Accredited investors with millions in net worth routinely make investment decisions they would never make in their primary business. They invest in real estate syndications based on trust in a person rather than verification of facts. Then they wonder why deals underperform.
Mor Milo, co-founder and CEO of Relli, works with both operators and investors across the platform. His observation is blunt: “Most LPs are hesitant to do due diligence because it’s something that usually is outside of their wheelhouse.” That hesitation costs money. It also reveals a fundamental misunderstanding of what due diligence actually is in real estate investment.
Investors spend significant time evaluating sponsor relationships. They attend dinners, ask questions, and build rapport. They call it due diligence. It isn’t. “I think that individual investors spend too much time focused on how they feel associated with the brand,” Milo explains. “There are many investors that will blindly go into a deal because they feel comfortable with the relationship.”
This approach works until it doesn’t. One operator with years of success and billions under management made underwriting assumptions that were dramatically wrong on a single property. The deal became underwater despite strong market fundamentals. “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.”
Professional investors use checklists. They evaluate every opportunity against the same criteria. They don’t make exceptions because they like the sponsor. “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,” Milo recommends. “Just like how, when we invest in the stock market, you need to have a strategy.”
The checklist approach removes emotion from evaluation. It ensures consistent application of standards. It catches bad assumptions before capital deploys. Milo identifies three critical checklist categories: The Sponsor, The Deal, and The Market.
Regarding the sponsor, investors need to understand who is making the decision, how many deals they have completed, what happened with those deals, how many went full cycle, the size of their team, and their track record over the last five years. “Can they prove that that thesis is aligned right?” Milo asks.
For the deal, investors should determine if it matches their criteria: asset class, return timeframe, condition, and more. Then dig deeper into replacement cost and rental increase assumptions. “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 conditions also matter. One operator sourced a property in a strong market, positioned it well, and achieved excellent operational results. But floating rate debt became unmanageable when rates rose. The deal became a loss despite perfect execution. “You want to look at the market and say, okay, does this product fit the market, does this product fit the geographic community,” Milo advises.
Most investors overestimate their knowledge of real estate syndications. Financial advisors who excel with stocks and bonds often trust sponsors in ways they would never trust stock issuers. “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, ask yourself three questions: First, do you have a written investment strategy that doesn’t depend on any specific deal? Second, do you have a checklist of specific items you evaluate for every opportunity? Third, will you reject deals that don’t meet your criteria, even if you like the sponsor? If you answer no to any of those, you’re not doing due diligence. You’re making an emotional decision dressed up as analysis.
