My friends just lost money on a deal and now I want to invest with them. Here’s why.
We’ve discussed syndication briefly here. In case you don’t recall, it is essentially when sponsors find a large apartment deal and put together an offer and all of the financials to support the project and then they offer passive investors an opportunity to invest in the project. This is great for the sponsors and the passive investors because the passive investor gets to be invested in a potentially very profitable real estate deal with little work. The sponsors do all the work and get some equity in the deal in exchange. They also often buy in and invest along with the passive investors.
Two of the smartest investors I know recently took a deal through due diligence and had investor commitments and the deal fell through just before the finish line. This preliminary process is much more costly than with individual houses. They laid out a lot of capital to get through the loan applications and inspections etc. The loan terms changed due to things completely outside their control and they felt that the deal would still be profitable but wasn’t a safe enough investment for them to place other people’s money in. They had the opportunity to push on and risk the passive investors’ money a little more and probably fulfill their expectations for the deal but they didn’t feel that the numbers still held up to their high standards. So they backed out and lost thousands of dollars of their own money.
So why does this make me want to invest with them? Because they took their responsibility for their investors’ money so seriously that they took a loss to protect the investors. Those are the type of people I want to do business with. So while they lost this project and the work and money they had already invested in the deal, they probably gained at least one new passive investor in their next deal; me.
The lesson here applies to any type of business or investing: be honest and protect the people who entrust you with their money. Investing isn’t without risk but we have to do our best to measure those risks and do our due diligence to protect those who invest with us. If we succeed, those investors will join us on future projects and perhaps tell a friend. We are playing the long game and our reputations are critical. More important, in fact, than our profit on any deal. My friends took a haircut today but their reputations grew in my eyes. And here I am telling my friends. Let’s all take that lesson into whatever we undertake. Be honest and take your licks with dignity and it will pay off in the long run. Kudos to two bona fide sponsors for walking away to protect your investors!
Investing is exhilarating and can be profitable but remember to “keep the main thing the main thing” as you go along this journey.