What You Should Understand About Syndication Before You Start

The following is adapted from Syndicating Is a B*tch by Bruce Petersen.

I want to tell you a story about a syndication deal I put together, and how right at the very end, $5.2 million completely disappeared. I know: I still can’t believe it myself, but it happened, and it offers a very important lesson that every syndicator should know before they get into this line of work. Here’s how it went down.

Everything about the apartment complex that we were buying in San Antonio had checked out. Our investors were lined up. We had completed our due diligence inspections and made it to closing day. Austin, where my wife and I live, is about an hour and a half from San Antonio, so we wired our $5.2 million for the purchase at about nine in the morning on a Friday, then made the drive down there to hang out in town until we received notice that the wire had been received. It typically only takes a couple of hours for a wire to go through, so the timing was going to be perfect.

By eleven, we were at the property and ready to meet with our newly inherited staff. The night before, the previous management company had taken all of the computers and phones out of the office, so there wasn’t much for anyone to do. The staff could physically walk visitors through the model unit and show them the amenities, but that was it. Since the wire was delayed, we couldn’t do much either. Still, we figured it would be there any second and decided to go ahead and set up all our new computers and phones and begin training them on our management software.

Around 11:30, I started getting phone calls. “Bruce, where’s the wire?”

I sent it at nine, should be there any minute.

Thirty minutes later: “Bruce — still no wire.”

Now, I’m an eternal optimist, so I wasn’t exactly worried, but this wasn’t normal. I needed to do some digging. So I called the bank, assuming that’s where the disconnect was. But the bank didn’t have the money either.

The wire had definitely gone out shortly after nine that morning. As far as I could tell, all of my investors’ money was gone.

I collected supporting documents, tracking numbers, and confirmations, hoping that would keep us moving — I didn’t have anything more than that to offer the sellers. The money was in my account, and then it was gone, and somewhere between there and the seller, it was nowhere to be found.

At 4:30, my attorney called me for the last time that day: “You have to get out.”

Without the successful wire transfer, the property and staff weren’t mine. I didn’t own it yet. The process is normally so sure that I hadn’t told anyone the sale wasn’t finalized — not even my wife. She’d been running around training the staff on our management software. No one else needed to worry about this thing that should’ve been resolved by now. But it was clear by that point that nothing was closing that day, and we had to go.

I had to tell my wife that we didn’t own the property. We had to explain to the staff that the closing didn’t clear — and that we had to take our computers and phones with us. We couldn’t leave everything there over the weekend without knowing what was going on. They had to call the old management company back to figure out what to do. Before we left, someone showed up, dropped a single box with one phone and one computer on a desk, then turned around and walked out.

Here’s the thing: when money is wired, it runs from one bank, through the Federal Reserve, and to the other bank. Usually, it’s a simple and quick process. In between, there’s a division of the US Treasury Department called the Office of Foreign Assets Control (OFAC) with the authority to pause proceedings. They’re charged with watching for money laundering and have a list of known bad actors throughout the world that they run against the participants of wires to see if anything pops.

Turns out, the name of the property we were trying to purchase was also the name of a known bad actor in Columbia. Since my proactive ass had already filed the dba (doing business as) paperwork to match our investment group to the name of the property, guess what name was on the $5.2 million wire? Yep.

OFAC had flagged it immediately and had been under no obligation to tell us.

After one more terribly uncomfortable explanation — an email letting the investors know their money was gone and the property wasn’t yet ours — our Friday night ended.

All eventually worked out, however. By Monday morning, we got word that the wire had been released, and we were finally good to close. Done — with a little bit of unneeded stress! If you think you can handle that kind of excitement in your life, syndication might be for you. If not, I would advise you to steer clear and pick a less exciting line of work.

For more advice on getting started in syndication, you can find Syndicating Is a B*tch on Amazon.

Known in the real estate world as the Apt-Guy℠, Bruce Petersen is a serial syndicator who started with a 48-unit building and has now syndicated over 1,100 units. As the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, Bruce has received local and national recognition for his syndication efforts. He was the recipient of the Austin Apartment Association’s Independent Rental Owner of the Year for 2016 and the National Apartment Association’s Independent Rental Owner of the Year for 2017. In addition to being a TV personality and public speaker, Bruce also mentors people on how to invest in apartment complexes.