How to vet syndicators
Federal Way, WA · Member since 2017 · 35 posts · 36 votes
How to vet syndicators
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes@Account Closed you’ve been given some great things to look for already but I saw a few things that haven’t been mentioned (or I just missed them).
- Ask to see the performance of their full-cycle deals. Compare the actual performance to the projected performance so you can see if they achieve the results that they forecast. If they haven’t had any full cycle deals, they might not have enough experience to justify investing with them—they are untested if they’ve never sold a property. Unless you are a test pilot, you wouldn’t fly in a plane that has proven to successfully take off, but has never proven it can land, would you?
- Ask to see comparisons between actual and projected performance of properties in the portfolio—this gives insight into how well they are managing currently. How many properties they are buying or the returns they are projecting are not the yardsticks for their success. The Measurement should be if they achieving the NOI and distributions that they had forecasted on the stuff they've already bought.
- Ask about the worst deal they’ve had or one that didn’t perform according to plan. What you are listening for is how they handled it. Their real character is revealed when things go wrong, not when things are going right. If they say they haven’t had one, they just haven’t been doing it long enough. So, will the one you invest in be “the one”?
- Ask if they are obtaining financing based on their own cash reserves and net worth, or are they relying on “loan sponsors” to bring the financial strength needed to qualify for debt. Lenders require the borrower’s key principal(s) to have a specific net worth, such as 1:1 on the loan amount, and cash reserves, such as 10% of the loan amount. If the sponsor has to bring someone in to meet those requirements, you might have an undercapitalized sponsor.
- Visit their office. You might find that some don’t even have one. Are they working out of their bedroom? Have no staff? You’ll find out, plus you’ll get to look them in the eye and shake their hand (even in today’s world of email and text messages, this is still relevant). Not to mention, you’ll find out if they are even willing to carve out that slice of time for you. If they aren’t willing now, they won’t be later when you have questions after you’ve made your investment.
- Ask about their team. Is this a one-person shop? Key man issues could be a problem if the only guy that knows what’s going on dies. So ask about the depth of their team and staff, and succession plan in the event that something unfortunate happens to one of them.
Finally, I’ll offer a contrasting point of view on the “skin in the game” topic. For full disclosure, my point of view comes from two decades of being an investment sponsor so it wouldn’t surprise anyone that my opinion is that this topic is highly overrated.
Investors are misreading the psychology if they think that having my own personal cash in a deal is going to cause their investment to perform any differently. Or that I could walk away and risk nothing if I have no cash in a deal.
I invest in my deals when I can, because I want a return on my money just like anyone. But I can’t invest in all. To qualify for loans I have to have very specific cash reserves. To get deals in contract I have to put up very large earnest money and financing deposits (can be $500K or more in some cases). Plus I have to front upfront costs for legal, inspections, etc. and if there is more than one property in contract you can double that capital outlay.
So I say that my cash is the spark, your cash is the fuel. I’ve had investors opt out because I didn’t have 10% of the equity committed from my own cash. I’ve raised over $75 million, if I had 10% in every deal that would be $7.5 million. Investors are sensitive to how much sponsors charge in fees—but how much would I have to charge in fees to have an extra $7.5 million laying around?! The math just doesn’t work.
Instead, I see it this way: I have cash reserves so I’m never in a position to feel like I have to do a bad deal just so I can earn a fee and make a living. And I’ve been the first one to take a bullet for my investors, sacrificing my own financial well being to protect my investors. If I walk away from a deal, the last thing on my mind would be my $100K skin in the game. If I ever did that it would be the last time I’d earn the trust of the very folks that provide the lifeblood of my business. So this means I have more like $75 million and my future income stream at risk at all times.
I get it—if you are investing with a first time sponsor (why would you?), having skin in the game gives them something to lose. But an experienced sponsor (which is what you are looking for) has so much more at stake.
I hope that helps! Good luck in your search. With the collective total of the advice in this thread, you are very well equipped to avoid mistakes.
42 Replies
- Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes8y
Originally posted by @Account Closed:
For those of you who invest with syndicators, what is your vetting process? Analyzing a deal seems pretty straightforward to me, vetting a syndicator, not so much.
