Watch the episode here
Listen to the podcast here
Top 10 Questions To Ask Before Investing With A SponsorWelcome to the show, where we bring you education and information that will help you take your next step in building wealth through real estate. Piggybacking off of our last show, where we talked about five strategies you should use before investing with a sponsor, we talked about the bigger overall strategies. However, we wanted to follow up with our top ten questions you should ask a sponsor before investing. Are you ready, Chris? I am ready. How are you, Lauren? I’m pretty good. Lauren has been working hard communicating with the team. We’ve had a lot of team conversations, which have been productive. It is a wonderful day.
How Long Have You Been In Real Estate Investment?We’ll go through these top ten questions and both answer and talk about why it’s important. Here’s the first question, “How long have you been in real estate investment?” This is one of the questions you ask people to get an understanding of their experience. You’re trying to gauge their level of expertise. For any of these questions, there is no right or wrong answer for the most part. It’s always that caveat. When asking somebody how long they’ve been in real estate, it is important to understand, “Is this their first deal? Have they been doing it for ten years?” It’s the intro question that you want to get people to answer and give guidance to where you want to take that conversation because, for somebody who’s been in real estate for 10, 20, or 25 years, the conversation probably is going to go very differently than somebody that’s been in the business for 12 to 24 months.
Have You Or Any Of Your Companies Or Properties Filed For The Bank?It sets expectations for the conversation. There’s no right or wrong answer, but it helps you assess what your risk tolerance is and steer that conversation. The second question is, “Have you or any of your companies or properties filed for bankruptcy? If so, what happened? What changes have you made?” You’d think there is a right or wrong answer, but if somebody filed for bankruptcy in 2008 during the downturn, that would be a different answer compared to somebody from a few years ago. It would give you a lot of hesitation from somebody who did file bankruptcy during that period of time. It leads to the next question of, “What did they learn from it? How did they change things?” which is what’s based on this question. You mentioned risk. Would you rather have worked with somebody who’s been in real estate for 15 years or in the first 3 or 4 years? I was going to say that. If they filed for bankruptcy in 2008, you’re like, “This isn’t your first rodeo. You’ve done this quite some time. You have some experience. You’ve probably learned a lot since then.” Would you rather have that or somebody who’s been in real estate for two years during an economic point where anybody could have invested in real estate in the last years and made money?
Are There Any Criminal Charges Or Investigations Against The Company Or Its Principles?We should go through these and explain the importance, go back through them quickly, and you can talk about your answer to them. The third question is, “Have there been any criminal charges or investigations against the company or any of its principles? Will the main principals survive a background check?” There is a wrong answer. If somebody had criminal charges against them, especially if it involves any type of financing scheme, or you do a background check, or they have a significant number of judgments against them, that’s a complete red flag to me. They may have answers for those items, but you’re going to hear their side of things. If you’re going for an interview and somebody gives you a resume and references, do you think they’re going to give you a bad resumé or references? This one has a wrong answer. I agree with all the questions we have. This comes from a list of twenty questions that we have on our website. Of all the questions we have, this is probably the one that has a wrong answer for me. The other thing is somebody may say, “We’re good. We’re clean.” You still need to go back and do a background check on those people.
Do You Know How Many Deals The Sponsor Has Gone Through A Full Cycle?The beauty of technology and the internet nowadays is you can probably google these sponsors and find out what their background is and if they have any not-so-awesome past. Question number four, “Do you know approximately how many deals the sponsor has gone through a full cycle?” It goes back to experience. If somebody’s got five deals going on now, but they’re all within what I’ll call the honeymoon phase, where they’re still within the first six months, then they haven’t been through a full cycle. They’ve been through the acquisition phase but haven’t done the management or disposition. It’s very difficult to see how well they’ve performed. It’s important to understand how many cycles they’ve gone through and what that type of cycle was throughout that period of time as well. I would add to that. It’s not just about the deals but also what types of deals. Have they done only joint ventures in the past, and now they’re doing their first fund? Is this the first fund they’ve ever done? Have they only done funds and now doing a mentorship or whatever it might be? It’s important not only to know how many deals they’ve done but what types of deals. One thing I’ll add is that some people will give you a range. When people ask me how many deals I have done, I know the range. I don’t keep track of the exact number because we have a lot of deals coming and going at any given point in time, especially since we invest heavily in nonperforming notes. We may pick up five assets in one week and sell them the next week. We’ve been through many of those. We’ve picked up rental properties consistently. We’ve done development deals. I’ve done development deals in the past. When you get in 25 years, you stop counting how many deals you’ve done and just give a ballpark or an estimate. Don’t be surprised if somebody gives you that type of number. If they say, “I’ve done a lot,” is it a lot like 5, or is it a lot like 50? Make sure you get at least that range.
