Syndications Gone Wrong
Minneapolis, MN · Member since 2018 · 20 posts · 11 votes
Syndications Gone Wrong
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votesI just don’t get it—this whole hired-gun KP thing. Sponsors don’t have the balance sheet, reserves or experience to satisfy the agencies—so they farm it out. Talk about having no skin in the game! And if the sponsor isn’t good enough for the debt lender—the safest segment of the capital stack, why should they be good enough for the equity...the riskiest part of the capital stack?
Then the deals go sideways and the hired-gun has to kick them out—now the investors have a whole new sponsor, who might have a nice balance sheet but doesn’t know about how to manage a syndicated offering (talking worst-case scenario here—some KPs would probably make a better sponsor than the original sponsor).
Want to find failed syndications? Look no further than inexperienced sponsors who are hiring out for balance sheets and experience because they are in it before they are ready.
Everybody wants to get into large syndications and look for the fast track. What ever happened to dedicating your life to this business, working your way up through the trials and tribulations of real estate ownership and market cycles, graduating to larger deals, building up your own balance sheet and liquidity and standing behind your own loans without farming that out to others? Man, I guess I did this all wrong...
40 Replies
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes7y
My first REI deal was a syndication but I didnt even know the term. A group of people decided to buy land develop some townhouses. Problem is no one had any experience doing it. I put money in. Project never happened. We sued the GPs and got back our investment plus legal expenses but it took 10 years for the whole mess. Lesson was to properly vette the sponsors and not just the deal.
- Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes7y
We have invested in 39 syndications to date. There have been a few horror stories; actually only a couple have gone absolutely smoothly.
* On our first deal (160 units in Irving TX), after about a year, the sponsor kicked off a second deal (this was his third deal - 100 units in Ft Worth, a value play). About 6 - 9 months into the second deal he lost focus! We almost lost both deals. I was a KP, formed a cabal and we tossed him from the first and the KPs soon after contacted me and they tossed him from the second.
* On a small (26 unit) deal in E Dallas, we had a terrible management company - small deals are very hard to get good management at a reasonable price.
* On a two owner deal (he was Sponsor and I was KP), he passed away. I had to take over, but his estate could not be a KP. Luckily I had been doing very well in several deals by then.
There are other stories, but they get involved. It is always one of the 3 Ps: Price, People, or Product.
Regards,
Charles LeMaire
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Charles LeMaire KP = Credit Partner ???
my experience is from a few decades ago and that was working for a syndicator as a land and project acquisition Broker although I was in their office I was still independent ( which turned out to be a great thing)
Their issues were many but here is the short list.
1. invested in Texas in older buildings new construction popped up next to them and raided their tenants vacancy sky rocket and they could no longer debt service.
2. Their failure to tell their limited partners that certain projects were not working.. then rob peter to pay paul which we all know is a slippery slope.
However I think you will see a lot of these partnerships stressed when the 5 year refi or exit gets to be a little tough.
quality sponsors are the key at least you have a chance.. I get it were new sponsor have to start somewhere .. but there is no substituting experience in these deals.. both as mentioned above with capacity and character.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
@Jay Hinrichs yes, credit partner...Key Principal. In commercial multifamily, Fannie and Freddie have net worth and liquidity requirements and the operating sponsorship group can bring on others and add their balance sheets together to qualify.
Inexperienced sponsors can also sign on as KPs in others' deals to meet the lenders' experience requirements so they can do their own deals in the future.
Compensating KPs is the norm (except in the mentorship programs where members sign the loan as KPs to gain their experience requirements).
These are non-recourse loans; so, the KPs are largely insulated from the lender in the event of default (but not insulated from limited partner lawsuits and reputation risk).
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Mike Dymski:
@Jay Hinrichs yes, credit partner...Key Principal. In commercial multifamily, Fannie and Freddie have net worth and liquidity requirements and the operating sponsorship group can bring on others and add their balance sheets together to qualify.