To vet the syndicator, you need to carefully scrutinize their track record. Look at previous deals. Check out how they did in the last downturn. Make sure you verify everything, don't trust whatever story they tell you.
-Christopher
- Federal Way, WA · Member since 2017 · 35 posts · 36 votes8y
Thanks, @Christopher Brainard. What would you consider a good track record? Personally, I'd find it difficult to invest with someone who hasn't been through a downturn, but I don't know if I'm being too picky.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
well we have to all start somewhere.. but I like your thought process.. its much easier to do these deals when things are rosy.. the rubber meets the road when things are not.
although well cashed up sponsors could mitigate the lack of long term experience in the market place.
choosing the right sponsor is in my mind as critical if not more so than the deal itself.
- Investor/Syndicator · Cincinnati, OH · Member since 2014 · 470 posts · 599 votes8y
@Account Closed as it has been said above the sponsor can be more important than the deal. A bad sponsor can take a good deal and make it crash and burn. On the other hand a good sponsor can take a mediocare or even poor deal and make it exceptional. As mentioned track record is the easiest indicator of this.
Sydication is a partnership while one side is passive and the other active it is a partnership nonetheless. It is my belief the vetting process is to be catered to the parties in that partnership not just a industry norm.
When forming that business relationship the role of the sponsor is to ensure the the investor is fully aware, capable and comfortable with the sponsor and than the deal. Even If this takes one call or 5 years.
I have actually had an investor say "would you be comfotable if I contacted your parents as a refrence?" All though I thought it strange I agreed. When I asked why he wanted this in addition to our other refrences he responded "If your own mother wont give you a good recomendation than I know I dont need to look further". The point of the example is there is no right way. Only that we make sure all parties are comfortable with each other. If that can't happen than capital should not be exchanged.
Something else to consider in that process is how the track record was built. Did the sponsor grow and learn on thier own dime before rasing capital or did they test the waters with other peoples money. Here is an article I wrote on the mindset I believe should be adopted by those raising money. If you feel a sponsor doesnt have this I'd avoid.
- 8yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Account Closed are right on. I'd even go one step further and say that the syndicator is the deal.
The best deal you can analyze in your due diligence in the hands of a not so great syndicator is a recipe for failure. Conversely, a bad deal should never make it to your plate from a good syndicator.
Their analysis should always be more comprehensive and accurate than what you are capable of or you're talking to the wrong syndicator.
The 1031 Investor5137 Reviews - 8yMichael DangPro MemberRental Property Investor · Houston, TX · Member since 2015 · 454 posts · 273 votes
I credit this link given by Kevin Nguyen in the BP community. Hope it helps.
- Federal Way, WA · Member since 2017 · 35 posts · 36 votes8y
Thanks, everyone! I so appreciate you taking the time to share your wisdom with me.
@Michael Dang, Thank you for that great resource! That is exactly what I needed. Have you used the advice yourself or are you trying to build a business by that example?
@Jay Hinrichs, You make a good point about cash reserves as one way to mitigate experience. I guess I would also be looking for a pattern of resilience and the ability to solve problems. It's amazing how some people fall apart at the first sign of difficulty.
@Jered Sturm, I appreciate your comment about syndication as a partnership, and I love the idea behind the "Mom" test even if I would never ask that. I completely agree with your thoughts on mindset. I hear too many things about the benefits of reduced risk for the sponsor, without any regard to the responsibility that comes with that.
@Dave Foster, You make a compelling case for the SYNDICATOR being the deal. My gut said that same thing, but your logic that bad deals don't come from good syndicators confirmed it for me. Well put.
- United States · Member since 2015 · 401 posts · 394 votes8y
@Account Closed's "Vetting an Apartment Deal Sponsor" - he offers some great insight.
I'd be happy to connect and discuss further. Best of luck!
- 8yJim WatsonPro MemberRental Property Investor · Davis, CA · Member since 2016 · 56 posts · 17 votes
@ David Foster. Excellent advice. I recently reviewed an MU proposal that included detailed pictures (overview from different angles, sample interior shots), info on building's roof, boiler and possible repair costs, analysis of cash and projected costs, evaluation of site and immediate neighborhood, potential, cost effective ways to improve the property. Well worth the origination fee. Agree that the syndicator is the deal.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes8y
Is the sponsor detailed? Are they organized? Are they well funded? Are they working within their scope? what is their support team? what is their reasoning for the deal? How will they make sure that the business plan is followed and do they have a detailed business plan?