Describe The Company’s Overall Strategy And PhilosophyI love this next one because I truly believe the philosophy, values, and everything that goes into a company is equally as important as everything else. This one is, “Please describe the company’s overall strategy and philosophy.” Go ahead, Chris. Tell me your thoughts. This is the one that will probably have the most back and forth. You want to have them give a Chris Seveney answer or a long-winded answer because Lauren always says I talk a lot. An example of this is on a multifamily deal, is their philosophy to buy and hold it for a long period of time? Is it to renovate and then turn around and flip it? I work for companies that they call Merchant Builders. They would buy raw land, get it developed, get an apartment building up on the property, get it fully leased, and turn around and sell it within 24 months of getting it fully absorbed. I’ve worked with other developers who would do the same thing, but they’re like, “We’re going to hold this for perpetuity.” The conversation with somebody who's been in real estate for 10, 20, or 25 years is going to go very differently than with somebody that's been in the business for 12 to 24 months. Click To Tweet Those are two completely different strategies and business plans. Neither one is wrong, but it’s also good to know that it will give you a timeline for how long your money’s probably going to be in the deal, even though it should be stipulated. The other is, on notes multifamily, are they just 100% in it for the money? In nonperforming notes, are they, “We foreclosed on every single borrower?” Is their philosophy, “We want to try and get them re-performing and get them on a modification to liquidate the loan later on?” Those are two different strategies. Two are completely different profit and loss templates on those, but it’s something you want to know. You talked about multifamily and touched on notes a little bit. Especially if you’re looking at investing in mortgage notes or some fund with that, there are two different philosophies. One is to purchase assets and go straight to foreclosure. Don’t negotiate at all with the borrower. Don’t look at anything but getting through foreclosure. There are other companies that try to balance, “If we can work with the borrower, let’s work with them. Let’s see what happened. Let’s see the whole picture.” You’re investing in two different types of companies. The other question I play off of that and also is part of our philosophy is, “Where’s your profit derived from?” It could be diversified. In notes, we attempt to buy them at a significant discount where if we get the borrower re-performing, there is profit involved in that aspect of it. If we cannot and have to take the property back and turn it into an REO, then there’s profit based on that. We get different types of strategies. If you’re solely buying it to foreclose and can’t, that can impact your profit because your acquisition costs may have been higher, and you may not be able to make the numbers work. Back to multifamily, if your whole goal is, “I’m going to buy it and jack up rents and raise rents, and that’s where all my profit is from and sell it at a low cap rate,” and then you can’t raise the rents and cap rates have increased, that has a significant impact on your exit strategy because it was all based on an exit that you’re not going to be able to get to. Being able to understand that and having flexibility is key.
What Geographic Markets Does The Company Target?It leads to an exit strategy but also shortens it down, “As an investor, how do you make money and get paid?” That’s what you’re hoping to take away from their answer. The next question is, “What geographic markets do the company target?” This is for your own knowledge. There’s no right or wrong answer, but it’s also good to understand this. Somebody says, “I target San Diego, LA, and San Francisco.” That’s a very different market than somebody says, “We blend and pick another city where it typically has a much lower cost of housing.” Are they diversified in their portfolio whereas they invest in different markets? Are they also in one market? Being in that one market, do you see that as a potential risk?
