If you are just beginning to look at how you can invest in a Real Estate Syndication, it can be somewhat overwhelming and confusing. I thought I would walk you through the steps most syndication sponsorship teams will take their investors through during the equity raising process for a property.
One key takeaway that I would like you to be aware of is that you need to be decisive when a new syndication opportunity is presented to you. The sponsorship team is on the clock to raise the funds needed to close the deal. They need your hard commitment to invest and money wired to the property bank account within one to two weeks from the time the deal is presented to you. Usually you will be presented a deal after Due Diligence is complete, which means the sponsorship team has 30 to 45 days left to close on the property.
Also, the really good deals will fill up fast and most sponsors use a First Come, First Served approach to allow you to participate in a deal. This means that until you have wired your funds to the property bank account, you are not guaranteed a spot in the project. Staying on the fence for more than two weeks will usually make you miss out on great deals because they will fill up within a few days. It is also stressful for the sponsorship team who has put up several hundred thousand dollars of nonrefundable deposits to bring the project to this point and must complete the closing process on a specific date or lose those deposits.
So review a deal when it is presented and if you want to be part of it…ACT!
Here are the most common steps that you will follow with most real estate sponsors:
- You will need to search out sponsors and get on their email list so you can become aware of their deals.
- The sponsor will want to meet with you so that you can share what your investment objectives are and determine if investing in their deals make sense for you. Also, you will get to ask the sponsor questions about their experience and background. This is a key step in the process…you need to believe in your sponsor because they control all the key decisions of running the property. Trust of your sponsorship team is an important part of the investment process. This step is also required for you to participate in a 506b project.
- When a deal is ready to be funded, the sponsor will send out an overview of the deal and invite you to a webinar. You need to register for the webinar, even if you can’t make it, they will send you a recording of it.
- Before the webinar, you will get the full Offering Memorandum that details out the important facts and strategy for the deal. During the webinar you can hear from the sponsorship team about the market, property, strategy and team that will manage it. You will be able to ask questions during this presentation.
- At this point, if you are very interested in the opportunity, you need to immediately express you level of interest through a “soft commitment”. This means that you provide the sponsor an indication that you are serious about investing with them and the level of investment you want to make. There is no final commitment at this point and you can choose to walk away without obligation.
- Once the sponsors have your “soft commitment” you will receive three legal documents to review. They will include an Operating Agreement for the legal entity that will run the business, usually a newly created LLC. The operating agreement tells you how the business will be run and the details of what the sponsor can and cannot do. The second document is a Private Placement Memorandum or PPM. This includes the Offering Memorandum that was covered in the Webinar and all of the risks associated with investing in this type of security. The PPM will cover all of the requirements to create a private security that is required by the Securities and Exchange Commission. The last document is the Subscription Agreement. This is the document that provides the sponsor all of the details about how you are going to hold the investment, personally, in an entity or Self Directed Retirement Account (IRA or 401k) and the amount of your investment. The biggest mistake that many people make is that they don’t take the time to read these legal documents! Make sure you read them because it provides the specifics behind what the sponsor can and cannot do. One area that you want to always look for is how they would handle a capital call if one is required.
- Fill out and Sign the Subscription agreement. Today most sponsors use Docusign or some other electronic signature service to make the process seamless and straight-forward. This is the point where you are now committed to invest in the property.
- Wire your funds to the account that is set up for this property. The sponsor should provide a sheet with wiring instructions that you can provide to your bank. A wire is the best way to send in your funds, since it is secure and can be tracked by your bank…it costs about $25 to $30.
That’s it, you are now invested in your first Real Estate Syndication. You should expect to hear from the Sponsor when they close and on a regular basis, at least quarterly, about the progress they are making with the execution of their strategy to create value.
Here’s to your Wealth and Happiness!
Dan Engdahl, Co-Founder Multifamily Connections, LLC