Vetting Syndications (Part 1 of 3)
The Deal Sponsor

September 24, 2022

In this series of articles, I’ll be breaking down passive investing in apartments into three components:

  1. The deal sponsor
  2. The deal (business plan)
  3. The deal structure

There are a lot of moving pieces to these deals, so educating yourself is critical to ensure you aren’t throwing away your hard-earned money. Deals can be structured where the deal sponsor gets paid every month, yet the passive investors never see a dime. I’m here to make sure you don’t get into one of those deals.

If you aren’t already familiar with real estate investing, then this article may have some new terms for you. Don’t worry, there will be subsequent posts that break everything down and provide you with the basics, but I want to begin with the end in mind. One of the reasons for my sharing the information in this manner

is to help you understand that you will need to dedicate some time to learn the ropes before investing in a hunch.In this first article, I’m going to focus on the details of the deal sponsor. I’ve said it before, and I’m going to say it again when you invest passively in a syndication, you are investing in the deal sponsor’s ability to execute the business plan and make money for you.

The Deal Sponsor

For those of you who haven’t started investing in multifamily, you probably have no clue how to find a deal sponsor, and once you do find a deal sponsor you’ll be challenged with knowing how to vet them. When I first got into multifamily investing, I jumped into an investment pretty quick with some sponsors that I didn’t know very well. Everything check out based on what I had learned from a deal and deal structure perspective but I honestly did very little checking on the deal sponsors. I wired the money for the investment and a week or so later I was speaking with someone who did know the sponsors and they told me that I probably wouldn’t be happy. They were right. Had I just spent a little time screening the sponsors I probably would not have invested with that group. The good news is that I’ve learned a lot about what not to do and what doesn’t make a deal work.

If you are new to passive investing in apartments or not sure where to get started then your first problem is finding deal sponsors. You’ve got a few options:

  1. You can just start showing up to some multifamily events and you’ll be surrounded by deal sponsors. Hand out some business cards, wait for the deals to hit your inbox then start handing over your money.
  2. Look for apartment syndication groups online: BiggerPockets, FaceBook, LinkedIn, etc, share your contact information and wait for deals to hit your inbox then start handing over your money.
  3. My suggestion is to go with options one and two BUT start building a relationship with the deal sponsors and don’t invest with someone you just met until you’ve properly vetted them. Based on what I’ve learned the quality of the deal sponsor can make or break the investment. Always be focused on getting to know the deal sponsors.

We live in a time where we are hyper-connected to the world and whether we realize it or not we are constantly bombarded with information. If you go to a multifamily event and you meet 50 active deal sponsors, you should plan on getting emails from most of them with information on their latest deals. You will quickly go from feeling like you are in a room all alone to being overwhelmed with deals. You will then have a different problem, picking the right deal.

So how do you find the right deal??

As I stated above you can break down a syndication deal into 3 parts: the sponsor, the business plan, and the deal structure. Focus on the deal sponsor first.  Once you find a sponsor and start seeing their deals you’ll start to see how they operate. When it comes to vetting these deals you need to take an active role even though you are a passive investor.  Basically, you are loaning your money to the syndication. I like to think of it like this, if you rent a house or apartment, buy a car, buy a house, take out a loan, etc, someone is going to screen you for things like:

  • Credit history
  • Criminal background
  • Employment history
  • Income statement
  • Delinquencies on past properties you’ve lived

Do you see where I’m going with this? You are loaning the syndication group money. You are about to invest a sizable amount of money into an investment where your money will be locked up for several years. Do you have any idea if this person can actually execute their claims? I’m not saying that you need to do a criminal background check before each investment but know that there are people out there don’t have a good track record and they will try to hide it from you. Don’t be afraid to ask the deal sponsors for things like their credit score (don’t expect a full credit report) and their track record in purchasing and selling apartments. You do need to take into consideration that apartment syndications require large amounts of capital which means a large number of investors which means the deal sponsors are potentially fielding a lot of questions. When you do ask questions or set up a phone call, be prepared, and better yet send them the questions ahead of time. You can probably get answers to most of your questions via email and a brief phone call.

Questions to consider before investing

How well do you know your sponsor? – The deal sponsor should be providing you their resume and a bio that shows their qualifications. I recommend this is someone you have met and talked to on more than one occasion. If you meet someone that you think you might want to invest with find out what events they attend and start attending those events as well. They may be at a local meetup, or real estate conference or maybe they are even hosting their own meetup. Also, note that generally there will be multiple partners that create a sponsorship team. It is not uncommon to see a person on the team that has much less experience than the rest of the team. These are likely people that are just getting started in apartment syndications. Don’t let that stop you from investing however you do want to make sure that there are people with a strong track record on the team.

Employment & Business History – Realize that anyone can put anything on a resume. I know a lady that has worked for NASA, the CIA, and the FBI. At least that’s her story and she’ll tell you that and it’s almost believable until you start asking questions and start adding the pieces together and realize it’s not true. She’s a very nice lady and a hard worker but I would not trust her with my life to put me on the moon or protect me from the drug cartels. The fact of the matter is she is not who she says she is.

Do a little digging and verify their background. Here’s a list of questions to help you get started:

  • What deals have they been in?
  • What was their role in the previous deals?
  • Ask for references or seek out people that have invested with them before. Once you get into a network of apartment investors you will find that it’s a relatively small world. Chances are you will be two to three degrees of separation from any of the deal sponsors.
  • What is their background? What were they doing, or currently doing, before they got into syndicating apartment deals?
  • Credit summary and investor questionnaire similar to what passives have to fill out
  • Do they currently own properties or businesses?
    • Can you get access to the property P&Ls?
    • Can you visit the properties?
  • Who is on their team?
    • Who is providing their legal advice?
    • Who is securing the loan?
    • Who is the management company?
    • Who is overseeing the rehab?
    • Google search for the sponsor and see what you can find out

If you don’t trust them, DON’T invest with them!

OK, now you’ve got answers to all of these questions and you’ve decided that the deal sponsor is legit. You hand over your hard-earned money then sit back and wait for the money to start flowing in right? Well, that’s one approach but maybe not for several months. Once the deal closes and you’re part of that deal, the sponsor has an obligation to keep you informed of the progress. After closing your job of vetting the deal doesn’t stop once the property is purchased. It’s much less involved but here are a few items that you should be prepared to keep on your radar once the deal closes:

  • Read the monthly reports. These will likely be in the form of a monthly summary along with financial statements.
    • At a minimum read the monthly email and executive summary
    • If you have questions ask them and make sure you get answers. Make sure you have contact information for more than one person on the team in the event you can get a hold of your primary contact.
      • Attend any meetings they have. These could be in the form of a webinar or tour of the property
    • Look out for these red flags
      • No financial reports
      • Not hearing from the sponsor
      • No explanation for items off budget
      • Never any “bad news”. 

Now you’ve got a good understanding of what to look for in the deal and the deal sponsor. Hopefully, you are starting to feel a bit more comfortable with your role as a passive investor and what goes into these deals. Next article we’ll focus on performing due diligence for passive investors by breaking down the specifics of the deal a.k.a the business plan.

To Your Success,

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