March 1, 2022
If you are a passive investor, it means that you invest money in a real estate deal, but you are not involved in the management or operation of the property. Instead, you delegate the entire management to the deal sponsor.Selecting the right sponsor is crucial because the deal’s success depends on the sponsor’s experience, network, portfolio, knowledge, and skills.
You’ll want to do your homework before investing in any syndication. After all, they have to be able to answer any question you might have about their past performance. In this post, we will share a few quick tips on evaluating a multifamily deal sponsor if you are a passive investor.
If you ever hired someone, you know that before this person can start working, you should conduct a thorough background check, including references from previous employers, criminal records, job history, etc. When selecting a deal sponsor, you are hiring someone to manage quite a substantial amount of your money ($50K+), so it goes without saying that you better make sure that you know this person really well.
In the modern world, the first thing you can do when doing a background check on anyone is type in their name into the Google search bar and check the results. The same goes for social media, like Facebook or LinkedIn. So before getting the resume and bio, check the sponsor’s social media, LinkedIn profile and references, press mentions, and any other significant signs that can give you an idea about their background and experience.
Syndicator bio and resume are the first things you should get from your deal sponsor as a passive investor. Some things you should look for in these documents are employment & business history. This information should be verifiable and specific. You should be able to ensure that what’s written in the sponsor’s resume is a true story.
Employment history is also important when evaluating the skills of the sponsor and if he is qualified to manage your investment. For example, it would be beneficial if they had accounting skills because it means that they have financial literacy. People management experience is a great plus. Suppose they had direct reports. In this case, they hired and fired people, and they know how to make tough decisions.
If they run their own business, they might have employees too. Ask them how their business is doing, how big their team is, how long they’ve been running it, and what’s their annual growth. You should be able to check their business track record and whether the business is profitable easily. Most business owners won’t have a problem sharing with you their P&Ls, however, if it’s not available, they still should give you some insight into the financial performance of the business.
Not all sponsors have a deal history because some might have just started syndicating deals but have experience in other areas. However, if the sponsor has a deal history, you should review it in detail. Ask the sponsor to share the financial information about the deal, review the P&Ls. If they say it’s confidential, you might want to go for another sponsor.
A reputed syndicator should be able to share the deal performance with you, let you visit their properties, and allow you to study the books. If they own any properties as investments (not necessarily multifamily), visit them too.
Like with any critical choice in life, getting references is one of the essential steps when choosing a syndicator. References are like reviews that you read when you buy a $5 product on Amazon.
Now, you want to entrust at least $50K of your hard-earned money to someone, so you better take the reference check seriously. At Cash Flow Portal, we are going to save you time and make this process much easier once we add the syndicator reviews section to the syndicator bio page.
If the sponsor had previous deals, you need to ask for references from LPs who had previously invested with them. The best question to ask is if they would invest with this person again. Ask about timely communication, trust, transparency, integrity, honesty, and whether they hit the projected returns.
If they own a business, you can get references from their business partners or clients.
Try to get 4-5 references from the sponsor. Because it’s easy to find one or two people to speak highly of them, however, it gets more complicated after three references.
A team is essential for any syndicator to succeed. If you need more information on who should be there, check our article on building a multifamily syndication team. Especially check who is providing their financing or the loan broker, who is on their legal team, and if they have experience with PPMs, the track record of the property management company, etc.
Asking for a credit summary is not the same thing as running a hard credit check. So make it clear to the sponsor that you are only looking for credit reports available for free.
You don’t need to see every single line of credit, but you should be able to check things like credit scores at least. Most people receive them quarterly or monthly in their email. If the sponsor is hiding their credit summary, it’s a big red flag.
Does the sponsor have a mentor? Who is it? How much are they involved in the deal? As for the mentor’s email address to verify if they are really involved. Syndicators who already have a long and excellent track record and have done multiple deals usually won’t have mentors. However, most new syndicators who are working on their first few deals have one.
Why is it important?
Mentors have invaluable experience and time in the market. If a sponsor started syndicating deals ten years ago, say in 2010, they never experienced down market (unless they were in the Bay area in 2011). Therefore, a mentor can help and guide the sponsor to mitigate crises and continue making money even if the market is down.
Here is a quick recap of what we’ve covered in this post:
Multifamily syndications are a relationship business, and it is based on trust and transparency. Consequently, if you see that a sponsor is hiding something or is hesitant to provide you with some essential information – it’s better to avoid this deal. Remember, always listen to your gut feeling, and even if everything is in order and the sponsor provided you with all the information, but you don’t feel that you can trust them – move on.