Providing Earnest Money Deposit for a Syndication

Multi-Family and Apartment Investing
3yFollow

Providing Earnest Money Deposit for a Syndication

Erik D.
Investor · Minneapolis, MN · Member since 2014 · 79 posts · 17 votes

Hi all,

I have recently been asked to provide the earnest money deposit for an apartment syndication, 120 unit apartment complex, in exchange for GP share of 3.6%. EMD would be $150k.

So far everything has been verbal over Zoom or via text, I have not seen any sort of agreement or contract for signatures. I have however been sent the wire instructions to fund an escrow account.

Is it my responsibility to come up with my own contract and ask for signatures or is it up to the syndication to hand me some sort of contract? The earnest money would be returned to me at closing, but how can I guarantee that?

Thank you!

0Reply
72 views

Most Popular Reply

Arn CenedellaPro Member
Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
3y

@Erik D.

1. Be careful here especially if you do not have a long standing relationship with the syndicator. I would be especially concerned if you are putting up alL the EMD. If the syndicator is not putting some of his own cash as EMD, I would probably run from the deal.

2. Understand EMD is “at risk capital” and it is YOUR capital at risk but you have no control over it. If syndicator can’t close the deal, you could very well lose your money and the syndicator doesn’t have to pay you back.

3. Generally the final documents covering the GP compensation are not finalized until the very end of the deal. So much of this is based on trust.

4. Be sure to understand 3.6% of the GP is not 3.6% of the deal. 

Proceed with caution. 
Hope this helps. 

Arn

[email protected]650-575-6114
2Reply
See this reply in the discussion

12 Replies

Jump to latestLatest
  • Arn CenedellaPro Member
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    3y

    @Erik D.

    1. Be careful here especially if you do not have a long standing relationship with the syndicator. I would be especially concerned if you are putting up alL the EMD. If the syndicator is not putting some of his own cash as EMD, I would probably run from the deal.

    2. Understand EMD is “at risk capital” and it is YOUR capital at risk but you have no control over it. If syndicator can’t close the deal, you could very well lose your money and the syndicator doesn’t have to pay you back.

    3. Generally the final documents covering the GP compensation are not finalized until the very end of the deal. So much of this is based on trust.

    4. Be sure to understand 3.6% of the GP is not 3.6% of the deal. 

    Proceed with caution. 
    Hope this helps. 

    Arn

    [email protected]650-575-6114
    2Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    3y
    Quote from @Erik D.:

    Hi all,

    I have recently been asked to provide the earnest money deposit for an apartment syndication, 120 unit apartment complex, in exchange for GP share of 3.6%. EMD would be $150k.

    So far everything has been verbal over Zoom or via text, I have not seen any sort of agreement or contract for signatures. I have however been sent the wire instructions to fund an escrow account.

    Is it my responsibility to come up with my own contract and ask for signatures or is it up to the syndication to hand me some sort of contract? The earnest money would be returned to me at closing, but how can I guarantee that?

    Thank you!

    So you are going to wire 150k withOUT any docs,,, umm, I think you know the answer to this question. 
    PS, why not just buy your own rental with 10% or better net cap, ? A lot less paperwork LOL 
    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Erik D.your earnest money is not going back to you - you are getting scammed.

    7e investments53 Reviews
    WebsiteView Page
    1Reply
  • Justin Moy
    Investor · Kansas City, MO · Member since 2020 · 400 posts · 278 votes
    3y

    I would engage a lawyer to draft the documents for you and give it to them to sign. Also look at the timeline of the EMD being refundable.

    0Reply
  • Jason Thompson
    Wholesaler · usa · Member since 2021 · 222 posts · 67 votes
    3y

    @Erik D. I agree with everyone if you have been asked to put up EMD from a syndication company, the credibility for that company is totally gone. Run as fast as you can, if they can't pay EMD they shouldn't be doing the deal plain and simple.

    1Reply
  • Arn CenedellaPro Member
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    3y
    Quote from @Arn Cenedella:

    @Erik D.

    1. Be careful here especially if you do not have a long standing relationship with the syndicator. I would be especially concerned if you are putting up alL the EMD. If the syndicator is not putting some of his own cash as EMD, I would probably run from the deal.

    2. Understand EMD is “at risk capital” and it is YOUR capital at risk but you have no control over it. If syndicator can’t close the deal, you could very well lose your money and the syndicator doesn’t have to pay you back.

    3. Generally the final documents covering the GP compensation are not finalized until the very end of the deal. So much of this is based on trust.

