Before you invest in any private venture, it’s important to do your due diligence on the deal sponsor(s). Here are five tips to help you vet your potential investment partners:
1. Check their track record.
How many deals have they completed? What was the outcome of those investments? A good deal sponsor will have a solid track record of successful investments and at least one of the partners will have gone full cycle on similar projects in the past. It is often a lender requirement that at least one team member has a significant level of experience in running similar projects.
2. Ask for references.
Talk to other investors who have worked with the deal sponsor. Get first-hand insights into what it’s like to partner with them. Google them on social media to glean whether they align with your goals and value system. Look for past litigation and/or bankruptcies; (PACER is a good source).
3. Review their business plans.
A competent deal sponsor should have a well-crafted business plan for the venture. This will give you an idea of their vision for the project and how they intend to make it successful. Make sure the projections are based on historical trends and not overly aggressive adn speculative numbers pulled out of a hat. Make sure renovation estimates are based on actual bids from third-party contractors unless they have their own construction company.
4. Evaluate their team.
A good deal sponsor will have a strong team in place to execute their vision. Make sure you’re comfortable with the team members and their abilities. (More details on that below).
5. Ask questions.
Don’t be afraid to ask the deal sponsor challenging questions about their plans and vision. This will help you gauge their competence and commitment to making the venture a success. See how they communicate to glean what communications may be like later.
While no level of research is perfect, by following these tips, you can help ensure that you’re investing with a competent deal sponsor. With due diligence, you can avoid costly mistakes and increase your chances of achieving success with your investment.
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Bonus:
The 6 Roles Necessary for a Successful Deal Sponsorship Team:
- The Deal Finder – The person who finds the deal. Typically strong in human relations and leadership.
- The Asset Manager – The person who manages renovation plans and contractors. Typically a strong construction background.
- The Experience – The person whose been around real estate awhile. Typically has been a general partner in several successful deals that have gone full cycle.
- The Baller – The person with the biggest balance sheet to help guarantee the loan. Typically the most financially successful member of the team.
- The Underwriter – The person who crunches the numbers and ensures they are sound. Typically very detail oriented and good with Excel.
- The Investor Relations Manager – The person responsible for monthly financial and operational updates to investors. Also a competent underwriter, yet typically excels at human relations and marketing.
When evaluating the team, look at the experience of each team member and ask who is responsible for what. Sometimes, more than one person may be dedicated to a role, and other times, one person can fulfill multiple roles. If you’re interested in learning more about this topic, click here and here.
If you are interested in future investment opportunities, click here.
By Kelsie Mans-Ray
KMR Multifamily Acquisitions / Syndicator
NOTE: This information is of a general, educational nature and may not be construed as tax, financial, or legal advice pertaining to a specific offering, exemption or situation.
