Situation: You’re looking over some written materials on a potential investment, but it’s across the country and you have no time to go see it. On paper, it seems like a deal too good to be true. It might actually be that good a deal, however, you’ll never know until you see it. Let me share a story….
I’m in the syndicated real estate business. What I do is help investors purchase large scale, institutional grade properties that they could not afford on their own. We do it by pooling their funds with other like-minded investors. As a group, these investors will generally purchase properties valued at $50M-$100M+.
In my business, advisors like me rely on due diligence materials provided by each firm (Sponsors) originating a specific offering for investment. These materials are truly comprehensive and distill information gleaned from the Sponsor’s 60-90 day due diligence on a given offering. The due diligence document is called a Private Placement Memorandum (PPM), and its contents are heavily regulated by the Securities and Exchange Commission (SEC) to help protect investors.
There are disclosures on the property itself, its competition, the market, the financial projections, the written agreements, loan specifics, Sponsor background, track record and more. A PPM for one offering is typically an inch or more thick.
Many advisors in my business rely solely on the PPM to determine whether or not to approve an offering for presentation to prospective investors. It is equivalent to reading a good-sized book to determine whether or not you’d like to buy a given home to live in.
Advisors in my business by and large do not take the time and make the effort to get out of their offices to go visit these properties personally. I believe that’s a mistake on their part.
So here’s the story….
A prominent firm in the syndicated real estate space had a new multifamily offering in Austin, TX that interested me. Everything in the PPM looked pretty good, and Austin was a very hot market at the time, so I started to gauge my investors’ potential interest in the offering. It ends up that I had 6 clients representing about $4M equity together potentially for this Austin multifamily property.
So, I got on a plane and went to see it. I see the properties in which my clients invest. It was a long one day trip down and back from San Francisco. I was in my rental car letting my GPS tell me where to turn next. I was very close to the subject property, but the neighborhood seemed all wrong. There were garden apartments and many people on the streets, some with shopping carts and others drinking from brown bags. I took two turns and there I was at the subject property. It was immediately adjacent to a low-income housing project.
As I drove up, I saw there was construction of a new apartment building about halfway completed across the street from the subject property.
When I entered the subject property lobby, no one greeted me for 5 minutes. Thank God I wasn’t a prospective tenant, as this level of service wouldn’t entice me to rent there. Even though I had an appointment, no one knew who I was, and the Property Manager was not available to take me on a tour of the project and answer my questions. The Assistant Property Manager helped me with a tour.
We went through the property, which had a very industrial feel with cement walls and fire doors. It was construction meant to appeal to the Millennial Generation, so that made sense. Other than finding the property a bit dirty, I had no complaints about the condition of the model unit, the common areas or the grounds.
So I asked the Assistant Property Manager about the low income housing next door. She replied that this was a “gentrifying neighborhood”. I asked about the new construction across the street, and she mentioned that it was the second of five multifamily properties to be built altogether in this specific area by the same developer as the subject property.
In other words, the property I was considering investing $4M of my clients’ money into was in a gentrifying neighborhood (which is a gamble – maybe it won’t “gentrify”), across the street from low income housing, and was the first of five-brand new, modern multifamily properties being built on the same acreage.
Now, my job is not to gamble with my clients’ equity. Was this the safest investment I could find for $4M of my clients’ hard-earned money? Absolutely not.
Had I not gone to inspect the property personally, I never would have understood the various factors which added substantial risk to the investment. With my clients’ grateful approval, I placed that $4M of equity into other investments that we judged as better.
Incidentally, the subject property was featured on another advisor’s website as a stellar example of the potential investments available for investors to consider. He clearly didn’t personally visit the property to be certain the investment was acceptable.
So, the lesson – see the properties you purchase. Nothing is better than boots on the ground evaluating a property for investment.
By Leslie Pappas, Founder and CEO