For The Love of Pete Don't Syndicate your First Deal!

53 Replies

Originally posted by @Mike Dymski :

"I think there will be a lot of unhappy investors over the next 5-7 years that didn't see the difference between a good sponsor and a rising tide that lifts all boats."

I have likely reviewed and underwritten 100+ offerings over the past year and routinely see red flags and deal breakers...inexperience, mis-aligned deal structures, weak offering materials, aggressive assumptions, background check follow up items, under-capitalized sponsors, etc...but the deals still get funded.  In this market, deal flow is king and whoever has the grit and time to generate it can make a good profit.

Could you even hazard a guess what 2-4 things drive these deals with red flags getting funded?

Are you seeing any of the hedge fund phenomenon 'compensation scheme disguised as an asset class" developing?

Originally posted by @Desmond Dunn :

Thanks so much for this post.  I am super interested in syndicated deals and I was made to believe that is was a process that a newbie could learn through research but somethings you can only learn by doing

 People cant even buy their first deal properly.  Hard money loan?  Whats up with that?

My take is that it's mostly a function of the strong market creating a lot of successful investments so the guard gets let down.

Also with the stock market and bond yields where they are at, everyone starts taking more risk to chase yield. 

Originally posted by @Bill F. :
Originally posted by @Mike Dymski:

"I think there will be a lot of unhappy investors over the next 5-7 years that didn't see the difference between a good sponsor and a rising tide that lifts all boats."

I have likely reviewed and underwritten 100+ offerings over the past year and routinely see red flags and deal breakers...inexperience, mis-aligned deal structures, weak offering materials, aggressive assumptions, background check follow up items, under-capitalized sponsors, etc...but the deals still get funded.  In this market, deal flow is king and whoever has the grit and time to generate it can make a good profit.

Could you even hazard a guess what 2-4 things drive these deals with red flags getting funded?

Are you seeing any of the hedge fund phenomenon 'compensation scheme disguised as an asset class" developing?

Pointing out that RE is in a 10 year bull market is Frowned upon here.

People need to realize BRRRRRR and R worked great 3-5 years ago.   No t so much now.

Originally posted by @Phil McAlister :

My take is that it's mostly a function of the strong market creating a lot of successful investments so the guard gets let down.

Also with the stock market and bond yields where they are at, everyone starts taking more risk to chase yield. 

I'll buy that for the big money players, just look at how Goldman's FICC has done recently, they need yield. That drives things like Invitation Homes/Blackstone SFR products and all the other funds that have come into RE since 2008. A kind of come for the depressed prices, stay for the better than bonds return thing. Though a lot of those folks are in the disposition phase themselves.

I can't 100% swallow that for these small syndication. I may paint with a broad brush here, but I don't see Dan the Dentist and Vicki the Veterinarian thinking solely in terms of optimizing their alpha for the 30-100k they put in Nick the New Guy's syndication. I think there is some Social Proof, Fear of Missing Out, Doubt Avoidance going on too.

But my experience is limited to only what I have seen so I'd love to hear other people's thoughts who have seen/done different things.

I would argue the opposite. Syndication are the best way for a person to participate in all of the best aspects of real estate investing without needing the knowledge or expertise. The key is a good sponsor and the deal structured for aligned incentives. 

Well said Phil! Syndication and Wholesaling for newbies can become more and more complicated, often with the newbie being unable to pull it off.i started a simplified referral program specifically for newbies so that they can have some success in the business that will encourage them to do more deals.quite often newbies will flounder on that first deal and it in effect, turns them off to real estate investing as a whole.

Originally posted by @Phil McAlister :

I would argue the opposite. Syndication are the best way for a person to participate in all of the best aspects of real estate investing without needing the knowledge or expertise. The key is a good sponsor and the deal structured for aligned incentives. 

 I think we are talking past each other; I share your thoughts on the positive aspects of syndication for experienced and non experienced RE investor alike. Access to deal flow, accomplished operators, financing, niche investment options... to name a few.

I was only referring to the influx of new syndicators who may not necessarily bring the same skill set to the table and have offerings with all the issues that Mike mentioned, but still get funded. I'm curious what factors, either internal or external, folks think allow someone with a poor business plan and background to still raise capital for their syndication. 