A sponsor should be running the deal as a business, so everything should look, feel and smell like a business.
I think making sure the sponsor is moral, ethical and honest is very important, but you also want to be sure they are operating a business properly and not just winging it.
- Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes8y
I second @David Thompson's post on vetting the sponsor.
However, as @Michael Bishop mentioned, I would look at how the sponsor underwrites the deal.
Are they being conservative in their assumptions (capex, rent increases, reserves, exit cap,hold period, refinancing, etc)?
Having invested in over 1000+ units, I have expanded my pool of syndicators (a form of diversification) and typically look at the above criteria in addition to sensitivity analysis around interest rates and exit caps.
Another important criteria is how much of their own money are the sponsors putting in the deal?
As for finding a syndicator who has been through the market downturn, the reality is that there are very few who have while syndicating (did this term exist in this context in 2007-2009?) in the same asset class. There are very good operators who have not been through the downturn or were focusing on a different asset class then.
- 8yJim WatsonPro MemberRental Property Investor · Davis, CA · Member since 2016 · 56 posts · 17 votes
Many good observations here. @Perry agree completely about how much money are they putting in. No skin in the game? I'm not interested. I see articles about the "invest with other people's money" strategy. Own an apartment building (well a portion) with no money down and no risk. These are the "syndicators" to avoid.
Has anyone heard of Ashcroft Capital? 191M portfolio with focus on large B grade MU's. Income stream (quarterly basis). AC does the value added investing (small improvements, major remodels, rebrand, etc as appropriate) and cash out/refi possibly 5 years. Passive investors profit as well.
Syndication (passive or perhaps active participation if it's an option) looks like an excellent idea. I'd appreciate PM's on folks to contact (and not contact)
- Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes8y
Thanks @Percy N.
Hi Rachel...here's a blog on vetting a sponsor you may find helpful and 25 FAQs on syndication.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jered Sturm too funny many of us our mothers are no longer with us... well my mom is 83 and going strong.. LOL.. and she better think I am great :)
- Federal Way, WA · Member since 2017 · 35 posts · 36 votes8y
Thanks, all! More great insights to ponder. : )
@Michael Bishop, Thanks for the tips about the sensitivity analysis and conservative underwriting.
@Todd Dexheimer, Good points. I would definitely want to work with someone who is a competent professional, not just a nice person.
@Percy N. It's nice to hear from a fellow investor that is not a deal sponsor. : ) I appreciate your insight on how few syndicators have been doing this for a decade+. I asked if I was being too picky, and I think I have my answer...
@Jim Watson, There's no way I would trust someone with no skin in the game, unless I had past history with them. It's crazy to me that some sponsors get a hefty percent of the upside, but stand to lose nothing if the deal goes south. If you are not putting equity in, then how are you a partner? Perhaps some people have so much deal flow and too many investors to keep up with their own capital, but in general, this seems like at least a "yellow light" if not a red flag.
@David Thompson, Thank you so much for chiming in with the links. #10 Holistic Win/Win is such an important point. I would be concerned about somebody who doesn't look out for all their stakeholders, including their residents. I look forward to re-reading these articles and internalizing the concepts.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Run a background check on them too.
I'd recommend the following podcast and checking out other podcast interviews where Jeremy Roll is the guest. He current has 70+ individual investments in syndicated deals. He also represents a large group of passive investors and shares investment opportunities with them.
http://forinvestorsbyinvestors.com/library/episode-2-how-to-build-a-passive-real-estate-portfolio/
- Federal Way, WA · Member since 2017 · 35 posts · 36 votes8y
Thanks @Mike Dymski! I listened to the podcast last night and learned a lot. Jeremy's detailed information about running background checks was especially helpful. If a basic one can be done for about $6, there's no reason not to.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes8yRachel Bjorklund a few things I do is ask around who has been in their deal before. You could ask for references but that might be a moot point. Im transition my portfolio from sfh to syndications and even though the returns are lower it’s scalable. I think it just works well if you go around and show one card at a time ... “did you work with bob d?” Or heard of this guy....