Inexperienced sponsors can also sign on as KPs in others' deals to meet the lenders' experience requirements so they can do their own deals in the future.
Compensating KPs is the norm (except in the mentorship programs where members sign the loan as KPs to gain their experience requirements).
These are non-recourse loans; so, the KPs are largely insulated from the lender in the event of default (but not insulated from limited partner lawsuits and reputation risk).
thanks Mike.. I know after going through the melt down of the syndicator I was working with ( and again this was mid to late 80s) and they had about 150 LPs they were GP for.. it was a mess.. holy man.. many of the LPs formed committees and kicked them out as GP and well that just made the attorneys rich.. choosing sponsor to me is critical in these deals.
- Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes7y
As a point of order, that first deal (and my first KP deal), an agency loan, went into technical default, the Sponsor was hiding from the lender and not providing required reports. I ended up on the Bad-Boy list for about a year. The lender was about to flip it from non-recourse to recourse! It can happen! After the mutiny, Kenny Wolfe stepped up to lead the deal and saved it. The investors ultimately got about 20% IRR (annualize). He also took over the other property, the value play; we ultimately got 13% IRR, on that one, well below what we could have gotten.
On the most recent KP adventure, it was a value play so the loan was recourse from the beginning from a local bank. I expect to do nicely on this one. As I mentioned above, all deals have bumps. On this one the Sponsor/Lead spent $620K of the $450K rehab budget. It's a long story, but I suggest a running total of the expended rehab be promulgated in each monthly report.
Regards,
Charles LeMaire
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
Primary causes of commercial investment failure:
- Under-capitalized properties
- Poor execution of the business plan
- Bad locations
- Untimely balloon payments (coupled with one or more of the bullets above)
- Fraud
Primary mitigants against failure:
- Good locations
- Cash flow
- Add value
- Prudent debt
- Reserves
- Due diligence
- Experience (track record)
A correction in housing and an economic recession are two different events. During the last economic recession, commercial multifamily default rates were less than 1%, primarily as a result of the housing crash...it buoyed rental occupancy rates in many areas. The next economic recession may or may not have that same life preserver for rentals.
The market has been so hot for the past 8+ years that even many under-performing investments have performed. That won't be the case when the market turns.
Many of us vet hundreds of offerings and sponsors and only a small fraction of them meet our criteria. It is far from a bullet proof strategy...podcasts present the Facebook version of reality.
We are fortune to have many great sponsors active on BP.
- 7yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
I just don’t get it—this whole hired-gun KP thing. Sponsors don’t have the balance sheet, reserves or experience to satisfy the agencies—so they farm it out. Talk about having no skin in the game! And if the sponsor isn’t good enough for the debt lender—the safest segment of the capital stack, why should they be good enough for the equity...the riskiest part of the capital stack?
Then the deals go sideways and the hired-gun has to kick them out—now the investors have a whole new sponsor, who might have a nice balance sheet but doesn’t know about how to manage a syndicated offering (talking worst-case scenario here—some KPs would probably make a better sponsor than the original sponsor).
Want to find failed syndications? Look no further than inexperienced sponsors who are hiring out for balance sheets and experience because they are in it before they are ready.
Everybody wants to get into large syndications and look for the fast track. What ever happened to dedicating your life to this business, working your way up through the trials and tribulations of real estate ownership and market cycles, graduating to larger deals, building up your own balance sheet and liquidity and standing behind your own loans without farming that out to others? Man, I guess I did this all wrong...
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes7y
@Allen Lemay Being a contrarian investor i thing now is one of the WORST times to buy multifamily. You have heard the phrase "the pendulum swings both ways. " Well ALL pendulums that drive multi family prices have swung to an extreme.
- Cap rates are well below historic norms
- interest rates are well below historic norms.
