Top 5 Strategies To Implement Before Investing In A Syndication

One of the most common questions for investors looking into investing in a syndication is, “How do I know if I can trust the sponsor?” Investors will often only look at the investments projected returns, but the most important component of any venture is inarguably the sponsor(s) who are leading the deal.

The longer we’ve been investing in real estate, the more we realized there are a lot of risks involved and the business has its share of bad actors. These risks are substantially different from other investment strategies such as stocks, bonds, and mutual funds where they are audited and regulated by governmental agencies and the parties are required to be professionally licensed.

While there are significant risks, there are also many benefits to investing in a syndication. But if you are going to be investing in this space, you need to do proper due diligence before handing over your retirement savings or hard-earned income to someone you have never met. You want to make sure you team up with legitimate and experienced sponsors that practice what they preach.

Therefore, we wanted to provide the Top 5 strategies you should implement before investing with a sponsor. This list is not all-inclusive and still cannot avoid a potential fraudulent act or the potential to lose money on the investment, but it will reduce risks of investing with someone who is inexperienced and/or has been fraudulent in the past.

1. KNOW WHO YOU ARE DEALING WITH

Before investing significant time on the phone with the Sponsor, first perform your initial due diligence. This consists of performing a quick Google, LinkedIn and social media search to better understand the Sponsor. You are looking for honest, high integrity folks with stellar character. Sponsors should manage their reputation zealously – online or offline.

For the cost of approximately $1 through a skip trace company, you can run a background check to look out for bankruptcies, felonies and criminal activities.

1. UNDERSTAND THE SPONSORS EXPERIENCE

Now that you have scoured their profile and they made it past step 1 of the evaluation process, you will want to schedule a “due diligence” call with the sponsor. It’s best to meet face to face or via video conferencing so you can (virtually) meet the Sponsor. Why is this important? If you are going to be investing thousands of dollars into a deal, it is important to know that your investment is in good hands.

During this time, it is your opportunity to determine if the investor is professional and have them tell you about their experience. Take notes and go above and beyond the standard questions of “how many deals have you done?”. We like to compare investing in mortgage notes to driving a car (as we are currently teaching our daughter to drive). When you are the passenger, do you feel safer with someone who has experience and knows the road or someone just starting out?

If you need assistance on the questions to ask, we have included a FAQs at the end of this document.

1. UNDERSTAND THEIR INVESTMENT STRATEGY

The Sponsor has the experience that meets your criteria, but do they have the same investment strategy you envision? An investors strategy will be key to highlighting the level of risk that will be involved. Does the sponsor target low-income areas where the deals are either home runs or strikeouts or does the sponsor target singles and doubles. With mortgage note investing, which is our specialty, a Sponsor may be focused on foreclosing on properties versus attempting borrower workouts. You will want to discuss with the investor what their strategy is and have them walk you through the road map they envision occurring during this process. During this conversation we recommend asking “what-if” questions to make sure they are prepared for unexpected occurrences and how they may be handled.

Make sure you also understand the Fee structure. Each sponsor will have a different fee structure which will be outlined in the agreement. It is important to also know if the investor has “skin in the game”, meaning is the Sponsor investing any of their own money and/or have any potential monetary risk. While we do not automatically disqualify an investor if they do not have skin in the game, it is more comforting to know that they are putting their own capital into the deal.

1. UNDERSTAND THEIR REPORTING PROCESSES

In our experience, many investors forgo this step and this is the MOST IMPORTANT! Given our experience in this industry, we know the importance of quality ongoing communication and reporting. Therefore, we recommend every investor request sample of the reporting package they provide to investors. You will want to understand how often this package is provided. You will want to ask how often the sponsor communicates with you. What decisions are you involved in and how often the Sponsor disburses interest /dividends/profits.

Remember, a good sponsor should communicate well. That means responding to phone calls and emails in a timely fashion. I’ve encountered individuals that do not respond to our inquiries and to us, that is a red flag. If this is what we can expect during their capital raising stage, I can only imagine the quality of communications once they have our hard-earned money.

PLEASE NOTE: If the Sponsor cannot provide a professional document which includes a summary of the investment, status on the investment and a balance sheet on the asset(s), this should be an immediate rejection on investing with this sponsor.

1. REFERRALS, REFERRALS, REFERRALS

I cannot stress referrals enough to investors. But what if the person has been using their own funds and does not have a significant list referrals? As a note investor, our main function is managing our partners. This includes servicers, attorneys, preservation companies, realtors, and title companies. If they do not have the required number of referrals from investors, ask them who their vendors are and discuss with them. Also, note investing is a small industry and we would recommend reaching out to other note investors to learn more about the sponsor. One last tip I will provide, use sites like bigger pockets and see if the Sponsor is on the site. See if they are typically asking questions or providing responses. This will give you an idea for their level of experience.

When you do speak with a referral, be prepared. Have your questions written in advance. When you have their time, use it to ask specific and measurable questions. Referrals should be the last conversation you have based on the information provided. You want to see if what the sponsor practices what they preach.

FINAL THOUGHTS

If you are thinking of investing in a syndication, these are the just some of the due diligence tasks you should go through. If you are not willing to invest the time to do the upfront due diligence, then you should not be investing in a syndication. There is significant risk and too many ways your investment can go sideways or underperform. There are many inexperienced sponsors trying to cash in on the potential forthcoming foreclosure boom and banks and hedge funds liquidating their assets, but they may not have the experience to properly manage your money. Remember, you don’t want them learning on your dime. Experience counts – a lot, especially in this business as it is a business of learning by doing. I like to use the example of golf. You can watch 1,000 hours of videos on how to hit a golf ball or read every book and magazine, but until you step up to the ball and hit it, everything you read is out the window as it is a completely different experience. The same goes for a General Partner.

I will leave you with this, the most important ingredient to a good investment is not the deal itself, but the sponsor. If the Sponsor is seasoned, ethical and experienced – they will obtain the good investments.