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Now, if you’ve been paying attention to the real estate industry—or even just skimming local news—you’ve likely noticed how elevated interest rates have exposed a lot of weaknesses.
And not just financial ones. It’s become clear that many real estate investment companies aren’t just poorly managed; some are outright fraudulent.
We’ve heard about several well-known groups facing FBI or DOJ investigations, with the SEC likely stepping in soon. Unfortunately, it’s you, the equity investors, who bear the brunt of these scandals.
This mess is bound to lead to stricter regulations for those of us involved in nonpublic investments. While this might give larger companies with big legal teams an advantage, it’s not necessarily a win for you, the investor.
More competition in the market often means better returns and more choices for you. Your goal is to navigate through the dishonest and inept players to find the solid, reliable ones. And yes, that’s easier said than done.
Whether you’re dipping your toes into your first syndication or managing a family office’s complex portfolio, you can take steps to protect yourself.
There are no guarantees, but paying close attention to certain details can make a world of difference:
Communication and Transparency: You need to invest with people who communicate openly and consistently. If someone can’t tell you the bad news as well as the good, you should take your money elsewhere. And you should always be able to reach someone from the company. At our firm, we aim to return calls within 24 hours. Does your investment partner have a similar standard?
Willingness to Answer Questions: If a sponsor refuses to answer even basic questions about their business or strategy, why would you trust them with your capital? Remember, Elizabeth Holmes of Theranos fame dodged questions, and investors lost millions. Don’t be one of those investors.
Referrals: If a company won’t introduce you to past or current investors, consider that a huge red flag. You should always demand referrals and talk to real people.
Honesty About Uncertainty: No one has all the answers, and if someone pretends they do, they’re lying. A sponsor who can’t say “I don’t know” is a dangerous partner. If they lie about the little things, what else are they hiding from you?
Consistent and Accurate Reporting: You deserve clear, consistent updates on your investments. No news is not good news in this case—it’s a red flag. Even if things are going well, regular reporting helps you spot potential issues before they become crises.
Third-Party Involvement: If one person is trying to handle investor relations, property managements, asset management, due diligence, books, taxes, and distributions for a large company, you should be concerned. It takes a team to properly manage a large portfolio. The more eyes on the financials, the less likely fraud will occur.
Access to Documentation: Never settle for anything less than full transparency. You should always have quick access to all your investment documents. If your sponsor resists, that’s a major red flag.
Investor Portal: Companies that provide you with a dedicated investor portal for easy access to reports, tax filings, and financial statements show they value transparency. Even smaller companies should make this available as they grow.
Ultimately, you need to be diligent about choosing the right partners. A few bad apples don’t spoil the whole bunch, but they should remind you to be cautious and discerning with your investments.
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