In a previous post we talked about the benefits of being a commercial real estate syndicator.
Many of you asked how to tell whether or not a syndicator is reliable and trustworthy, especially since the 1980s saw a plethora of fly by night syndications end up crashing by the wayside.
The answer is one you might not be happy to hear, since it involves a basic tenant in real estate: do your due diligence! Perhaps doing your due diligence brings up unhappy memories of doing endless, boring homework, but in reality, due diligence – however tedious it may get – is the most effective way to vet real estate syndicator.
Standard due diligence rules apply, but if you’re looking for a few extra questions to give you that extra edge, the questions below will help you weed out any suspicious characters.
LIST OF TIPS FOR VETTING REAL ESTATE SYNDICATOR OR SPONSOR
First of all, try and meet the syndicator in person. Meeting someone face to face, even in this age of texting and social media, is still important. In addition to being able to put a name to the face, asking your questions in person allows you to gain of wealth of insight about the person. Seeing how the person carries themselves, noting whether they are organized, as well as noting how they respond to you, is invaluable.
- How long have you been in real estate investment?
- What locations do you invest in? Which asset clauses?
- Do you put any money into the deal other than your broker commission? Did you ever have a deal go bad? How did you handle it?
- Do you personally guarantee investments?
- Are you sponsoring any other investments? If so, how many?
- Can you give me the name and contact information of you CPA and your lawyer?
- Do you mind if I speak to them about you?
- How do you structure your deals?
- How is this investment structured: as an LLC owned investment, or a blind pool?
- Do you retain business liability or E & O insurance?
- Can you provide me with a list of references?
- Check online for complaints about the syndicator. Use social media, YELP, or type in the person’s name with a plus sign, and add as the second keyword “scam,” or a similar word. You can also check on real estate forums to see if anyone has heard of them.
- Perform a background check. Accessing public records can inform you of events such as civil lawsuits, bankruptcies, criminal records, liens, judgments, or other negative factors.
- Ask for details about a past deal they’ve handled. Make sure they explain the structure, the fees, and if their projections for that project were accurate.
- Make sure the legal paperwork is complete and accurate. Check that all documents are there, and that they look professional, and were prepared by a reputable lawyer – and not online.
These questions can go a long way to giving you substantial information about a syndicator’s trustworthiness. Remember, though, to trust your gut instinct: if everything looks pretty much okay, but your instincts keep insisting that something is off, don’t be afraid to pass.