We rag a lot on Wall Street. We’ve told you about red flags when working with financial advisors and how to be in control of your own financial freedom. But, we haven’t much touched on the “dark side” of real estate promoters.
As a real estate syndicator and promoter myself, I’ve encountered a lot of red flags and worst practices that I’ve learned not to do. Before becoming a promoter, I was on the other side of the equation, so I can understand how it feels when someone tries to mislead or take advantage of you as an investor.
To help you avoid similar situations and bad opportunities, here is a list of what you should be wary of when it comes to real estate promoters. This information can be pretty widely applied to commercial properties but could also be loosely generalized to single-family homes and the like.
Seven Red Flags from A Real Estate Promoter
1. The one-man show who can “do it all”
If you’ve read even a fraction of our blogs, you know this is totally false and against what we believe at SAO. You can’t do your due diligence, property construction, property management, legal and financial work all by yourself.
2. “I’ll find the property and rehab it, then turn it over to you.”
If you want to be a real estate manager, that would be great. Otherwise, I wouldn’t get involved. It’s just too much work.
3. “I’m doing this as a side job.”
Think of someone (much like yourself) with a full-time W-2 job — do they honestly have the time to promote and develop a real estate opportunity? Probably not. At least not to the degree and efficiency that you should be looking for. It’s not totally impossible, but I would personally be worried about investing in such an opportunity.
4. “I’ll handle all the legal paperwork — we don’t need an attorney.”
Run away! This is a major red flag and a total prescription for disaster, especially for commercial projects or private placements that are syndications.
On a turn key single family home, you may be able to work without an attorney, especially after an attorney has set up the “boilerplate” forms, but definitely not on large commercial projects.
5. “Don’t question my fees.”
There’s nothing wrong with charging fees, but transparency is key. Promoters should be charging fees, otherwise I would be concerned. Without fees, how are they going to pay their bills, do their due diligence, and be held accountable to what they say they’re going to do?
The major red flag here is when they’re unwilling to reasonably explain their fees.
6. “Real estate always goes up in value!”
Sure, normally that is true. But, not always. There are some markets, such as in Vegas or Florida that are highly turbulent. Needless to say, the statement that all real estate is always going up is a serious overstatement.
There are plenty of markets that are generally very stable, and those are the places we like to operate in. For example, Kansas City, Birmingham, Memphis, etc. In those places, things are pretty steady and go up in value at the pace of inflation.
7. “This investment is for everyone.”
That’s impossible. An investment can’t be for everybody. For example, for a person who is already earning a healthy income, a cash flow investment will not be appealing to them. Similarly, if the investors are retired and there is no cash flow, but the payout is on the back-end, that doesn’t work either — they need cash flow now.
Similarly, the investment may be beyond your risk tolerance, in an unfamiliar market or outside of your investment preferences (i.e. old vs. new properties, or a ground-up opportunity).
Bottom line: if someone says this investment is for “everybody”, I would be concerned.
Basically, do your due diligence! Know who you are working with, ask questions, be inquisitive and eager to learn.
I hope this list helps you in your process. Have you experienced any of these “red flags?” Are we missing any? Let us know!
And, as always, when you’re ready, we’re here.