@Phil McAlister I agree with everything you put in the original post except one thing, that money is easy to find.

I disagree that it is. Sure if you have an amazing deal then I guess it would be, but most deals aren’t amazing and a newbie is unlikely to understand the difference.

I know several high net worth individuals and I can guarantee you I’d have a hard time convincing any of them to invest in real estate, with me or otherwise. If they don’t have any experience with it (as most people don’t) that’s an uphill battle. Hard to convince someone who’s already well off to do anything different then what got them to being well off.

Finally I wanted to say this comment so we can stop perpetuating this belief on BP that raising money is easy or necessary. I think it’s neither easy or necessary

Originally posted by @Bill F. :
Originally posted by @Phil McAlister:

I would argue the opposite. Syndication are the best way for a person to participate in all of the best aspects of real estate investing without needing the knowledge or expertise. The key is a good sponsor and the deal structured for aligned incentives. 

 I think we are talking past each other; I share your thoughts on the positive aspects of syndication for experienced and non experienced RE investor alike. Access to deal flow, accomplished operators, financing, niche investment options... to name a few.

I was only referring to the influx of new syndicators who may not necessarily bring the same skill set to the table and have offerings with all the issues that Mike mentioned, but still get funded. I'm curious what factors, either internal or external, folks think allow someone with a poor business plan and background to still raise capital for their syndication. 

 I was actually responding to Abdul's post. I was on mobile so couldn't tag, my apologies. I think we are on the same page. 

"Could you even hazard a guess what 2-4 things drive these deals with red flags getting funded?

@Bill F.

  1. There is a lot more money chasing deals than there are deals (and a lot of commercial properties have already traded hands in the past five years leaving inventory low)
  2. Most passive investors don't realize what is available; so, they invest in the limited deal flow that they see...I was there at one point
  3. "XX% return secured by a hard asset beats the market" (regardless of risk) 

Are you seeing any of the hedge fund phenomenon 'compensation scheme disguised as an asset class" developing?"

As sponsors scale, their investor database gets more sophisticated, including institutional capital sources who have the sponsors over the barrel; so, I don't see it here.

I do see mis-aligned deal structures below scale all the time though, many with family and friends as investors.  There are sponsors who do a great job of securing inexpensive capital/debt and their investors think they are getting a good return.

@Caleb Heimsoth

Actually in my post I say that there is a lot of capital out there in the market, but it is NOT easy to come by. 

And I think people should definitely try to avoid working with investors who have never participated in a real estate deal before like the HNW individuals you mentioned, unless you're ready to do a lot of hand holding. The last thing you want is an investor that has some level of discomfort on day 1. So that narrows your pool further.

Originally posted by @Abdul Shishi :

Todays syndications are yesteryears Hedge Funds.  Great for the operators but lousy for Jim the Janitor and Barbara the Baker.

I do see some mis-aligned deal structures but I also see many where the structures are aligned and even see structures that are more investor-friendly than they need to be.  For the deals I am in, particularly with preferred returns, it's the sponsor who is not going to make much profit when the economy takes a turn and cap rates increase.  It's a feast right now for them (and their investors) "flipping" properties at low cap rates and could be more of a famine in a downturn (with investors still getting the preferred return).

Investing with trustworthy professional sponsors who have mature deal flow pipelines is a very compelling strategy in today's market where deal flow is hard to come by and rehab is challenging and expensive.

And BRRRR works in all market conditions. Adding value is imperative in this market and if you don't, you are exposed to a lot of downside risk.

IMO, the difference between the winners and losers is property management. It’s one thing to buy right, but it’s a completely different ball game when it comes to implementing the business plan.

Most gurus portray property management as the easiest part of the equation (just hand it to a 3rd party and relax) but that is not the case. Managing the property manager is critical and is the key difference (shout out to @Ivan Barratt for doing a good job).

@Phil McAlister

I agree with your sentiments. There will be unhappy investors. I am continuously surprised at the sheer amount of horse manure folks are willing to gobble just to say they’re in a deal.

@Chris Seveney

Have to agree with your comment on the physician part. My wife is a physician and it’s shocking/entertaining how many people in our network think that being a physician/engineer means they can be a GC/realtor/plumber/mechanic/underwriter/etc.