- Massive numbers of people have moved from single family homes -(think foreclosures) to apartments
- home ownership is below recent highs
- Millennials don't want to buy
- the 2008 Crash stalled many apartment building construction jobs.
All these factors have caused great returns in Multi family BUT a new part of the cycle is coming
- Interest rates will rise - how much and how fast no one knows. however that will drive up cap rates. Buildings will decrease in value unless owners can increase NOI.
- The factors that have driven demand for rentals up, is easing.
- Milenials will start to have interest in SFH as they start families.
- Stalled multi family construction is now in full swing and is likely to cause an oversupply - a normal part of the cycle
I believe the only opportunity in Multi family is value add through repositioning along with extreme selectivity of only the best deals. Given the number of people pushing syndications that means a lot of failures coming.
I am curious what the smart people here who are actively in the business think of my analysis. @Brian Burke @Mike Dymski @Jay Hinrichs @Charles LeMaire
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ned Carey I defer to the others you mentioned I am in no way a MF expert.. Although I watch the market as a curious observer.. And in the PDX market there is some stress on the Lux end of the market.
IE new construction that took 2 years in planning another 18 months or so to build.. build cost shot up.. and so 4 year old profroma's are not matching rental rates as rents have stalled or fallen this last quarter at least from what I hear from those that own rentals in PDX.. Although out our way.. rentals are apartments not SFR's like you see in the mid west and in the rust belt cities.. so well priced MF is still very solid in this area ..
- 7yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
I certainly agree with most of your analysis, @Ned Carey. At least the part about what has been pushing the market.
As to the risks / negatives, I generally agree but I have some thoughts on the nuances.
Point 1, "Interest rates will rise": Interest rates are probably more likely to rise than not. But a rising rate environment is usually a signal of a strong economy and/or inflation, both of which typically go hand-in-hand with a rising rent environment. Increasing rents will increase NOI, which would in turn mitigate the effect of rising cap rates. The question would be is it enough to completely offset any loss in value from rising cap rates? Or would it even completely overpower the effect and still allow rising prices even with rising cap rates? No one knows. My view is that the risk of falling asset values is a realistic risk, but not a catastrophic risk. Even if it happens, there is a good chance that the market would recover in a reasonable period of time and still allow favorable outcomes as long as owners have enough time to ride through the turbulence.
Point 2, "Factors that have driven demand is easing": True in some markets, not so much in others. Picking the right markets is key. Look for ones where there is enough runway left to continue to ride a wave of demand. I do, however, see some risk that people can only afford to pay so much, and many markets are approaching that ceiling. The question is, will income growth grab a strong enough foothold to give rents additional bandwidth? If income-to-rent ratios are 3:1 (as it is with most owners), a 1% increase in income could cover a 3% rent increase. Time will tell if incomes keep up. But is it reasonable to assume continued 6% rent growth, as we have seen in some markets over the last few years? Not likely, in my opinion. And even if it were a good possibility, I couldn't underwrite to that with a straight face.
Point 3, "Millennials will start families": Probably true. But will they be able to afford to buy homes? Or rent them? Or will they choose to? Will this result in a flight to single-family or will it just increase demand for 3-bedroom apartments? I can't call this one--there are so many forces at play. 20 years ago I would have said they'd go to SFR. But these days, with student loans, high house prices, high construction costs, potentially higher interest rates...this might not be an option for them. I can't call this one.
Point 4, "Construction is in full swing": True. But most of the construction is either luxury apartments or in the urban core (or even luxury in the urban core!). This seems to leave a void in the workforce housing segment with the only new workforce supply being the downgrade of yesteryear's class A product. But buying activity is so intense with value-add buyers always pumping capX dollars into older properties it makes me wonder if these properties will actually downgrade. And will construction shift more to the suburbs? If growing families are moving from the urban cores to the suburbs will it cause an oversupply in the core while burbs suffer from overheated demand even during a period where everyone else thought there would be an adverse market cycle? It's hard to tell, but it seems possible.
