a jack of all trades and master of none. Also, in a mainstream asset class like value-added multifamily, I see no reason to take a risk on a sponsor that doesn't have full real estate cycle experience and didn't lose money. Again, other might feel differently here.
b) Skin in the game: as a conservative investor, I understand that the dirty secret of industries that the waterfall compensation is in the line with me and incentivizes sponsors to take more risk. So I require skin in the game (average is 5% to 15%) to offset this. Contrary to popular belief, this is not set because I believe it will give me a higher return. I believe it tends to give me a slightly lower return, because the sponsor is going to be more careful, and if there is a severe downturn will prevent me from taking catastrophic losses. Someone that is more aggressive, may want lesser even though skin in the game. Also, if the sponsor is new, I am fine with less skin in the game as long as it is significant to their net worth. On the other hand if they are a sponsor that is experienced in stopping a skin in the game, that's a huge red flag for me.
c) how open to scrutiny are they? I always discuss investments with others in an investor club because other people might think of things that I might miss. And even though virtually every sponsor agreement allows me to share investment information with others who might be advising me on it (especially when club members are bound by an NDA), I still ask the sponsor if I can share it, because it's a test. Most are fine with that, but a few will have problems with it and claim there are legal issues, etc.. That's a red flag for me.
d) death by Google: I Google everything I can about the sponsor. I check the SEC, FINRA, ratings websites for inside information on the principals in the company. I also look for lawsuits and see what happened in them. Many times it's an easy red flag. Sometimes it's ambiguous, but even then, why should I bother with the company that has numerous unresolved lawsuits, versus another company that is virtually the same but has none. Again, others might feel differently here.
3) property level due diligence: (takes seconds to weeks per deal): here is where I drill in with the low-level details.
a) pro forma popping: I examine all the assumptions, and see if they are overoptimistic or not. I look at every single item in the pro forma and imagine that it is complete BS, and see if I can challenge it. If there's a hole, it may be a red flag.
b) sensitivity analysis: I examine all the assumptions, and make sure I can live with the worst case scenarios.
c) "Stall and see": if they are getting money over multiple years, and there is no penalty for investing later, I would usually wait so I get some real performance data, versus having to look at theoretical pro forma information.
d) Recession stress test: I will not invest in anything, until I subject it to recession level stress and see if I can live with the result. And I take the worst recession I can find in the recent past. Sometimes there is only great recession data, and that recession was pretty mild on some asset classes, versus previous recessions. So I will usually 1.5x or 2.0x the stress. If the deal collapses and I would lose everything, I'm out. Others might be fine with taking risk, but least by doing this a person can get an idea of what might go wrong.
e) Legal document analysis: it will usually take a few days to go through the legal document properly, as almost inevitably there are tons of gotchas that either have to be explained, or mitigated with a side letter.
That is the very short summary of what I do. If you want more information, p.m. me and I can give you a lot more details.
The Real Estate Crowdfunding Review - Specialist · Scottsdale, AZ · Member since 2014 · 626 posts · 700 votes8y
@Daniel Shafer there is some great practical advice in this thread. IMHO, the character of the sponsor is the most important item to vet, before you spend time digging into the deal. Common sense would suggest if you have a sponsor lacking in that department, even the deal of the century could turn out to be a bad investment. @Ian Ippolito gives some great advice (above) on research you can do from your computer. Something to consider adding to your evaluation is a handful of references who've had prior experience with the sponsor. In a 15 minute phone call, you will learn more about the sponsor than you ever could elsewhere. Also, prior investors won't give a glowing testimonial unless they have had a great experience. Keep in mind, if you take this step, you'll want to ask for several references who've had many years of investment experience with the sponsor, not just a new investor who is getting into a current offering. If they resist your request, that should be a red flag as well.
- San Francisco, CA · Member since 2017 · 12 posts · 8 votes8y
I appreciate everyone's comments! Thanks so much especially to @Alina Trigub whom I even ended up speaking to on the phone later as well as @Ian Ippolito for the very in-depth write up.
As a follow up to where I'm at currently: the syndicator I had in mind when writing this post a couple months ago also has a podcast where he recently interviewed Clayton Morris. I commented on the post questioning why he would invite such a notorious scammer onto the show and his response was that this was the first he had heard of such things and that he would look into it. A couple weeks later and there's been no response. So I'd say at best he isn't bringing great due diligence to whom he has on the show and at worst he's...not got investors' best intentions at heart.
- Real Estate Broker · Chicago · Member since 2021 · 108 posts · 23 votes4y
The best way to evaluate a real estate syndication is to visit the property. If you find yourself at an upcoming scheduled open house and it really matches up with your investment criteria and expectations then that may be a great opportunity for you.
- Investor · Salt Lake City, UT · Member since 2017 · 7 posts · 3 votes4y
I sure wish I would have looked at this post before I invested. I just barely invested in my first 2 syndication deals this last month. Hope it turns out well!
Originally posted by @Brett Childs:
I sure wish I would have looked at this post before I invested. I just barely invested in my first 2 syndication deals this last month. Hope it turns out well!
Have you looke back and re-evaluated your decisions based on what you know now? Not that you might be able to change your decision at this point, but you can better understand what you may be in for and where you went right or wrong
- 4yPaul MoorePro MemberCommercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
Since this was originally posted, BP and @Brian Burke came out with an awesome book on this exact topic. Over 300 pages on how to evaluate a syndicate tour and the syndication: The Hands-Off Investor
I would also recommend @Ian Ippolito’s excellent site: The Real Estate Crowdfunding Review. Happy Investing! - Investor · Salt Lake City, UT · Member since 2017 · 7 posts · 3 votes4y
Originally posted by @Taylor L.:
Originally posted by @Brett Childs:
I sure wish I would have looked at this post before I invested. I just barely invested in my first 2 syndication deals this last month. Hope it turns out well!
Have you looke back and re-evaluated your decisions based on what you know now? Not that you might be able to change your decision at this point, but you can better understand what you may be in for and where you went right or wrong
@Taylor L. Yes. Now that i have done even more research I am realizing that one of the deals may not be as sweet as i thought. It is still good, but I may not have done it had I reviewed a few more deals first.
- Investor · Fort Worth, TX · Member since 2019 · 120 posts · 147 votes4y
@Daniel Shafer Shoot me a message - I have a great webinar series called, "Tricks Syndicators Play to Make the Numbers Look Good." The guy who teaches the series has invested in 13,000 units - and is one of the most conservative underwriters in the industry. It'll give you some great questions to ask and a perspective that will help you feel confident your money is safe.
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