WS449: A Caller’s Real Estate Syndication Question Answered with Whitney Sewell

[INTRODUCTION]

[00:00:00] ANNOUNCER: Welcome to The Real Estate Syndication Show. Whether you are a seasoned investor or building a new real estate business, this is the show for you. Whitney Sewell talks to top experts in the business. Our goal is to help you master real estate syndication.

And now your host, Whitney Sewell.

[EPISODE]

[00:00:24] WS: This is your daily Real Estate Syndication Show. I’m your host, Whitney Sewell. Every week, I get questions from people that schedule calls and, I mean, just we’ll say 20 calls a week, maybe 30 or more from random people that just find a link online or ask me to speak just for an intro call, and they ask questions.

This past week, I had a question from a guy who’s just getting into the syndication business. He hasn’t done a deal yet and he had this big plan. I wanted to – I just thought that we would take some time to talk about it, and my response to him – What his question was, and I thought it would probably help you as the listener as well, because you’re probably thinking through some of the same things.

I wanted to take the time to just tell you about our conversation and really his thought process behind what he was trying to accomplish. I may start doing this from time to time. You’re going to get some good questions, and a lot of them are very common questions or repeated questions. But I felt like on the show it would be helpful for the listener as well.

This past week, he schedules a call. He’s telling me about what he’s doing. He’s telling me he’s just getting in the syndication business. He has found a property that he’s wanting to purchase. He has gone and looked at it. He has potentially submitted an offer on this property as well and he is looking to do a 506(c) offering. I encourage you to look up the differences in 506(c) and 506(b). We’ll talk about it a little bit. But in the syndication business, when we’re doing a 506(c), you need to know what that means and what’s entail – What that requires of you as the operator and just a couple things to think about.

What I want to talk through what – I asked him and I just said, “Okay.” We’ll call him John. “All right, John. Tell me about your experience.” And well, he doesn’t have an experience in real estate. Maybe he’s been successful in the corporate world a little bit, but there wasn’t a lot of experience that he could talk to me about. So, tell me about your investor list. Well, he doesn’t have an investor list. He’s really counting on the fact that with doing a 506(c) that he can advertise. He’s assuming that investors are going to come. That he’s going to present this amazing deal that he’s found. He’s going to be able to blast it out all over social media. He’s going to be able to blast it out to the people that he does know, and that investors are going to want to invest.

I mean, that’s what a lot of us think when we’re first getting started, until you understand this business a little better and more importantly the relationship aspect of the business with your investors. He and I discussed this a little bit. I just asked him different questions and asked him, “Okay, John. You’ve never met me before. Let’s say you didn’t know anything about me. You didn’t read anything about me or my track record or experience, anything like that. But all of a sudden, you see an offering on Facebook or in the Facebook group. We’re doing a 506(c) deal. You just happen to see it, and it looks amazing. The returns are great. Are you going to hand me 50 to 100,000 dollars if you have it? Or are you going to hand it to me to invest in this deal even though you’ve never met me before?”

Well, John thinks about it a minute or so. I mean, his response is, “No! I’m not because I don’t know you.” I paused a minute. I wanted him to think about that. Doing a 506(c) offering, you do get to advertise, right? You get to advertise. Most of you probably are aware of those regulations, and I’m not an attorney, by the way. But we do 506(b) offerings, which means we can take up to 35 non-accredited investors, but all the rest them have to be accredited. But when you’re doing 506(c), they all have to be accredited. They all have to be an accredited investor and they have to certify. You have to certify that they are accredited. So, you have to get a letter from their CPA or from an attorney or somebody saying that this individual is accredited.

There are third-party services that you can hire to complete this for you. But it’s a lot of hassle, and a lot of investors get very frustrated at this process. A lot of times, a CPA will not want to sign a document saying that this person is accredited. They try to say that you it’s too much liability, that they don’t want to do that, and it’s a hassle. I’ve heard story after story about operators who have to go back and forth with their investors’ CPAs or an attorney, somebody trying to get them to sign off, and they don’t want to.

Then eventually, a lot of investors get frustrated at that process and just say, “Well, I’ll just –” They’ll say, “I’ll just wait for the next deal that’s a 506(b).” That’s disappointing, right? As you are working so hard to complete this deal and you felt like you could advertise and it was going to go so well. But now, even investors that have invested with you on numerous deals potentially won’t invest, because they’re frustrated with the process. Or another aspect you need to think about is look at your investor list. You need to know that list very well and you need to understand those investors.

One simple thing that you need to know is the difference in the number of accredited versus non-accredited investors. Then if you’ve done deals before, well, how many non-accredited investors versus accredited investors have invested with you on previous deals? If that number is greater on the non-accredited side, then doing a 506(c) deal is probably not the best avenue for you, because then you are knocking out all those non-accredited investors who have been investing with you faithfully, potentially over numerous deals. Now, they cannot invest in this next deal that you’re looking to do. So, know your list. Know your investor list.

Back to John. We talk through this, and I’m trying to explain to him that this is a relationship business. Yes, it seems great that you can blast out about this great deal that you have. That you can promote these amazing returns and show these pictures all over social media and all those things. But unless there’s already a relationship there, I would say 98 to 99% of investors, especially accredited investors who are sophisticated, they’re accredited for a reason. They’re smart investors. They’re going to think long and hard about investing with someone and handing someone 50 to 100,000 dollars or potentially more.

