If you’re a real estate broker, you or your team members have probably encountered your fair share of investor groups or syndicates as clients. These types of clients have their own unique set of risks and challenges compared with your run-of-the-mill individual buyers and sellers.
Investor groups and syndicates typically involve multiple unrelated individuals who pool their resources to invest in property. Their complex ownership and decision-making processes can make it difficult for brokers and licensees to navigate. Managing the risks is important to ensure your brokerage is protected in case of a lawsuit.
In this blog, we look at the unique risks you may come across with investor groups and syndicates. Vetting, strong communication, and documentation can help to mitigate the risks. We cover those and other tips to help you navigate investor-backed transactions successfully.
Understanding the Unique Risks of Investor Groups and Syndicates
Investor clubs/groups may have up to 10 people involved — sometimes more, sometimes less. Members pool their money to invest in property and create a legal entity that ensures each member is a joint owner of the property.
The sheer number of people involved in a transaction when investor groups and syndicates are involved heightens the risks. With multiple unrelated owners comes different personalities and multiple, sometimes divergent, perspectives. Risk tolerances can differ among the members which can lead to potential conflict. With multiple investors, it may not be possible for everyone to inspect the property sufficiently, increasing the risk associated with buying properties sight unseen. It can also be difficult to navigate who in the group is an authorized decision-maker in control and able to represent the others.
Whether the group or syndicate decides to purchase property to fix and flip it, or to rent it out and get a return, there is potential for conflict within the membership. It’s not always easy for members of an investor group to take their money back. However, it can happen. Even if they need to find another member to buy them out, this can cause costly delays to a real estate transaction.
All these things can result in delayed decision-making and challenges in the transaction process for the real estate broker or licensee. The potential for mistakes and oversights by brokers or their team members is also heightened when dealing with these intricate client relationships.
Vetting in the Onboarding Process
When working with investor groups and syndicates, brokers and licensees should have a thorough vetting and onboarding process in place. It’s important to understand the group’s legal structure and decision-making process.
- For example, who are the authorized decision-makers acting on behalf of the group.
It is imperative to set clear expectations upfront so that all parties to the transaction are aware of their obligations, your obligations, and how the buying or selling process will work.
Brokers should have procedures in place to identify red flags for money laundering schemes. This can be useful should you or your team face a situation where investor groups or syndicates are actually shell companies concealing the true origin of funds.
Why You Should Maintain Strong Communication and Document Everything
Clear communication isn’t only important in the onboarding process. As a broker, you and your team need to maintain strong communication with the investor group or syndicate throughout the transaction process.
While it’s important in all real estate transactions to document everything and keep good records, when you’re dealing with multiple investors, it’s even more important. Document all conversations, decisions, and agreements, so you have a paper trail to defend yourself if you need it in the future.
Tips to Navigate Investor-backed Transactions Successfully
Get to know the Investor Group or Syndicate
Each group or syndicate will have its own structure and dynamics that can impact a real estate transaction. Brokers and licensees should invest time upfront to understand the group or syndicate, their leadership, and communication preferences to avoid potential pitfalls
Be Proactive
Brokers and licensees should adopt a proactive approach. Try to anticipate potential roadblocks that may arise during the transaction process. Focus on solutions so you can steer these often-complex transactions to a successful close.
Establish Policies and Workflows to Manage These Transactions
Ensure you have established policies and workflows documented at your brokerage to manage these types of transactions. This will provide your team with a guide of what you expect and it can also help to minimize the risks.
Focus on Due Diligence
Due diligence is important in any transaction, but when dealing with multiple investors, attention to detail is particularly important. Ensure all signatures are obtained from the appropriate authorized decision-makers, and title searches should be conducted to confirm ownership and any hidden liens, lawsuits or pending claims on the property.
When it comes to disclosures, you need to be sure that everything that needs to be disclosed, has been and that all relevant parties are aware of these disclosures.
And meticulously document the transaction process.
Educate Your Team
Educating your team isn’t a cost — it is an investment. Ensure your team knows exactly what they need to do if navigating transactions involving investor groups or syndicates. Ensure your team are trained in your policies and procedures, and the documentation they need is readily accessible to them if they need them. Regular team briefings and internal communications can foster a culture of ongoing learning and development.
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