Accredited Investors Warned: Trust in Sponsors Is Not Due Diligence

Accredited investors with millions in net worth routinely make investment decisions in real estate syndications based on trust in a person rather than verification of facts, a mistake that costs them money and reveals a fundamental misunderstanding of due diligence, according to Mor Milo, co-founder and CEO of Relli.

Milo, whose platform connects accredited investors with commercial real estate syndication opportunities, observes that most limited partners (LPs) are hesitant to perform proper due diligence because it falls outside their expertise. “I think that individual investors spend too much time focused on how they feel associated with the brand,” Milo says. “There are many investors that will blindly go into a deal because they feel comfortable with the relationship.”

This approach can lead to disaster. Milo cites an example of a well-regarded operator with years of success and billions under management who made underwriting assumptions that were dramatically wrong on a single property. Despite strong market fundamentals, the deal became underwater. “They were very capable at leasing up that deal, but because of bad underwriting, that deal is now negative,” Milo notes. “So although this person was a great marketer and raised a boatload of cash, that doesn’t mean that they’re a good operator.”

The distinction between a skilled capital raiser and a skilled operator is critical, and trust in a sponsor tells investors nothing about the quality of property analysis. To address this, Milo recommends a checklist-based approach similar to professional investors. “Have a checklist, have certain things that you look at for every single deal that you use as a barometer for whether you like the deal or not,” he advises. “Just like how, when we invest in the stock market, you need to have a strategy.”

The checklist should cover three categories: the sponsor, the deal, and the market. For the sponsor, investors should evaluate how many deals they have completed, what happened with those deals, and their track record over the past five years. For the deal, they should assess asset class, return timeframe, condition, and replacement cost. Milo gives an example: in San Francisco, if a sponsor assumes $350 per square foot when market rates run $900 to $1,000, that is a red flag. “You can say, ‘Hey, Mr. Sponsor, I see that your numbers are off completely in this assumption,’” Milo explains. “Either they’re going to stumble and be like, ‘Oh my gosh, you caught me,’ at which point you probably shouldn’t invest in that person. Or they’re going to come back to you with a reasonable explanation.”

Market analysis should consider whether debt financing is fixed or floating and what happens when interest rates change. Milo highlights a case where an operator executed perfectly on a property in a strong market but used floating rate debt that became unmanageable when rates rose, turning the deal into a loss. “You want to look at the market and say, does this product fit the market, does this product fit the geographic community,” he says.

Many investors, especially financial advisors who excel with stocks and bonds, overestimate their knowledge of real estate syndications. “They know index funds and mutual funds. They expect that the person that’s selling them the deal knows more about that asset class than they do,” Milo observes. “So they rely on those people because they trust them, as opposed to trust but verify.”

Before investing, Milo suggests asking three questions: Do you have a written investment strategy that doesn’t depend on any specific deal? Do you have a checklist of specific items you evaluate for every opportunity? Will you reject deals that don’t meet your criteria, even if you like the sponsor? If the answer to any is no, the investor is not doing due diligence but making an emotional decision dressed up as analysis.

Real estate syndications offer genuine opportunities for diversified portfolios, but only if investors apply the same analytical rigor they use elsewhere. Trust the sponsor, but verify everything. For more insights, visit Relli.

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