Good on you for staying within your circle of competence and not trying to do everything. Smart move!

@Bill F.

Practically ZERO folks with fancy sounding “fund names” could walk you through the underwriting in detail. Like Chris’ point – every doctor/engineer thinks they can do everyone else’s job while continuing to do their own demanding jobs.

The strategic partner/board member/advisor is another way of saying that the person/company in question is a capital raiser only.

Coaches are making a pretty penny (upwards of $20k in most cases) without taking on any liability. I wouldn't do it myself but genius move if you ask me… lol (why should they be held responsible if someone is stupid?).

I would agree and disagree with the original post (I haven't read the replies). I am ok with newbies syndicating their first deal as long as they are truly aligning themselves with experience that has a stake in the deal. If I am doing my first deal and am good at raising capital and maybe underwriting and then team up with a property management company and possibly someone else with some experience, then doing a raise on the first deal could work.

People are setting themselves up for failure when they are new (or experienced) and think they can do it on their own. Some people get big eyes when they look at the money that can be made and don't want to share it. I would say, make sure that you share the profits with others that will help you become successful or you will fail and the big numbers on paper will be little numbers in your account. 

There are several ways newbies can start with large apartments/commercial: https://www.biggerpockets.com/blogs/10145/70092-ge...

Originally posted by @Chris Seveney :

Let me tell a story about a developer that the company I worked for was building. The developer had sold his software company for $30M in 2004 and decided he wanted to be a real estate developer. 

Guess what happened - 2008 happened. The buildings units went to foreclosure auction and the developer lost everything. Was he a smart guy - absolutely guy was a genius at what he did and what he knew - but he didn’t know real estate.

It’s like riding a bike, you start out on training wheels or a simple bike- you don’t take a 5 year old and put them on a Harley.

 Sad story.....but I don't even have experience in development and I know that you don't go all in on one project. Someone with that net worth should have advisers looking out for him...but perhaps when it all comes at once (e.g. selling a company) you decide to trust no one but yourself. 

Originally posted by @Paul B. :
Originally posted by @Chris Seveney:

Let me tell a story about a developer that the company I worked for was building. The developer had sold his software company for $30M in 2004 and decided he wanted to be a real estate developer. 

Guess what happened - 2008 happened. The buildings units went to foreclosure auction and the developer lost everything. Was he a smart guy - absolutely guy was a genius at what he did and what he knew - but he didn’t know real estate.

It’s like riding a bike, you start out on training wheels or a simple bike- you don’t take a 5 year old and put them on a Harley.

 Sad story.....but I don't even have experience in development and I know that you don't go all in on one project. Someone with that net worth should have advisers looking out for him...but perhaps when it all comes at once (e.g. selling a company) you decide to trust no one but yourself. 

I know everyone is different although folks I know who sold companies  ( IE garbage to wastemanagement) etc.. most of the cash went into double tax free Grade A muni's or pay cash for assets they own and control.  debt and risk goes way down the line. Now some like to be in the game I know another who took his winnings.. and invested in like 20 different companies and business with real estate being one.  However business is littered with the carcass's of failed developers..

and timing is HUGE  08 to 2010 took down some of the biggest players in the Industry..  Look no farther than Opus out of Minneapolis..

@Phil McAlister @Jay Hinrichs   If you are young and want to learn what it takes to syndicate a smaller deal (around 50 units c+ or b-) say 5-10 years into the future, what actions should you start taking now to learn the skills necessary to have a chance in the future. 

I am buying my second multi-family now and have a lot of friends doing the same thing. I would like to syndicate a smaller deal in 5-10 years but how should I  be learning now and what actions should I be taking?

Originally posted by @Ben Mandelstein :

@Phil McAlister @Jay Hinrichs  If you are young and want to learn what it takes to syndicate a smaller deal (around 50 units c+ or b-) say 5-10 years into the future, what actions should you start taking now to learn the skills necessary to have a chance in the future. 