So while there are certainly risks in the multifamily sector, my opinion, for what it's worth, is that that there isn't a major storm brewing on the horizon. Not just yet, anyways. But the skies are starting to get a bit cloudy. But what does that mean? Beats me...the other day our weather forecast was for a significant storm to move through. But we got hardly any rain at all. Sometimes these anticipated events are non-events. We'll only know for sure as we look back.
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes7y
@Brian Burke thanks, that is a great analysis.
- 7yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Welcome to BP, @Account Closed!
I’m curious, what makes you so interested in a Grant Cardone deal, specifically? Is there something particular that makes it seem as if they are better than the alternatives?
- Minneapolis, MN · Member since 2018 · 20 posts · 11 votes7y
Bigger Pockets Community -
Thank you for responding to this post. I've dabbled around with bigger pockets in the last 6-months but not frequently. However, the power of multiple minds coming together to share their experience / knowledge is incredible. Big THANK YOU to everyone who has taken the time to respond.
@Account Closed
- Investor · St Augustine, FL · Member since 2016 · 135 posts · 126 votes7y
While I haven't seen one of these go badly on a personal level, I have been following several syndicators for the last 18-24 months, mainly learning as much as possible about the pitfalls. We have attended a few seminars/classes/events... whatever you want to call them, some good - many being nothing but a marketing pitch for someone's deal.
What I HAVE noticed, especially after sitting through many webinars about 'deals' (aka - a pitch for funds) is that many of these folks all say the right things... at least the things that the guru's teach, however they seem to have little experience or contingency for when something blows up. We have had several recent calls from various folks that essentially have zero experience or money, but are experts in how to invest MINE. When pressed for tough answers I've found many responses to be rather evasive or vague - a sure way to get a "dial tone" from me :-)
One in particular had gotten into a 'program' that was rather brilliant (at least from an outside perspective once you saw how the thing was actually structured)... essentially an internship that the intern PAYS the sponsor to learn the ropes, then go out and hustle your contacts for funds in exchange to be a GP - and sign a note! Seriously, after the syndicators office contacted me directly... then found out I personally knew one of their students I got "dropped like a rock" from any further contact. That sure as heck tells me a lot about how the business will be run when a problem arises. (and the head honcho is a VERY well known podcaster / syndicator too). After taking a few steps back and really looking at the cracks in the mortar on this one it became painfully obvious the "system" that both majority and minority GP's are utilizing.
While I wont mention names - I would suggest to be EXTREMELY careful on whom your actually taking advice from. THere is a new expert popping up every day, a new podcast, a new guru building credibility (or attempting to) in subtle but dubious ways. We do look at what someone has done in the past - but we also employ our own countermeasures to sniff out the crap. I've caught a couple of these guys in what I would summarize as a bold-faced lie as well. when confronted I've never heard from them further either (wonder why).
All said, I do think that many good assets are going to come back to the market once times get tough... many newbies are simply over-paying, and using investors money to do so! as has been said before - caveat emptor - 7yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Matt A., if ever I could vote for a post twice, yours would be the one. Such a spot-on assessment of the current landscape of the syndication space.
There are great groups out there--not just great syndicators, but great operators...but they get drowned out by all of the noise. The passive investor's greatest challenge is sorting out the who's who, because the greatest real estate investment in the world can be the biggest disaster in the hands of the wrong group. Sponsor selection is the single most important element to successful investing, and I think your story should be an eye-opener for a lot of people.
- WorldWide · Member since 2016 · 1k+ posts · 1k+ votes7y
Originally posted by @Brian Burke:
Welcome to BP, @Account Closed!
