How Do You Vet A Syndicator; What Questions Should You Ask?

[Ellie Perlman]

Vetting the syndicator involves learning about the syndicator’s past experience and credentials, as well as recognizing the gut feeling you will have about them and whether you like and trust them. A good place to start when evaluating a syndicator is to make sure you ask these three critical questions:

1. Can you tell me about one of your investments that failed or did not go as originally planned?

This question is important because the answer the syndicator will give you will be a testament to their honesty and integrity. If they do share a story of a failure with you, it’s a great sign that they are humble and truthful. What would be even better is if they share what they’ve learned from the mistakes and how they have corrected them since.

If they cannot give you an answer, they are either not telling the truth or are inexperienced and have not had many opportunities to partake in a deal that did not go as planned.

What you should look for: Pay close attention to how they respond to the question. Are they defensive or open to discussion? Are they humble about their own faults in the deal, or are they passing the blame to others?

2. What is your investment goal?

By asking this question you will be able to tell if the syndicator’s goals are similar to yours. Ask to see their business plan and decide if it is one you feel comfortable with. Study the hold period and look at if it is reasonable; some investors are comfortable with three years while others may be comfortable with 10 years. Look to see if they are cash flow or appreciation buyers.

What you should look for: Watch and see if they genuinely share their goals with you or simply tell you what you want to hear. Focus on:

• Desirable returns (IRR and CoC).

• Hold period (most commonly five, seven or 10 years).

• The business plan (turnkey or value-add?).

• Location (solid area, high growth or crime areas?).

3. What happens if the deal does not go as planned?

Ask the syndicator, “What if you cannot raise rents by the amount you plan?” In my own deals, I never underwrite with the exact premiums I plan to get. (Premium is the addition I get from renovating units interiors and increasing rents, so if a unit is on the market for $750 a month, and after renovation I charge $900, then the premium is $150.) For example. In my last deal I knew I could get over $250 premium but was underwritten based on $150 premium. The deal still worked with the lower premiums, so it will work with the actual premiums as well.

As a passive investor, make sure that the returns are still good with the lower rents in place by asking the syndicator to see the returns with lower premiums. Another good question you can ask a syndicator is, “What if you need more time to renovate units?” This way, you will be able to see if the syndicator has any experience renovating this market and if s/he has a plan B and what it looks like.

What you should look for: Pay close attention to if the syndicator is conservative in their underwriting, or optimistic (which is not recommended). Also, examine if they are prepared to face unexpected issues and underwrote the deal based on the worst-case scenario.

What additional questions do you feel should be asked when vetting a syndicator?