10 Red Flags in Real Estate Offering Documents
In private real estate investing, what you don’t see in an offering document often matters more than what you do.
Offering Memoranda (OMs) and Private Placement Memoranda (PPMs) are designed to present opportunities — but it’s the subtle details, buried assumptions, and missing disclosures that reveal the true quality of a deal.
At Assemble Capital, we believe in transparency through education. Our investors don’t just fund projects — they understand them. That means learning to read between the lines, ask better questions, and recognize when something doesn’t add up.
Here are ten red flags to look for before investing in any real estate offering.
Why Due Diligence Begins With the Fine Print
Every private placement offering is built around a story — a property, a strategy, a projected outcome. But not every story is told with the same discipline or honesty.
The offering document is your first window into how a sponsor operates. It reveals their priorities, their standards, and their ability to communicate clearly. A sponsor who takes shortcuts in documentation often takes shortcuts in execution.
Due diligence doesn’t start with financial models — it starts with words. The way a sponsor explains risk, structure, and return tells you everything about how they treat investors.
Red Flag #1: Unrealistic Return Projections
If it looks too good to be true, it usually is.
An OM promising outsized returns — say, 25–30% IRR on a stabilized multifamily deal — should immediately raise questions. High returns can happen, but only with higher risk. Sponsors who project aggressive numbers without corresponding downside analysis are either inexperienced or misrepresenting probability.
What to look for:
Conservative rent growth (aligned with market averages).
Realistic exit cap rates (not lower than acquisition).
Sensitivity analysis showing how returns shift with different assumptions.
Assemble Capital’s approach:
We prioritize accuracy over excitement. Every underwriting model includes base, downside, and best-case scenarios — because integrity begins with expectation management.
Red Flag #2: Lack of Sponsor Co-Investment
When a sponsor doesn’t invest their own capital, their incentives may not align with yours.
The best sponsors invest significant equity alongside their limited partners. This ensures decisions are made from the same perspective — protecting principal before pursuing profit.
What to look for:
Sponsor equity participation listed in the capital stack.
Disclosure of GP contribution percentage (5–10% is typical).
Alignment of risk and reward in the waterfall structure.
Assemble Capital’s approach:
Our principals invest personally in every project. No fees are taken until preferred returns are met. That’s alignment — not marketing.
Red Flag #3: Vague or Overly Optimistic Timelines
An unclear development or disposition timeline signals weak project planning.
When a sponsor doesn’t specify key milestones — acquisition, construction, stabilization, or exit — it’s nearly impossible to evaluate execution risk. Conversely, a timeline that seems too short for the scope of work likely sacrifices quality for speed.
What to look for:
Defined project phases with estimated durations.
Contingencies for permitting or market delays.
Realistic hold period (typically 3–7 years depending on strategy).
Assemble Capital’s approach:
We build backward from reality, not ambition. Every project timeline is vetted by our construction and finance teams to ensure feasibility under real-world conditions.
Red Flag #4: Aggressive Leverage and Unclear Debt Terms
Leverage amplifies both returns and risk. Excessive debt can erode investor safety — especially if market conditions shift.
A healthy capital stack balances debt and equity. Sponsors who push leverage above 75–80% LTV to boost projected IRRs are creating fragile structures.
What to look for:
Loan-to-value ratio below 70%.
Clear disclosure of interest rate terms and lender type.
Debt coverage ratios and refinancing assumptions.
Assemble Capital’s approach:
We use conservative leverage to maintain flexibility and resilience. A well-capitalized project isn’t just safer — it performs better when markets tighten.
Red Flag #5: Missing Exit Strategy
Every investment should begin with a defined exit.
When offering documents don’t clearly explain how the project will return investor capital — through sale, refinance, or stabilization — it’s a warning sign. Without a roadmap, investors can’t assess timing, liquidity, or performance benchmarks.
What to look for:
Defined exit strategy with multiple potential scenarios.
Realistic pricing assumptions for sale or refinance.
Historical or market-based evidence for exit valuation.
