Syndicaters can't get enough investors

[Paul B.]

Background: I have been looking into multi-family passive investing. I attended a multi-family seminar in early November, hosted by a guru (he hates the term but I'll call him that here for simplicity) who knows my local market very well. I was convinced that it's the right path for me as a passive investor, but was discouraged by the high cost to join the program, which is exacerbated by the fact that I currently don't quite have enough liquid capital to participate in most deals. I networked with several deal sponsors at the event, in the hopes that I would be able to work with them in the future.

Two months later, two situations have raised my eyebrows:

1. One of the sponsors I met, who has a good track record, was working on a new deal that was mentioned at the seminar. I requested the information, knowing that I would not participate, but wanted to get practice examining the PPM and other documents. After our initial contact and email exchange, he has since followed up with me twice, asking if I am interested. The second time was after the date that he initially expected to have all his passive investors committed, and he still has room for 15-20% of the funds he needs.

2. The "guru" who ran the seminar emailed me recently about a deal one of his contacts (whom I have not met before) is sponsoring, in which he (the "guru") is investing his own money. I assume it was sent to everyone who attended. I also requested the information, for the same reason as the previous example. After reading through it, the dates on the documents indicated that I was not part of the initial distribution, which leads me to believe that they didn't get enough interest the first time and now were casting a wider net to reach more potential investors.

My question is, are these the signs of a weak deal?

I've been under the impression that there is more investor money out there than good deals, which would mean that anyone who has a good opportunity should have no problem finding passive investors. I don't have the expertise to do my own due diligence, which is fine because I am not ready to participate right now anyway, so all I can do is look at the projected performance, and the numbers looked good. Can I assume that more savvy investors have found flaws with the projections, and are passing? Or do all syndications take several weeks (or months) to generate enough interest to raise the money they need?

Obviously I am not asking anyone to evaluate the deals themselves. I am just asking if it's a red flag that an experienced deal sponsor with a wide network can't immediately find 30-50 people to put up 50-100K a pop?

[Eleena de Lisser]

Originally posted by @Paul B.:

My question is, are these the signs of a weak deal?

I've been under the impression that there is more investor money out there than good deals, which would mean that anyone who has a good opportunity should have no problem finding passive investors. Can I assume that more savvy investors have found flaws with the projections, and are passing? Or do all syndications take several weeks (or months) to generate enough interest to raise the money they need?

 I am just asking if it's a red flag that an experienced deal sponsor with a wide network can't immediately find 30-50 people to put up 50-100K a pop?

Paul, skepticism is good when it comes to real estate investing. However, allow me to play devil's advocate here. First things first....you assume that because someone is experienced that they have a "wide network" of potential investors. That may or may not be true. Someone could have a large network of potential investors, in theory, but the reality could be that only a small percentage of that network is both financially able and ready to invest. Don't assume that just because someone is experienced that they have a deep network of investors with funds ready to invest. You'd be surprised at how shallow the pool might be.

I invest in Texas and know several multifamily investors in the DFW market. Based on the situation you described, I think I know exactly who you're talking about. If it's the same guru, I know that he and his coaching clients have done over 21 multifamily transactions in 2015 alone. You heard about these deals in November. It is quite possible, with it being the end of the year, that these deal sponsors have already tapped out the natural resources within their current network, and need to find/develop a new pipeline of investors because their existing network is already committed to other projects and either can't or won't invest any more. 

So, does that mean the deals you saw are flawed or deficient in some way? Maybe, maybe not. You need more information to know for sure. 

Is it an automatic red flag that an experienced deal sponsor is taking longer than a week to raise millions of dollars? Maybe, maybe not. Depends on size of deal, returns of the deal, location of the deal, timing/business plan/exit strategy of the deal, and which investors are getting wind of the deal. 

Look at it from another angle - if this deal sponsor had raised the funds "immediately," would it be safe to assume that the deal was great just based solely on the speed on which the funds were raised? I don't think so.

Like I said, skepticism is good and warranted, but you also need more information to arrive at a conclusion. Continue to do your due diligence and keep asking the hard questions on everything that comes your way, but also examine your own assumptions. Good luck!