BET ON THE JOCKEY, NOT THE HORSE: Five Traits to Look for in an Operator & Important Questions to Ask

How do you find the right team to help you reach your investment goals? Here are five things to keep in mind and questions to ask to help determine if your operator is the right fit for you.

Personality
Are they smart and hardworking? Do they have integrity? Take the time to find the right personality fit, and never rush into a deal or partnership.

Track Record
Don’t just look at how previous deals performed. Look at how they performed relative to the original business plan. Did the operator project a 20% IRR but only deliver 17%? That’s not a terrible return, but it’s suspicious when compared with the original objective.

Team
Apartment syndications are a “we” game, not a “me” game. The property management team will be on the property every single day executing the business plan. This makes them one of the most important aspects of a deal. Ensure the deal sponsors have partnered with the right team and that they’re not cutting corners by simply going with the cheapest option.

Education & Resourcefulness
Whether they’re new or more experienced, your operator should have a deep knowledge of the market, deal structures, risk, and financing options, and be resourceful enough to protect your money.

Trustworthiness
To determine that a person is trustworthy, we have to understand their motivations and goals. What are their long-term plans? Why do they get out of bed every morning? Why, of all the paths they could have chosen through life, did they land on this one? Additionally, it’s never a bad idea to run a background check on a prospective sponsor. Due diligence is your responsibility. A couple resources for running background checks are TLO.com and trustify.com.

QUESTIONS TO ASK

Track Record

• How many deals have you closed? How many have you taken full cycle?

• What were the actual returns compared to the projected performance?

• May I look at the marketing materials for your past deals?

• Tell me about a deal that didn’t go to plan. How did you handle it? What caused the issue? What would you do differently?

Experience

• How many assets do you currently have under management?

• How long have you been investing in real estate?

• How did you get started in real estate investing?

• Why this particular niche and business plan?

• How many assets of this type do you have in this particular market?

• Have you ever failed to hit projected returns? If so, why?

Team

• Who are the major players on your team?

• What are their backgrounds? What are their roles? What experience do they have in their roles?

• How did you meet the other members of your team?

• How long have you known them?

• Have you ever had a partnership fail? If so, what happened?

• When I run a background and credit check, what will I find?

• Why are you working with these partners in particular?

Compensation

• Are you investing in the deal? If so, how much? If not, why not?

• What fees (and how much) do you charge?

• Acquisition fee

• Guarantor fee

Asset Management Fee

• Refinance/disposition fee

• Others?

• Why those fees and those percentages in particular?

• If the deal fails to perform, do you still collect your fees?

• In what ways do you create alignment of interest with your passive investors?

Trustworthiness

• What were your three biggest concerns with your last deal? Why those three? What did you do to mitigate them?

• Have you experienced these concerns or issues before? How did you deal with them?

• If everything went sideways, what would you do?

• How do you view losing your investor’s money?

• Have you ever lost your investor’s money or had to do a capital call? If so, what happened?

• What would you do if facing the possibility of losing your investor’s money?

• In what ways do you consider the underwriting on your last deal to be conservative or optimistic? Why do you believe that to be the case?

• Can you show me exactly where you’ve been conservative and where you’ve been optimistic?

• Do you have alternative models you can show me with different levels of sensitivity analysis?

• What are the worst, expected, and best-case outcomes of your last deal?

• Have you ever been sued? If so, why?

Posted by Joe Grunnet on
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