I’m curious, what makes you so interested in a Grant Cardone deal, specifically? Is there something particular that makes it seem as if they are better than the alternatives?
he's either being sarcastic or just heard his podcast (sales pitch) on BP lol
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
Originally posted by @Matt A.:
While I haven't seen one of these go badly on a personal level, I have been following several syndicators for the last 18-24 months, mainly learning as much as possible about the pitfalls. We have attended a few seminars/classes/events... whatever you want to call them, some good - many being nothing but a marketing pitch for someone's deal.
What I HAVE noticed, especially after sitting through many webinars about 'deals' (aka - a pitch for funds) is that many of these folks all say the right things... at least the things that the guru's teach, however they seem to have little experience or contingency for when something blows up. We have had several recent calls from various folks that essentially have zero experience or money, but are experts in how to invest MINE. When pressed for tough answers I've found many responses to be rather evasive or vague - a sure way to get a "dial tone" from me :-)
One in particular had gotten into a 'program' that was rather brilliant (at least from an outside perspective once you saw how the thing was actually structured)... essentially an internship that the intern PAYS the sponsor to learn the ropes, then go out and hustle your contacts for funds in exchange to be a GP - and sign a note! Seriously, after the syndicators office contacted me directly... then found out I personally knew one of their students I got "dropped like a rock" from any further contact. That sure as heck tells me a lot about how the business will be run when a problem arises. (and the head honcho is a VERY well known podcaster / syndicator too). After taking a few steps back and really looking at the cracks in the mortar on this one it became painfully obvious the "system" that both majority and minority GP's are utilizing.
While I wont mention names - I would suggest to be EXTREMELY careful on whom your actually taking advice from. THere is a new expert popping up every day, a new podcast, a new guru building credibility (or attempting to) in subtle but dubious ways. We do look at what someone has done in the past - but we also employ our own countermeasures to sniff out the crap. I've caught a couple of these guys in what I would summarize as a bold-faced lie as well. when confronted I've never heard from them further either (wonder why).
All said, I do think that many good assets are going to come back to the market once times get tough... many newbies are simply over-paying, and using investors money to do so! as has been said before - caveat emptorMatt, I agree with many of the things you say. However, I take issue with the blind statement - "...they are overpaying.."
If you have a crystal ball to advise us all as to when the dynamics in the marketplace will shift, and how, I would sure like a little help. Or, perhaps, let us define "overpaying" a bit more in-depth - what does that really mean?
@Brian Burke has closed a number of deals this year. I've only found one thus far. I am rather certain I did not over-pay. And, I have much too much respect for Brian to assume that he did.
Perhaps, we could breathe some intelligent content into this conversation by identifying some baseline upon which to make these determinations.
- Investor · St Augustine, FL · Member since 2016 · 135 posts · 126 votes7y
@Ben Leybovich - great point you raise, from a clarification perspective. Several OM's that have been presented to me are really based on overly optimistic back-end projections. I've seen a couple that CURRENT numbers will barely cover the debt, let alone turn a projected profit till several quarters into the future, and that's if everything goes well!
Im also generalizing a couple of the more well know pod-casters comments (specific to multifamily) that they are seeing a considerable uptick in deals that they are reviewing being 'overpaid", or at least the consideration of overpaying.Lastly, in the smaller MF space Im hearing of folks that are buying based upon what they "think" the project will produce in the future... something that I simply wont do. I have no qualms or doubts on Brian's ability to analyze and/or close (in fact I don't believe I ever called that into question)... and I've done a couple small deals myself in the last 6 months, I KNOW we didn't overpay as they are generating NET CASHFLOWS of over $500 per door!
So from a clarity perspective - I can directly identify 4 OM's from first timers that Ive seen, none of which Id attempt to go after on my own (the returns are simply too thin, in tertiary markets that simply don't meet our criteria. I view several key factors that need to be met to move an opportunity forward, buy it right, get the correct financing (and have a realistic exit on said financing as well), have a significant upside to even get involved with it, and manage the thing correctly. While by no means an expert, I have built a solid business with small MF that's producing excellent returns. I haven't personally found anything worth making an offer on in the last 4 months myself - albeit when the "deal of the decade" comes along every week, we are well positioned to beat most of the competition to the punch.