Assemble Capital’s approach:
Each project begins with an exit in mind. We identify multiple disposition paths and track market triggers continuously — because liquidity shouldn’t be an afterthought.
Red Flag #6: Complex Fee Structures
Some sponsors stack fees at every stage — acquisition, management, construction, refinance, and disposition — diminishing investor returns before profits are even distributed.
Transparency in fees is non-negotiable. If a sponsor can’t clearly explain how they’re compensated, they probably shouldn’t be managing your money.
What to look for:
Simple waterfall model with disclosed percentages.
Clear explanation of sponsor promote (performance-based incentive).
No hidden “consulting” or “administrative” fees.
Assemble Capital’s approach:
We maintain straightforward fee structures — transparent, performance-linked, and easy to understand. Investor returns always come first.
Red Flag #7: Weak or Inconsistent Underwriting
Underwriting is where deals are made or broken. When financial models lack consistency or clarity, it indicates either incompetence or intent to mislead.
What to look for:
Data sources cited for rent comps and expenses.
Logical expense ratios (not unrealistically low).
Uniform assumptions across documents (no conflicting numbers).
Assemble Capital’s approach:
Our underwriting models are built in-house, audited by third parties, and validated against live market data. We prioritize realism, not optimism.
Red Flag #8: Limited Transparency in Reporting
The best sponsors communicate proactively. If the OM doesn’t mention investor reporting — frequency, format, or access — expect limited updates after funding.
What to look for:
Defined reporting cadence (monthly or quarterly).
Access to project photos, progress updates, and performance data.
Open investor communication channels.
Assemble Capital’s approach:
We believe clarity compounds trust. Our investors receive structured updates, financial reports, and progress visuals every quarter — no exceptions.
Red Flag #9: Market Story Without Market Data
A narrative about “booming growth” or “rising demand” is meaningless without supporting evidence.
Too often, sponsors rely on sentiment instead of research — painting optimistic pictures with no data to back them up.
What to look for:
Credible data sources (CBRE, CoStar, Census Bureau).
References to current market trends and absorption rates.
Comparative analysis of similar assets in the submarket.
Assemble Capital’s approach:
Every investment thesis we publish includes independently verified data and third-party analysis. A good story is only valuable if it’s true.
Red Flag #10: Poorly Defined Risk Disclosures
No deal is risk-free — and any document suggesting otherwise should raise immediate suspicion.
Incomplete or vague risk disclosures are not only a red flag but a compliance concern. Sponsors must openly acknowledge economic, regulatory, and project-specific risks.
What to look for:
Clear “Risk Factors” section in the PPM or OM.
Specific, not generic, risk explanations.
Mitigation strategies tied to each identified risk.
Assemble Capital’s approach:
We list every conceivable risk — from supply chain volatility to local zoning changes — because an informed investor is an empowered investor.
How Assemble Capital Protects Investors from Hidden Risks
At Assemble Capital, risk management isn’t a department — it’s a philosophy.
Our horizontally integrated model allows us to control every stage of the investment lifecycle — acquisition, entitlement, construction, and disposition — minimizing reliance on external parties. This integration provides tighter control, lower costs, and faster decision-making when markets shift.
Our Risk Mitigation Framework:
Conservative Underwriting — We model downside scenarios for every project.
Aligned Capital — Our partners invest their own funds in each deal.
Transparent Communication — Full access to data, photos, and financials.
Integrated Oversight — In-house construction and asset management teams.
Third-Party Validation — Regular audits from independent consultants and CPAs.
The result? Predictable processes, dependable outcomes, and investor trust built on performance — not promises.
Red flags aren’t always obvious. They’re often subtle — a missing disclosure, a too-perfect projection, an unverified claim. But the disciplined investor learns to spot them before it’s too late.
In private markets, protection doesn’t come from regulation — it comes from rigor.
Every investor should approach an offering document like a blueprint for trust. If the structure feels solid — transparent, balanced, and conservative — you’re standing on stable ground. If it feels rushed or incomplete, it probably is.
At Assemble Capital, we build transparency into every page. Because when clarity is the foundation, confidence becomes the outcome.