Have You Ever Lost An Investor’s Principal?There are investors who like investing in certain areas. It’s like, “You’re in California? Great. I know California. I’ll put my money there,” whereas other people would be like, “Absolutely not. I’m out of California.” It’s like we talked about in the beginning. There’s no wrong answer. All of these answers are meant to give you the information so you can make the decision you think is best for your strategy, expectations, and the risk you’re willing to take on. The next question is, “Have you ever lost an investor’s principal?” This is one where people would think, “There’s only one answer to this.” There isn’t because it would significantly impact somebody’s perspective. If you said, “I had a deal back in 2008 that we did a fix and flip. I partner with somebody, and the economy happened. We lost financing. We couldn’t refinance,” no. People who have been in this business long enough have lost money. The question is, and it’s interesting the way this is phrased because my initial reaction is, “Have you ever lost money on a deal?” That’s what popped in my head first, but you’re asking if you ever lost an investor’s principal. That has a different effect. You might want to pose those two questions together because I’ve lost money on a deal, but I’ve never not returned somebody’s principal back to date. For someone who might be new to investing, can you explain what you mean by that? Let’s say, Lauren, you decided to invest in me on a nonperforming note and put $20,000 in the deal. At the end of the day, the note only returned $15,000 because of the expensive cost, wherever the case may be. In that deal, we started with $20,000 and ended with $15,000. We lost $5,000. This is where you get different sponsors doing different things. Some sponsors will be, “Sorry, Lauren. We lost $5,000 on this deal here. Here’s your $15,000.” To slow it down a little, $20,000 is what you would call the principal. Yes. Your principal that $20,000 at the end of the day is only $15,000. Let’s think of a stock market. If you invested in $20,000 stocks, and all of a sudden, the stock is only worth $15,000 when you go to cash it in, you lost $5,000 on that. If you’re dealing with a sponsor, they are not required to give you the $20,000 back. I’ve had some deals that have gone south like this, but I did give these sponsors their full principal money back. The largest probably has been $3,000 to $5,000 grand. It was not a significant amount. What I consider significant, others may consider insignificant. That goes to show that you care for those investors in that sense and breeds a lot of trust.
How Do Investors Receive Accurate Information About The Status Of Their Investments?It’s that investor-first philosophy. Question eight, “How do investors receive accurate information about the status of their investments?” I’ll talk about it. I’ll wait until you say it, and then I’ll add my two cents at the end. This is something that shocked me when I started in this industry. There was no uniform way investors were getting updates or information on their investments and distributions. It’s what you expect. If you’re someone who wants to receive a monthly statement, wants to be able to log in to a portal, or doesn’t matter like, “As long as it hits my bank account, that’s fine,” it’s good to know what information and how you like to receive information. Also, asking this allows you to see if that aligns with what you want. We spent a lot of time building out an investor portal to give that transparency. With the way technology is being able for someone being able to go in, log in, and see what they’ve contributed and what they’re receiving, it also speaks a lot to the sponsor and the transparency they have with how investments are doing. It is so important to know what information you want to see and receive and how often and where the sponsor stands on how they distribute their updates.
Where Does The Sponsor Stand On How They Distribute Their Updates?This is one where it’s very easy to call out a sponsor. After you ask the question, they say, “Can you send me a few examples of the reports you send out?” If you don’t get them, that, to me, would be a showstopper. You want to see how they’re doing it because the easiest way to tell whether people are paying their investors back is by showing a report. If they’re paying somebody back, I guarantee you that they have a report showing how much they paid somebody. They can redact all of the information. You shouldn’t hear like, “I can’t give out that information.” If they take off all the investor’s personal information, it should be easy to get your report. It goes to that transparency of how your investment is doing and where your money is working. That’s super important. That is a very key one to focus on. Make sure that is one follow-up that you get that information. “Are you sponsoring any other investments? If so, how many?” Why is this important? Do a background check. If there is a significant number of judgments against the sponsors, it's a red flag. Click To Tweet This is important to understand their bandwidth, how many deals they have going on, and what their team is. That was my follow-up. If they do have more than one deal going on, what team do they have supporting them? For example, I’ve done several funds in the past. You and I were essentially running those over the last year plus. We had very good software that we spent good money on that takes the place of 1 or 2 people. As we started our Regulation A+ plus offering, we realized early on, “As great as we are, Lauren, the two of us couldn’t handle it. Let’s try again.” It’s important to know. We brought on Toni, who assists with marketing. We have a full-fledged marketing company as well. We’ve got two asset managers. We’ve got another person in investor relations. We’ve got two other people in asset management coming on board. We have an acquisitions person coming on board. We are making sure we have the bandwidth to manage what we have going on. This question is like, “Do you have a lot going on? Do you have the support to run this investment or fund? Who is that support?” It is about the takeaway there. You can tag on to that, “You have the support. If I do have a question, who do I call?” “Am I going to speak with a real person?” I had someone ask me before, “After we invest, if we have any questions, are we going to get an automated response? Is there a real person we’re going to be talking to?” which I thought was interesting. I can tell you that if it was me investing and I didn’t get a real person or got a call center outside of the United States, I would lose my mind.
