Vet Soft Commitments

Vetting soft commitments involves reviewing possible investor partners and trying to determine whether they'd be a good fit.

What does vetting a soft commitment mean?‍

Vetting soft commitments means carefully evaluating and reviewing possible investor partners who have made a soft commitment to invest in your business or project but have not given their final decision yet. It is done to determine whether the investor will be a good choice to be made a partner in your project. 

This is most commonly done in real estate investments and real estate syndications where sponsors conduct a due diligence on every possible investor who has made a soft commitment. 

As soft commitments are not concrete and the investor can decide to change his decision, it poses a problem for the sponsor or property manager. Today, a lot of soft commitments are made by people who have no intention of investing in a project but still communicate their wish to manipulate the market and raise the prices. 

If a property manager or sponsor decides to bring on such an investor, it will create additional problems in the future and possibly become a major hurdle if the sponsor is not careful.  

Why is it important to vet soft commitments?‍

It is important to conduct through background checks and research each of the investors to ensure that they are a good fit for the deal and will bring in valuable contributions to the project. Additionally, it helps to predict the amount of capital that will be generated should the sponsor decide to agree that the investor is suitable to be made a partner in the project.

Vetting soft commitments ensures that the sponsor is getting into a deal with the right investor and provides a good background to build a relationship. 

What are the factors on which a soft commitment can be vetted?‍

There are a few ways that a sponsor or property manager can successfully vet soft commitments and make an informed decision. Check them below. 

• Check past investments: It is important to check the investor’s investment portfolio and gaze into their past investments. See what type of projects they involved themselves with and what was the outcome. Additionally, cross check and verify this investment with the original property manager/sponsor/owner.
• Verify investor credentials: Ensure you do a credit check, ask for financial statements, W-2 or other earnings statements, and investor reputation. If you are dealing with an accredited investor, ensure you verify that they are registered with the SEC.
• Determine their goals: It is important to determine if an investor is looking for short term returns or long term returns. This, in turn, can tell you if they will be pushing for personal agendas or willing to cooperate for the betterment of your project as a whole.
• Understand their risk tolerance: If your project comes with high risk factors, you may want to choose investors with a good risk tolerance. If an investor with a soft commitment has low risk tolerance, it is likely that they will turn their back if things become unstable.
• Conduct a background check: Remember to conduct a background check of the individual and see if they have any past history of criminal records or defaults. 
• Follow their social media: Checking the social media accounts of an investor can help you identify any red flags. It also provides a clear understanding of the kind of person they are.

Conclusion‍

Vetting soft commitments is an extremely important step that you must take to ensure that the investor is reliable and can become a valuable partner. It also helps in building relationships with the investor even if they choose not to invest in your project. It can open doors to approach them in the future with a new project if the relationship is built well. Additionally, vetting soft commitments will protect the sponsor or property manager from ending up in a deal with fraudulent investors.