I am buying my second multi-family now and have a lot of friends doing the same thing. I would like to syndicate a smaller deal in 5-10 years but how should I  be learning now and what actions should I be taking?

owner operator is a great way;..  do what your wanting to sell first experiment on yourself before you bring in others.. sounds like a great plan..

then when you go to syndicate your bio reads.. I have owned 5 of these myself for the last 10 years etc etc.  Not hey I have never done anything in real estate and now want to be syndicator.. although I think when many of those who think they want to .. actually start to talk to lawyers and cpa's how to set it up.. the cost of doing so will probably shut down most until they get more capital and more experience.

it takes 20k or so before you can go to market then you need 10 to 50k for em  inspections etc.. and if you can't raise money you just lost all these set up fees. 

@Ben Mandelstein

I'd say keep doing what you're doing, and in 5-10 years you'll probably naturally get where you want to be. Honestly, you may not want to syndicate at that point. What if you've got 100 or so units with a handful of partners and you're making great cash flow with enough left over to keep doing deals selectively for yourself? Then you're on a mountain, untouchable and totally free to pursue your life. Go to Europe for a month with an Instagram model while your properties cash flow. A lot of folks would prefer that lifestyle.

If your goal is to show up at work everyday, even if it's your company, and work hard to create larger amounts of wealth, then you can go down the syndication route. A TON of man hours are needed to fill an acquisition pipeline, do due diligence, manage property etc. Then its a full time job just on the capital raising side. Then there's investor relations/reporting, marketing, reporting, accounting, distributing funds, complying with SEC regs, etc. That's why syndicators make those nice fees and promotes, it's a lot of work. There's nothing wrong with this approach, just make sure you're goals are in line with your investment philosophy. How important is it for you to be free vs. having all sorts of people to answer to?

Now that's large, legit syndicating. If you're getting a handful of buddies together to do a little larger deal then you could do on your own on a one-off basis, that's technically a syndication but really should be in its own category as far as becoming a syndicator vs investor.

@Jared Carpenter

That's a good place to start. Join charities, volunteer, coach a little league team, etc. But do it for all of the right reasons not to find investors. Just chat with people, don't be weird or come at them like a jehova's witness. Just be a good, likable guy. Inevitably what you do will come up.

Here goes...the voice of "unreasonable"...I just posted this on Facebook today...

"I see on popular on-line forums many people saying not to syndicate a deal until you start slowly and build up a track record...

Worse they are saying not to pay a "guru" thousands of dollars that claims they can help you do that...

Just take it slow and safe...

I do agree there is a lot of wisdom in that approach, don't get me wrong....that is the "safe" path for most people...

But to me that's like saying study hard, get good grades, go to college, live below your means, and accumulate a nest egg and pray that you die before you run out of money...that is also the path that most people choose...

But what if a newbie can actually successfully syndicate a large deal on their first deal, by getting educated, leveraging people with experience (attorneys, investors, mentors, brokers, prop mgmt companies, etc) and learning to do it "right" in spite of all the risks? And have "skin in the game" and not take large upfront fees and large carried interest/waterfalls/etc...and not just close it successfully (which many people can do) but actually meet or exceed their projected returns and feel confident that they can do it???  

Well I know this is possible. 

So you can go slow or you can go faster...

And the good news is, you can choose your own path and your own pace. People with no job/money/credit/team should not be trying to syndicate their 1st deal...but for others it is definitely the right way to go! 

My comment here is - of course listen to everyone who posted here, and then decide what you are going to do and how. 

I have syndicated / owned / controlled over 3,800 doors and know what im talking about. 

@Phil McAlister , I agree with your post if you are trying to do this on your own without any prior experience or knowledge. Most people hear all the success stories out there from experienced syndicators and want follow their path right away.

Chances are you will NOT be able to structure a syndication as your first deal anyway because most people don't have ALL the requirements to get a deal done - TRUE deal, broker relationships, larger multifamily experience, track record, net worth, equity, liquidity, agency loan experience, etc. 

UNLESS you bring something of VALUE - (see above) and you partner with an experienced partner/ sponsor and leverage him where he oversees your steps beginning to end. After all it'll be his deal as well anyway and he'll want to make sure to do his best. 

On the mentor/ guru note. I think this is a way you really can get into a deal if you are lacking on any key area. That's the whole point of these programs - to bring you the remaining necessary key pieces to close a deal. I'm not affiliated with any mentor program but I've known many successful syndicators who started with little experience and got into the game. Again, but you have to bring SOMETHING to the table.