In closing - let me say my thoughts, experiences, and opinions are mine alone. Im usually not in the habit of pontificating my expertise (in fact I like everyone else, am still learning THIS business). Im simply sharing a perspective that I see and have experienced. Take whatever is applicable and discard the rest. - Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
Originally posted by @Matt A.:
@Ben Leybovich - great point you raise, from a clarification perspective. Several OM's that have been presented to me are really based on overly optimistic back-end projections. I've seen a couple that CURRENT numbers will barely cover the debt, let alone turn a projected profit till several quarters into the future, and that's if everything goes well!
Im also generalizing a couple of the more well know pod-casters comments (specific to multifamily) that they are seeing a considerable uptick in deals that they are reviewing being 'overpaid", or at least the consideration of overpaying.Lastly, in the smaller MF space Im hearing of folks that are buying based upon what they "think" the project will produce in the future... something that I simply wont do. I have no qualms or doubts on Brian's ability to analyze and/or close (in fact I don't believe I ever called that into question)... and I've done a couple small deals myself in the last 6 months, I KNOW we didn't overpay as they are generating NET CASHFLOWS of over $500 per door!
So from a clarity perspective - I can directly identify 4 OM's from first timers that Ive seen, none of which Id attempt to go after on my own (the returns are simply too thin, in tertiary markets that simply don't meet our criteria. I view several key factors that need to be met to move an opportunity forward, buy it right, get the correct financing (and have a realistic exit on said financing as well), have a significant upside to even get involved with it, and manage the thing correctly. While by no means an expert, I have built a solid business with small MF that's producing excellent returns. I haven't personally found anything worth making an offer on in the last 4 months myself - albeit when the "deal of the decade" comes along every week, we are well positioned to beat most of the competition to the punch.
In closing - let me say my thoughts, experiences, and opinions are mine alone. Im usually not in the habit of pontificating my expertise (in fact I like everyone else, am still learning THIS business). Im simply sharing a perspective that I see and have experienced. Take whatever is applicable and discard the rest.Matt, thank you for responding. I see no cohesive answer in your response, however. I am sure you don't want to be bored with further analysis. I'll simply say this:
Your commentary is broad strokes. If I were to answer I'd say in equally broad strokes - your assumptions are not wrong, but your conclusions are.
- Real Estate Investor / Syndicator · San Ramon, CA · Member since 2015 · 93 posts · 91 votes7y
I will be very curious to see responses to this post in 4-5 years' time. Right now, I am looking at sponsors advertising IRRs in the high teens, with little to no operating experience. And the poor investors have no way to compare investments other than to compare the promised percentage returns and equity multiples, as if that is actual analysis.
What I do expect to see is that many of these syndications and syndicators, especially those who have not been through a down cycle, will suffer significantly if either a) their operating skill is not as good as they have said it is, or b) the market decides to be disagreeable. There are so many assumptions built into their models around rent increases, minimal opex increases, and further compressed cap rates 5 years out, that there is little to no buffer in case anything goes wrong.
If you are looking to invest in a syndication, look closely at these assumptions and compare them to the local market's demographics (population trends and job growth). Do they align? If someone is promising an exit cap rate lower than what they are buying it at today, in a city with decreasing population, run for the hills.
- 7yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Matt A. says "many newbies are overpaying".
@Ben Leybovich says "I take issue with the blind statement 'they are overpaying'" and asks for some "baseline upon which to make these determinations."
It should be no surprise to anyone that Ben and I disagree here, as Ben and I disagree for sport...it is fun for both of us. :)
To this topic I agree that many newbies are overpaying. If I'm a broker or a seller and I have two offers at generally the same terms, and one buyer is well established and the other is a newbie, I'm accepting (as a seller) or recommending (as a broker) the offer from the established buyer with a track record and reputation.
