Five Questions You Can Ask To Ensure A Syndication isn’t a Ponzi Scheme

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“Is this opportunity a Ponzi scheme? I have never heard of these investment types before. So, why now?” These are fair questions. We’ve created five clarifying questions you can ask deal sponsors to see if they are a legit company and not simply push marketing materials in front of your face. 

“Can you show me the property title the Real Estate Syndication is acquiring?” 

The foundation of any real estate syndication should be that of the actual property. Each property should have a public record title filed with the State it’s located in. In addition, it should have the current owner and contact details. Use this information and match it up to the current marketing material proposed by the sponsor. If it doesn’t exist, ask the sponsor who the current owner is. 

If you want to bust the chops of the deal sponsor, you can ask if they ran a Prior Claim to the title. This exercise helps uncover a few common issues. 

  • The previous owner failed to pay taxes
  • Contractors were not fully paid out
  • Errors in deeds
  • Forgery
  • Any undisclosed owners

Run a quick search of the operating agreement to see if anything is mentioned regarding this test. 

“Did the deal sponsor pass a background check?” 

Few people like doing business with shady characters. Luckily, technology has enabled us to run background checks on individuals in an efficient manner. Request these background checks from the person who is advertising the deal. They should have it readily available.   

Hot tip: Review the sponsor’s online presence with their website and online profiles such as LinkedIn. The more professional it appears, the less risk there is. If they uphold a more prominent brand, they are more likely to uphold it by doing the right things. However, I’m not saying people without a web presence are not legit. It simply helps build rapport and be transparent with all stakeholders involved. 

“Can you provide third-party reviews to illustrate deal sponsor does good business?” 

Syndication investments usually last anywhere from three to ten years. That is a long time to do business with someone you don’t like or trust. However, we can expedite this “getting to know you” phase by obtaining third-party reviews from various sources seen below.  

  1. Current and prior investors
  2. Employees
  3. Third-party management 
  4. Contractors
  5. Renters 

“Can you provide previously filed SEC exemption documents of a prior deal?” 

The General Partners and syndicators must file the correct documentation for that deal. If they’ve filed properly in the past, finding the documents should be a straightforward exercise. You should see the deal’s company name (or subsidiary), owners/managers, and limited partners (passive investors) in the papers. If you don’t, ask why the company name differs from the company name shown in the marketing material. There could be a legitimate reason, but it’s essential to ask and not make assumptions. 

“Can you provide an example of the communication cadence when the business plan didn’t go as planned? 

Investors can expect consistent communication, including asset updates, and during onsite visits from the sponsors. A solid sponsor should have these email communications organized and housed inside their online investor portal. Providing prior deal communication records should be a straightforward process if organized sufficiently. 

A typical email communication cadence is quarterly if the asset is performing well and there are no over-arching issues. However, when the business plan or market enters choppy waters, the communication frequency should increase to monthly, if not weekly. Although prior results aren’t indicative of future actions, you can use this as a decent baseline for how the deal sponsor communicates. 

Transparency is a Requirement 

The lack of transparency of wall street investment vehicles influenced us to Farmers Capital Group. We’re an open book and only work with deal sponsors and operators who share the same values.