What Are Your Targeted And Historical Returns?It all comes down to who you are and what you expect. I would also lose my mind. The last question is, “What are your targeted and historical returns?” This is a loaded question where people will do their Texas Two Step on the dance floor for historical returns. It’s important to understand what their target is and what they have gotten. If someone says, “Historically, we get super high returns,” it’s like, “What’s your appetite for risk?” Typically, higher returns do yield higher risk. It’s not in every situation. It depends a lot on the asset class and their expertise and experience. For me, I would always say when people are promising 20%-plus returns, and they’re saying, “That’s historically,” over periods of time, can you get there? Look at stocks. You pick a period of time, and you can get 20%-something, but over time, if people were promising returns that high, that seems overly aggressive. It would cause concern for me. A lot of people want to hear high numbers. The timing of when they invested makes a difference in the returns. It’s seeing the bigger picture, not just 10%, 12%, or whatever they throw out. Also, when was that? Where the economy is and what’s going on at a macro level has a bigger impact on that as well. It’s also the asset class. If you do new development, for example, and you were doing where I mentioned Merchant Builder about an apartment building, those returns are very high. I’ve also been a part of a company that was making 30% plus year-over-year, and then 2007 and 2008 hit. They, in a span of eight months, completely went under and shut their doors. Hopefully, before you even get to these questions, you should know the asset class and have done the information and research that we talked about in our last episode. Understand what it’s based on. Is it cash-on-cash? Is it multiple? Is it ROI or IRR? You can google all those terms. I was about to have you go through some of them, and then I was like, “There’s too many. We don’t have enough time. That’s another episode.” I want to go through these quickly by me asking you so that people can have your philosophy and experience. Let’s start at the bottom and go back up. What are your targeted and historical returns? In our latest fund, we are targeting 8% to investors. Overall in the fund, we’re targeting the mid-teens. The reason why we target that is we have marketing overhead costs and other costs included in that, that we want to make sure our investors get paid first. That’s why if you look at our funds, we don’t put management fees. There are other questions that we have from another episode about those types of things. We want to make sure that our investors get paid first. We like to make sure we hit our targets. Under promise and over deliver is a phrase. With the numbers we’re targeting in our latest fund, we’ve consistently been able to hit those numbers previously. I believe we can continue to hit them, but the caveat is past performance is not a future indicator, and I’m not making any promises or guarantees of any returns as part of this conversation. Next is historical returns. I don’t want to say a number, honestly, because the number has been very positive. Our historical returns have been in the double-digit range. Something here we didn’t touch upon, too, was it also depends on how the fund or syndication is structured. Is it just a preferred return? Is there an upside? That all affects the historical return number as well, so that also might be something worth asking here. I know you’ve done a lot of different structures when it comes to your funds. The next question is, are you sponsoring any other investments? If so, how many? We have in the past sponsored other investments. We’ve essentially closed all those other funds and are in the process of closing many of those other funds. The focus primarily on this one fund we have going on, as we mentioned, was we’ve ramped up staff from you and me. I lost track now. It’s close to ten people we have either onboard or coming on board in the next number of days. The easiest way to tell whether people are paying their investors back is by showing a report. Click To Tweet You answered this one, have you ever lost an investor’s principal? I never lost their principal. I had deals where I lost money but never anybody’s principal. I skipped this one because I’m doing these from memory. How do your investors access and receive accurate information on their investments? For our investors, they’ve got several avenues. Especially as a new offering, they have a portal they can log into to see the portal. We have an investor relations team they can email and set up a phone call with. We are going to make sure that we can answer questions in a timely fashion and give them access to all of their information and