I recently read the National Real Estate Investor article “Survey Shows Family Offices Falling Short on Due Diligence for CRE Deals.”
This article is 100% on point. Investors not familiar with the nuances of private real estate investments do not consider the elevated risks often posed by real estate, which result from its illiquidity, debt, lack of transparency, and reliance on a sponsor.
Family-office professional DJ Van Keuren’s questions that family offices should ask during due diligence (modified below from the article) hit the mark.
- What is the sponsor’s track record?
- How long has the sponsor been in business?
- How much of its own money is the sponsor investing in the deal?
- What are some examples of deals that went south? How did you handle those situations?
- What is the market demand for this type of property? How many similar projects are in the local development pipeline?
- Has the sponsor run the numbers based on best-case and worst-case scenarios?
- Do you like and trust the people associated with the sponsor?
At PREF, we always advise people to ask these types of questions.
But here’s what we have found: Family offices often don’t want to pay for good professional advice; therefore, they either reach out to deal-driven brokers; hire lower level professionals to work in house; or consult with their accountants. They also tend to think they know enough to source opportunities using listing and information services, like Co-Star, LoopNet and CREXi, without professional advice. This heightens the risk of making a bad deal.
We also have found that with ego-driven, high-net worth people, the fear of missing out on the “big deal” their peers are investing in is greater than their fear of loss, which can be substantial in real estate. Thus, they will invest in opportunities without proper due diligence or invest with people who don’t have a healthy track record or proven industry knowledge—people who are much more interested in how much money they will make off the deal.
The classic question to these sponsors is “Where are the Investors’ yachts?”