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 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 and reveals a fundamental misunderstanding of what due diligence actually is in real estate investment.
The trust problem masquerades as due diligence. Investors spend significant time evaluating sponsor relationships, attending dinners, asking questions, and building rapport. They call it due diligence, but 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.” Trust in the person tells you nothing about the quality of that property analysis.
The checklist approach that actually works involves professional investors using checklists to 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, ensures consistent application of standards, and catches bad assumptions before capital deploys. Milo identifies three critical checklist categories: The Sponsor, The Deal, and The Market.
For the sponsor, ask: Who is making this decision? How many deals have they completed? What happened with those deals? How many went full cycle? How big is their team? What’s their track record over the last five years? “Can they prove that that thesis is aligned right?” Milo asks. This means understanding the sponsor’s overall investment strategy, not just this single deal. For the deal, determine if it matches what you’re looking for: asset class, return timeframe, condition. If multifamily, what class? What vintage? Does it need renovation? Then dig deeper into replacement cost. In San Francisco, is $350 per square foot reasonable when market rates run $900 to $1,000? If the sponsor’s assumptions are dramatically off, that’s a red flag. “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.” Also evaluate rental increase assumptions: two percent annually versus five percent creates massive differences in returns. For the market, ask whether market conditions will support this deal. Is debt financing fixed or floating? If floating, what happens when rates change? 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, turning the deal into 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.” The difference is critical: trust is emotional, verify is analytical. 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. Real estate syndications offer genuine opportunities for diversified portfolios, but only if investors apply the same analytical rigor they use elsewhere. Trust the sponsor, but verify everything.