data. Because it is also registered with the SEC, all the financial information, the semiannual report, and annual audit reports are public information. What geographic markets does the company target? Forty-eight continental states, essentially. We’re not married to a specific market. There are markets that we prefer over others, but we look at the opportunity. For us, the opportunity exists in some instances where people don’t have good teams to go in. When I say a team, I’m speaking of an attorney, boots-on-the-ground, contractor, property manager, and realtor. A servicer and attorney are the two people who would be sitting closest to us at the proverbial table. Please describe the company’s overall strategy and philosophy. Our philosophy is we’re buying distress-first position notes with the attempt to try and provide forbearance and modification loans to borrowers to try and keep them in the property and create a win-win situation for all the people involved. We could go on forever about this. This is probably one of the longer questions, but I feel like people who have read this and know that you’ve been in notes for quite some time have an understanding of your philosophy. You summarize that well. Do you know approximately how many deals you’ve gone through a full cycle? I was going to say hundreds. My background is different because I’ve done a full cycle of 300 to 400 notes. I’ve done new development for condos, apartments, offices, retail, and hospitality. I’ve done an MRI suite, which is cool because everything’s led around it. The MRI machines don’t come out and stuff. MRI machines are expensive. I can digress easily and talk about different experiences. That’s how many note-specific asset deals you’ve gone through. How many deals have you done with either individual as a JV or funds? It’s pretty close to the same. I started with my own money. I did 25 deals on my own roughly before I started taking outside investor money. I grew by starting doing JV deals, got to 25 to 50 JV partners, and then was like, “This is way too much because each deal is its own little company.” I did a fund that mirrored the JV deals. That fund was successful, and we rolled into funds 2, 3, 4, and 5. Now, this is my sixth syndication. If you’re wondering what JV, syndication fund and all of that is, we did an episode a few episodes ago about that. “Have there ever been any criminal charges or investigations against the company or any of its principles?” The main principle survived a background check. I can answer this. Only because when we went through the qualification process, we had to get background checks. Yes, we can say, “We will also survive background checks,” and, “No, there have not been any criminal charges.” As I alluded to, part of the qualification process for the specific fund was doing background checks and assessments on the founding principles. I also am a registered mortgage loan originator who does fingerprint background checks as well. That gets checked every year. The only criminal thing I’ve done is that jacket I wear on our website. Go over to 7EInvestments.com or Invest.7EInvestments.com to check it out. Here’s the next question. Have you or any of your companies or properties filed for bankruptcy? No. How long have you been in real estate investment? I’ve been in real estate for many years. Personally, I’ve bought my first primary residence. We’re supposed to close on 9/11/2001. I was supposed to close on my first property. I got pushed. I started in ’97 working for a large commercial contractor, University of Connecticut, South Campus dorm and dining hall. That was my first project. That was all of the questions we walked through. This list that we pulled is our top ten questions. However, on our website, we do have a downloadable eBook that we put together. That is the top five strategies we talked about in the last episode, combined with the top twenty questions you would want to ask once hopping on the phone with a sponsor before investing with them. I’ve had someone use our eBook, and I don’t want to say against us, but I showed up to an investor call and asked me every single one of these questions. That’s what gave me the idea to be like, “We should talk about this on a show.” It is on our website. You can go ahead and download that. It’s free. Chris, do you have any final thoughts? I’m good. I enjoyed this episode. It was great seeing you again. I’ve got nothing else. Thank you, everyone, for reading this episode. Make sure to subscribe to our show. Also, head over to YouTube. Subscribe for new videos and updates we have there. Thank you for reading. As we like to say also, go out and do some good deeds. Thank you. Thanks, guys.
- Misconceptions in Finance and Real Estate: How To Start Investing With Toni Shackelford – Previous episode
- YouTube – 7E Investments