When you’re considering investing in a multifamily deal, ensuring that you’re asking the right questions is paramount. When you’re working with a sponsor, being sure you understand his/her investment strategy is an important step in vetting your sponsor. BAM founder and CEO, Ivan Barratt, (himself a multifamily unit owner and syndicator) has developed a list of questions to keep in mind for your potential sponsor. We share Ivan’s suggestions in today’s BAM Blog…

Vetting your sponsor is an important part of doing your own due diligence in your journey with multifamily investing. By asking the right questions and carefully reviewing your sponsor’s investment strategy, you’ll know that you have partnered with the right sponsor to work with on your multifamily investment. Here are some of Ivan’s suggestions below:

Ask About:

The Actual Investment Strategy: This one is pretty simple. Ivan says to ask about the investment strategy itself. Can the sponsor explain their strategy in a simple, coherent snapshot, or do they ramble without any real firm, clear picture in mind? Ivan uses the example of a few, simple sentences: “We invest in Midwest multifamily B and C assets. It’s typically workforce housing, where we can add value and provide a return in excess of fifteen percent to our investors.” Simple, coherent and you get a clear picture of the strategy.

The Sponsor’s Track Record: Ivan notes that most experienced sponsors will be happy to produce their track record, and show you how their properties have performed over time. By looking over a potential sponsor’s track record, you’ll get a good idea for the types of deals they do and if that’s ongoing or if they’re changing tactics.

Refinanced Deals or Deals that Were Exited: Ivan says that most experienced sponsors exit a deal or two. It’s important to ask about how deals the sponsor has refinanced or exited have turned out. According to Ivan, you’ll typically see this on the sponsor’s track record. Asking the sponsor about it, and hearing the story behind the deal provides further insight into the sponsor’s strategy.

Sponsor’s Underwriting: Ivan says that by asking about the sponsor’s underwriting discipline, you’ll learn how they go about finding that one great deal. Ivan points out that in the current market, if a sponsor is showing a lot of deals in a short time frame, that could be a sign they’re fudging the underwriting to get more deals done. As we’ve said before, right now the average for BAM is looking hard through 200 or so deals to find one good opportunity.

Hold Period & Exit Strategy: Ivan said if he were vetting a sponsor, it would be important to find out what the sponsor’s typical hold period is, as well as the exit strategy and if the sponsor has one strategy or multiple plans in place. Another important question is growth rate: how do they plan to grow the top line and does it make sense.

Sponsor Co-Investing: Ivan says he’s often asked how much your sponsor is co-investing in the project. You’ll often see anywhere from 0-25% of the sponsor’s funds going into the deal. Ivan cautions that it isn’t necessarily a negative if the sponsor is investing less, because large sponsors sometimes have to keep funds in reserve for other aspects of the project.

One of the most important pieces of Ivan’s advice about the investment strategy is that, while most of this will be in the offering memorandum, you should still talk to the sponsor and ask them the tough questions anyway. He advises to see if what they say lines up with what you’ve read, and he says that any sponsor who can’t answer the tough questions without a smile on his/her face may be hiding something. It’s better to find out during the vetting process than when you’re already too deep in the project!

Want to learn more about multifamily investing? Visit ivanbarratteducation.com: you’ll find a free library with videos and articles featuring Ivan and his deep industry knowledge.