The only way the newbie gets the deal is if he or she drastically out-prices the more experienced buyer. Here is a real life example that happened to me (and variations of this happen to me almost weekly). Six buyers all bidding for the same property. My offer isn't the highest but it is at least competitive with most other groups. After the interview calls, everyone admits that without question we are the most qualified and professional buyer. So, we would get this deal, even though we aren't the highest price.
But, there was one buyer. A newbie. But, this newbie's offer was over $700,000 higher than everybody else. Against the broker's recommendation the seller can't take his eyes off of the extra $700K they get if this buyer somehow manages to close, so they take that offer. Did they overpay? I suppose that one could argue that the other 5 buyers all missed something, but I somehow doubt that.
Purchasing large multifamily properties is a relationship business, and the groups that have the relationships, track record, experience, and highest certainty of closing get the deals. Newbies get the deals when they overpay. It's that simple. I was a newbie once too and I know it happened to me. I got the deal because I didn't know how to underwrite properly and I suffered for my sins. Never again.
There is an old saying, "there's a sucker in every room. If you don't know who the sucker is, you are the sucker."
And @Yousif Abudra just posted some great stuff above. What he said about sponsors and their IRRs is spot-on. Passive investors looking at opportunities shouldn't be deciding on which is best by comparing IRRs. Instead, they should be comparing assumptions (and so much more but that's another topic). IRR is simply financial engineering resulting from inputs and assumptions. A bad design will lead to structural failure...
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes7y
@Matt A., @Brian Burke - this is really becoming fun. Let's just agree - people are over-paying. Most are predicting OpEx that is unrealistically low, rent growth that is unrealistically high, etc.
Those people (most people) buy the market. Brian buys the Delta. I buy the Delta. We do not buy the market.
I simply wish this could be a more sophisticated conversation than simply illuminating the fact that most buyers are stupid. We agree on this, and this hasn't changed since 201. The only thing that's changed is that the market took care of stupid in 2011 - it won't going forward.
But, at the end of the day, while the market is too high to be buying the market, it's never too late to buy the Delta.
- Honolulu, HI · Member since 2017 · 247 posts · 315 votes7y
Originally posted by @Yousif Abudra:
I will be very curious to see responses to this post in 4-5 years' time. Right now, I am looking at sponsors advertising IRRs in the high teens, with little to no operating experience. And the poor investors have no way to compare investments other than to compare the promised percentage returns and equity multiples, as if that is actual analysis.
What I do expect to see is that many of these syndications and syndicators, especially those who have not been through a down cycle, will suffer significantly if either a) their operating skill is not as good as they have said it is, or b) the market decides to be disagreeable. There are so many assumptions built into their models around rent increases, minimal opex increases, and further compressed cap rates 5 years out, that there is little to no buffer in case anything goes wrong.
If you are looking to invest in a syndication, look closely at these assumptions and compare them to the local market's demographics (population trends and job growth). Do they align? If someone is promising an exit cap rate lower than what they are buying it at today, in a city with decreasing population, run for the hills.
it scares me that I am seeing more and more offerings that are offered to sophisticated investors
a couple years ago, those deals did not seem as prevalent
yeah, I know that being accredited is not really proof that you know what you are getting in to, but still...
- Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes7y
Originally posted by @Brian Burke:
@Matt A., if ever I could vote for a post twice, yours would be the one. Such a spot-on assessment of the current landscape of the syndication space.
The passive investor's greatest challenge is sorting out the who's who, because the greatest real estate investment in the world can be the biggest disaster in the hands of the wrong group. Sponsor selection is the single most important element to successful investing, and I think your story should be an eye-opener for a lot of people.
Great advice as usual Brian. Passive investors need to be familiar with the idea of Batesian Mimicry, particularly in RE investing since the barrier to entry is lower than other areas of money management while still having high returns. This creates a situation that breeds copycats.
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