With no relationship there, it’s so unlikely that they’re going to give you 50 to 100,000 dollars. A lot of times, doing a 506(c) offering, it can be kind of a long-term approach. It can – Thinking long-term. Well, on this potential deal, it may not gain that many investors but it does allow you to advertise. It allows you to blast your business out with his potential deal. Maybe it allows investors to see you. Maybe they sign up on your website, and then you get to build that relationship.

But on this particular deal with John, I’m not going to count on those investors investing. Ultimately, you better already have this money raised before you do your first 506(c) deal. That would be my plan. Maybe do a little bit smaller deal where we’re confident. Extremely confident that we have enough accredited investors to invest and potentially already have the money raised before talking to our investor list or a few key investors and ultimately already have the money raised before we even blast it out. So, then we’re not even counting on the raise, the capital raise for this deal. But it’d be more of that long-term approach like I was talking about if we did that.

We are focused on doing 506(b) offerings, so we don’t knock our non-accredited investors out from investing who have been so faithful to invest with us time and time again. I want those investors to be able to invest and I want them to get the opportunity as well, because they’ve been very faithful. So, we don’t want to keep them from being able to invest and ultimately, we don’t have trouble at raising the capital through doing a 506(b) from our investor list.

There’s other ways to grow your list. But in John’s example, he did not have a list. He had no relationships with investors. So, I want you to think through that as you are contemplating this 506(b), 506(c) offerings. Which one should we do? Everybody seems so tempted to do the 506(c), because now we can advertise. Well, that’s not all that it’s cracked up to be.

In numerous companies that I know of who have tried to do a 506(c), thinking, “Well, now we can blast it out. Now, we can advertise. Now, we’re going to be able to raise so much more capital.” Guess what? It did not happen for them. Numerous times, the deal does not close, because they cannot raise the capital that they thought they would be able to. But they’re counting on the fact that they can advertise, and that’s a problem. That’s a big problem.

Before thinking you’re going to do a 506(c) offering, I’m just encouraging you, just as I encouraged John, let’s think about where this capital is going to come from and let’s think about why you already need those relationships. Before you can advertise, you already have to have the relationship with an investor, because ultimately, they’re not going to invest without it. So how are you building those relationships? How are you connecting with people?

Ultimately, in John’s situation, I encouraged him to find a partner. Instead of trying to do it by yourself and doing a 506(c) as your first – Really, his first real estate deal or transaction. I encouraged him to find a partner. Find somebody that’s more experienced that does have the capital raised already, because they already have the relationships built and the trust and all those things. So, find a partner.

Getting a deal, especially your first one closed is more important than trying to make all the money from it yourself. Ultimately, if you make nothing, you’ve still made – John, if let’s say this experienced partner came in and ultimately he had to pay him the majority of what was made from that deal, he’s still so far ahead because of all the experience and knowledge gained from that acquisition and just going through those motions, and especially with the inexperienced partner.

So, find a partner. If that’s you, if you’re looking for those investors, you’re trying to raise that capital, maybe you have a deal. Well, go to somebody who has the experience or already has the investor list and those relationships built up. That’s how you’re going to close that deal. You’re not going close it, we’ll say, 95% of the time. Somebody’s not going close their first syndication on their own. It has to happen. People do syndications all the time by themselves. But normally, it’s not going to be a 506(c) deal, because you don’t have the relationships.

Think through that. Think about how you’re building these relationships with your investors, and we’ll try to do some more shows, specifically on that. We got numerous shows where different experts and operators have talked about how they are building their investor base, and there is a list of investors in cultivating those relationships. It’s such an important part of the business, if not the most important part, especially the capital raising side, because it’s a relationship business even if it’s partners. But specifically, with investors, think through how you are reaching your investor base and how you’re building those relationships, how you’re staying in front of them.

That has to be done long before you ever have that deal. It has to be done long before. If you’re not thinking about it now, it’s not going to happen after you have the deal. That’s where partners come in. Usually, there’s somebody that’s really good at finding a deal, and then there’s other people who are good at raising capital and building those relationships. Sometimes, it’s already done. If you want to go find a deal and maybe you’re really good at running underwriting and the numbers, then find somebody that’s good at raising capital.

Think through the 506(b), 506(c). We didn’t go into extreme depth on the differences there. But ultimately, that’s what this conversation revolved around with John is the relationship matters in a big way. Even if you can advertise, it does not mean the capital’s going to come to you, no matter how good the deal is.

[END OF EPISODE]

[00:13:08] WS: Don’t go yet. Thank you for listening to today’s episode. I would love it if you would go to iTunes right now and leave a rating and written review. I want to hear your feedback. It makes a big difference in getting the podcast out there. You can also go to the Real Estate Syndication Show on Facebook, so you can connect with me and we can also receive feedback and your questions there that you want me to answer on the show. Subscribe too, so you can get the latest episodes. Lastly, I want to keep you updated. So head over to lifebridgecapital.com and sign up for the newsletter. If you’re interested in partnering with me, sign up on the contact us page, so you can talk to me directly. Have a blessed day, and I will talk to you tomorrow.

[OUTRO]

[00:13:48] ANNOUNCER: Thank you for listening to The Real Estate Syndication Show, brought to you by Life Bridge Capital. Life Bridge Capital works with investors nationwide to invest in real estate while also donating 50% of its profits to assist parents who are committing to adoption. Life Bridge Capital, making a difference one investor and one child at a time. Connect online at www.LifeBridgeCapital.com for free material and videos to further your success.

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