    4. Be sure to understand 3.6% of the GP is not 3.6% of the deal. 

    Proceed with caution. 
    Hope this helps. 

    Arn

    While the comments are well-intentioned, I believe there is a lack of actual experience with syndications is evident. 

    I am either the lead GP or coGP in about 10 syndication deals at present and I can tell you there was NEVER any contract between the GPs signed before the end of the deal. It just doesn't happen that way. I've put EMD in for other syndicators and there was NEVER a contract signed at the time I sent EMD in. NEVER. 1. You should only be working with people you know and have some experience with. Amongst the GP team there can be discussions and confirming emails about how the GP compensation is structured but that is never formalized until all the syndication docs - the PPM the Operating Agreement and the Subscription Agreement is prepared. The GP teams evolves over the course of due diligence and escrow - some are added. Actual GP shares can not be calculated until the capital raise is completed. I speak from first hand experience.

    All this being said, if you let this syndicator two days ago on social media by all means send no money. That would be dumb. 

    Often times The GP team belongs to same MF mentor group so there is trust and knowledge within the group. 

    Hope this helps. 

    Arn

    [email protected]650-575-6114
    2Reply
  • Erik D.
    OP
    Investor · Minneapolis, MN · Member since 2014 · 79 posts · 17 votes
    3y

    @Arn Cenedella Thank you this is very helpful! The group reached out to me about a month ago, so it is not a group that I have a track record with or anything like that. Since I don't know them that well, I am asking for documentation that lays out all the terms before wiring earnest money, but it sounds like this is not standard operating procedure and I may not be able to proceed comfortably based on what it is that I want beforehand.

    I have been provided with the investor deck, underwriting spreadsheet, and PPM. Still does not feel like enough due diligence on my part based on the lack of an existing relationship with the syndicator. Thanks for the help!

    0Reply
  • Arn CenedellaPro Member
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    3y

    @Erik D.

    Sounds like you have it covered.

    Yes the investor deck, underwriting, and PPM won’t detail the compensation structure among the GPs.

    If the syndicator won’t at least send you a detailed email or document laying out the terms, I would pass also.

    One additional comment, I would never post EMD unless I thought I could raise capital for the deal and thereby increase my GP %.

    And per the SEC, one can not simply raise capital unless one is a registered securities agent - putting up EMD checks one of the necessary boxes to stay clear of SEC regulations. Doing both on the same deal makes sense.

    Keep networking and building relationships.

    Go to some conferences and met folks face to face.

    [email protected]650-575-6114
    0Reply
  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    3y

    Be careful as there are probably more deals falling out of contract nowadays than deals that actually close. The debt market is really wild and if the GP doesn't have any skin in the game, getting retraded a few million by the bank near the end will mean an easy decision to walk away.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Bob S.:
    Quote from @Erik D.:

    Hi all,

    I have recently been asked to provide the earnest money deposit for an apartment syndication, 120 unit apartment complex, in exchange for GP share of 3.6%. EMD would be $150k.

    So far everything has been verbal over Zoom or via text, I have not seen any sort of agreement or contract for signatures. I have however been sent the wire instructions to fund an escrow account.

    Is it my responsibility to come up with my own contract and ask for signatures or is it up to the syndication to hand me some sort of contract? The earnest money would be returned to me at closing, but how can I guarantee that?

    Thank you!

    So you are going to wire 150k withOUT any docs,,, umm, I think you know the answer to this question. 
    PS, why not just buy your own rental with 10% or better net cap, ? A lot less paperwork LOL 

    Just read one of the largest crowdfund hundred syndication track record, their IRR is only mid 10-15% with 1.4-1.5EM ; and Zero Return statistic (investor being wiped out) in syndication the chance is as high as 8%.....I'm wondering if direct rental investment/oenweship would be better than general syndication, and the answer seems to be yes. Even low LTV HML seems to be better in terms of reward/risk like you said.

    It's not nice to see the chance of being wipe out is like 10%, even stock market is not that bad as comparison.

    0Reply
  • Brock Mogensen
    Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
    3y

    1000% need to have legal docs to cover you before wiring the money.  There should be an Operating Agreement that spells out the term of the deal between the GP team and what equity you are receiving. Generally if the GP team does not have the capital come up with EM $ on their own, it means they are just getting started in this space.  Not to say you shouldn't do the deal because of that, but just want to be extra careful. 

    1Reply
  • Scott Mac
    Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
    3y

    Maybe talk to the Syndication Attorney with (the GP's ok on doing that), and talk about your concerns.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free