- Federal Way, WA · Member since 2014 · 15 posts · 3 votes8y
Wow what a timely thread for me! ( Door knocking for off market MFU's in the next week. )
Thank You All.
Michael Dang what a great link! Very Helpful!
As an expansion or similar idea to this threat, would your vetting process or consideration be similar if you were actually bringing to deal to the table for the GP or Sponsor to syndicate?
My guess is yes? Or would someone simply JV with a experienced Sponsor or experienced Syndicator? Or maybe a straight JV with a money partner would be a better option all around?
I have zero experience with syndication or closing commercial MFU's, But I have years of experience finding off market deals.
- Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes8y
@Account Closed
You have received a ton of valuable advice here! Speaking from personal experience while looking for syndicated deals myself: I'd recommend to double and triple check all the information you receive from a syndicator/sponsor. Google is a beautiful tool when it comes to researching anything and anyone! I'd utilize it to the fullest! The research should cover both: personal and professional bio's. Do not ask for references. Identify them while researching a syndicator and contact directly. You'll be amazed how much you can learn about a person this way. :)
If you would like to speak futher, feel free to PM me directly.
My best!
Alina
- Federal Way, WA · Member since 2017 · 35 posts · 36 votes8y
Thanks, @Alina Trigub!
I appreciate your tip about references. I've wondered how useful that really is, and you offer a compelling alternative.
- 8yMichael DangPro MemberRental Property Investor · Houston, TX · Member since 2015 · 454 posts · 273 votes
@Account Closed
To answer your question. Yes, I am using some of the advise and can attest that the advise works. There are a great number of syndicators out there with different syndication models, so definitely vet and if you don't get a straight answer I would consider it a red flag or push to clarify the answer.
- 8yMark RobertsonPro MemberInvestor · Salisbury, NC · Member since 2014 · 313 posts · 385 votes
I agree with what most people posted from track record to background check and everything in between. It also very important that their structure is aligned with the investor. Low fees so they only make money if you make money. The promote should be 70/30 or higher. 80/20 is better but tough to find. They need to have REAL skin in the game. Not just their upfront fee. Money from their own pocket. Some have GP funds which is really investors money, but they will claim it as their own. Ask to see their reporting statements from prior deals. I rarely trust a syndication that can't communicate or produce an informative/accurate/timely investor statement.
- 8yKim Lisa TaylorPro MemberAttorney · Saint Augustine, FL · Member since 2016 · 244 posts · 234 votes
Here's my list. I often teach this as a public service for investors:
Checklist: 10 Things You Should Know Before Investing in a Syndication
Before investing in a real estate syndication, you should carefully review all of the offering documents provided by the sponsor and look for (or ask) questions regarding the following things:
1. The Sponsor’s background, education and experience with similar investments, if any.
2. The team members involved in acquisition and operation of the property, including attorneys, CPAs, other members of the sponsor, property managers and affiliates that may receive fees, etc.
3. Cash distributions to investors during acquisition, operation and disposition of the property, including the proposed timing and anticipated percentage returns.
4. Sponsor fees and cash distributions.
5. Anticipated duration of the investment.
6. Property information, including its type and condition, the purchase price, financial history, proposed “value add” and exit strategies and pro forma financial projections.
7. Dispute resolution provisions in the governing documents for the company selling the interests to investors.
8. Voting rights of investors.
9. Provisions for removal of the sponsor.
10. Information about the law firm that structured the offering and drafted the offering documents, and whether the firm is experienced with securities offerings, and has errors and omissions insurance.
- Liberty, MO · Member since 2017 · 55 posts · 51 votes8y
Lots of really great advice!
@Mark Robertson makes a really good point in making sure the syndicate has real skin in the game, and that it is not from GP funds.
I also would advise, as some have on here, that you pay close attention to the distributions and fee structure. Does your dollar buy the same amount as everyone else and the GP, or is it tranched? I believe the best investment relationships are pari passu. You should also see how much, they themselves, are putting into the deal and that their equity has their own dollars invested and not just the syndication fee.
Whenever someone new is looking to invest in something we do I always try to offer them any information they want with the expectation that they are going to ask a ton of hard questions and nothing is off the table. It is a relationship that goes both ways and the harder the questions you ask the more I like you!
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