An Often Missed but VERY IMPORTANT Check before Investing in a Syndicated Offering

Syndications & Passive Real Estate Investing
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An Often Missed but VERY IMPORTANT Check before Investing in a Syndicated Offering

Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes

What experience, ability and capacity does the syndicator have to manage the asset IF THINGS GO SOUTH?

This is very different skill than managing an asset that performs profitably.

1. Has the syndicator successfully handled negative investment situations before? 

2. Is the syndicator able to MITIGATE losses in multiple ways

3. Does the syndicator have pre existing relationships with lenders who are willing to “cut some slack” if things get tough?

4. Does the syndicator have pre existing relationships with capital providers that can invest capital for equity to try to salvage some of the investors capital in a bad situation.

5. Is the syndicator financially strong enough and willing to advance their own capital in a crisis situation rather than waiting to collect the proceeds of a capital call? 

If the answer is no to these questions, you have unlimited downside risk.  If you’re worried at all about downside, invest in self managed, publicly traded, low debt REITs instead.  I say that and I’ve been a syndicator for almost 30 years having completed over 300 syndications.

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3mo

Also, do not just take there word from them,. probe the questions, WHO is the capital provider, How much of their own capital WOULD they be willing to put in the deal. 

This is not like buying something on amazon, you need to ask a lot of questions and really dig deep into the offering to make sure you understand the risk as many times these investments are one of the largest investments someone will make.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3mo

    Also, do not just take there word from them,. probe the questions, WHO is the capital provider, How much of their own capital WOULD they be willing to put in the deal. 

    This is not like buying something on amazon, you need to ask a lot of questions and really dig deep into the offering to make sure you understand the risk as many times these investments are one of the largest investments someone will make.

    7e investments53 Reviews
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  • Stuart UdisPro Member
    Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
    3mo

    At a time when you can take a course from a guru who teaches you how to raise capital and even allows real estate transactions in which the GP student had no involvement to be added to their website, where real estate investors announce to the world in BiggerPockets forums that they are now syndicating real estate transactions while simultaneously asking where to find capital partners, which lenders to use, and how to obtain insurance coverage, due diligence on the GP has never been more important.

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    • Don KonipolBusiness Member
      OP
      Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
      3mo
      Quote from @Stuart Udis:

      At a time when you can take a course from a guru who teaches you how to raise capital and even allows real estate transactions in which the GP student had no involvement to be added to their website, where real estate investors announce to the world in BiggerPockets forums that they are now syndicating real estate transactions while simultaneously asking where to find capital partners, which lenders to use, and how to obtain insurance coverage, due diligence on the GP has never been more important.

      “due diligence on the GP has never been more important.”
      Private Mortgage Financing Partners, LLC
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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    3mo

    I'd argue its not unlimited downside risk.

    Your risk is capped at $0. complete loss is very different from owing money. A $100k investment goes to $0 vs. $100k and then owing someone -$200k.

    2Reply
  • Mark RobertsonPro Member
    Investor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
    2mo

    I agree with the premise, and I’d take it one step further: instead of asking a sponsor whether they can handle a distressed situation, ask them to show you one they actually handled.

    Pick a deal that materially missed underwriting and walk through it from beginning to end. What caused the problem? When did they recognize it? How quickly did LPs hear about it? What concessions did they get from the lender? Was additional capital required? Did the GP contribute? Were investors diluted? What did LPs ultimately recover?

    I’d also want to see the original underwriting next to the actual results. That can tell you whether the problem was truly unforeseeable or whether the original assumptions simply left too little margin for error.

    Most sponsor presentations naturally spend a lot of time on successful exits. I often learn more from one detailed discussion of a bad investment than from ten slides of winning deals.

    You’re not looking for a manager who has never had a problem. You’re trying to determine what kind of manager you’ll be partnered with when the problem eventually arrives.

    1Reply
  • Jamie Parker
    Real Estate Investor · Memphis, TN · Member since 2016 · 417 posts · 140 votes
    2mo
    Quote from @Don Konipol:

    What experience, ability and capacity does the syndicator have to manage the asset IF THINGS GO SOUTH?

    This is very different skill than managing an asset that performs profitably.

    1. Has the syndicator successfully handled negative investment situations before? 

    2. Is the syndicator able to MITIGATE losses in multiple ways

    3. Does the syndicator have pre existing relationships with lenders who are willing to “cut some slack” if things get tough?

    4. Does the syndicator have pre existing relationships with capital providers that can invest capital for equity to try to salvage some of the investors capital in a bad situation.

    5. Is the syndicator financially strong enough and willing to advance their own capital in a crisis situation rather than waiting to collect the proceeds of a capital call? 

    If the answer is no to these questions, you have unlimited downside risk.  If you’re worried at all about downside, invest in self managed, publicly traded, low debt REITs instead.  I say that and I’ve been a syndicator for almost 30 years having completed over 300 syndications.

    @Don Konipol I am new to the syndication space. However In my market I have 1 investor with experience that is looking for deals. How do I gain experience to be an operator that gains the right experience vs just collecting doors/fees.  

    I am a working on my first fix and flip project with investors. its the first time Ive raised funds. I thought start there then JV a couple multifamily deals then Syndicate as deals grow.

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