When selling or buying a home, you often interview a couple of real estate agents before you decide on the right one. A real estate agent which focuses on rural areas may not be the best fit for someone who is looking for a large neighborhood with a pool. You need to do your due diligence as a buyer or seller to vet the real estate agent. Some ways to make sure the real estate agent is the right fit for you is by looking at their website, selling data, and other key information. Your real estate agent will be your right-hand man (or woman) for at least a couple of months, and it is important they are the right fit for you.
When you decide to start the investment process and pursue a real estate syndication, you want to do your due diligence and research as well. You will want to research locations, the age of the investment property, the type of commercial property and trends related to that industry, and many other details.
Beyond property and market details, you'll need to review the real estate operator carefully. A real estate operator is a person or company who rents, leases, and manages residential and commercial properties. They are involved in the development of properties, connected to brokers and sellers agents, and heavily involved in the appraisal and property management processes throughout your investment hold period.
In this blog post, you'll learn how you can perform extensive due diligence well when vetting a real estate operator (or syndicator) before diving into the first real estate syndication investment opportunity that comes across your desk. Taking the time to gather and implement solid advice upfront will help you feel more confident throughout the investment process and will more likely lead you to the projected returns and the investor experience you were hoping for!
How To Vet a Real Estate Operator
Investors are always very excited to hear about the returns. When looking at different investment opportunities, you want to know what the cash flow will be like and how much money you will make.
But before you get too excited about the projected returns, you must realize that the deal operator is in charge of executing the business plan. It's the proper execution of the plan, properly timed decisions, and the operator's choice in other property management partners that create those returns.
So, before choosing a particular investment, you need to make sure your views and goals align with the operator and that you like the property market they are in. Then you can start talking about returns.
Due Diligence Process: Choosing the Operator
There are six questions investors should ask an operator when looking at different real estate syndications they are interested in. These questions will help you ensure you get all the information you need to have a successful transaction and a great real estate partnership.
Questions To Ask The Operator
1. What is your investment philosophy?
You want your investment’s and your operator's philosophy to be aligned. Aligned philosophies mean you have the same expectations regarding a real estate deal, investments, properties, financial matters, etc. All parties involved should have the same goals, and you want the operator's philosophy to align with what you need in your portfolio.
As an example: an investor may be looking for double-digit returns and doesn't need cash flow and wants to do hotel deals in California. Another investor may be looking for stabilized cash flow, reasonable chance of appreciation, growth markets, and may like the idea of value add projects where we can force appreciation.
2. What does the company invest in?
This is when you ask about property information. If you are looking to invest in multi-family, but that operator does self-storage, you will not be a good fit. You also want to look at what the operator actually invests in. Do they invest in direct assets (single asset entity / syndications) or funds with multiple properties within it?
There are many different investment opportunities, and you want to ensure you understand what that real estate business group invests in and how they invest. Check to see if the operator offers multiple vehicles for investment. You may be able to meet various investing goals under one roof.
3. Is the OPERATOR competent?
Do they know what they are doing? Do they have a track record of successful real estate syndications / funds? Have they done deals before, and if so, have they been through the full cycle and exit? Have they ever exited a deal early, and if so, how were investors treated throughout the process?
When completing your due diligence investigation, you need to look at the real estate syndications the operator has been a part of and see how many have gone full cycle. You want to be with operators who have experience and have learned from multiple deals—looking at the return profile as well.
4. Does the company work with sophisticated and/or accredited investors?
If you are in the middle of the due diligence process and are looking at the company website, see if they work with 506c deals. 506c deals mean they only work with accredited investors.
To become an accredited investor, you must make $250,000 annually for the last two years or $300,000 jointly with your partner or have one million dollars in assets outside your primary residence.
If the operator does 506b deals, they can take up to 35 sophisticated investors per deal. When this happens, spots for sophisticated investors (non Accredited) may fill up very quickly.
Once you have found a deal, you've vetted the operator by conversing with them, looking at their markets, and getting a good idea of how the deal will work; then you can move on to number five.
5. Get references or talk to other investors who have invested in previous deals with the operator.
When you decide to invest, you are taking a risk; therefore, you do not want to take a risk with an operator who has thousands of poor reviews. You can easily make sure your operator is in good standing, and it's in your best interest to look at multiple sources.
You can look at their review page, google reviews their BBB reviews. There are also real estate forums where investors can carefully review and share information and resources.
Veryvest.com is a third-party site that verifies operators where you can view their transaction track record. This will help you get an outside view of how the operator has done in the past and currently.
6. Listen. How does the company respond to you?
Is the company happy to hear from you, and how do they respond to questions? When doing your due diligence, you must listen to your gut and feelings. How do you feel when you speak with them via phone or email? What type of vibe do you get from their social media? You will have a business relationship with them for a minimum of 5-7 years, and this relationship is an important part of real estate syndications.
You can probably find many of the answers to these questions on the operator's website. If you can't find answers to your questions there, call. It is important to be thorough. Investments are risks, and you want the best team to handle your investments.