Sometimes you cannot do everything on your own, and that is okay! So what is exactly a sponsor? A sponsor is commonly known in the real estate industry to be an individual or a company that funds a project until its completion. They are essentially owners of the property and are responsible for various tasks and operations. By reading below, you will know how to properly select a sponsor and what factors can affect so that you would not end up losing a lot, if not all your money.
A good investment choice would be to fund a real estate transaction with a poor sponsor rather than a terrific deal with a great sponsor.
Here are a few factors investors would want to consider, given how much the sponsor’s actions will affect the real estate’s performance.
Track record
Track record is the first thing to take into account.
The agreement under consideration shouldn’t be the first transaction for the sponsor; they should have some prior experience.
It might be concerning if a sponsor hasn’t yet made a successful departure and could be a warning sign if they’ve only closed two or three transactions.
Naturally, there are some exceptions.
When examining the history and profiles of the sponsor firm’s founders,
Greater confidence may be warranted if they come from a large operator or private equity firm, where there is a spinoff narrative about them having gained extensive expertise working at one business before founding their own.
Experiencing cycles
Experience with economic cycles is another crucial element.
It is critical to have competence in all four stages of the economic cycle rather than just the inflationary expansion phases.
Although it is typically desirable to deal with sponsors whose track records include performance through at least one significant downturn, sponsors still encounter difficulties during bull markets.
It can be instructive to discover how multi-cycle sponsors handled economic downturns, but for sponsors with just bull market experience, a question to be asked is what they failed at and what they learned from that failure.
One instance is observed in a multi-family real estate market when the sponsor engages a property management firm.
Although management firms regularly exceed expectations, likely, they won’t be able to adhere to the goals the sponsor had in mind for the company plan.
It can indicate that a sponsor has faced challenges in the past and will be able to do so in the future if they have to switch to a property management company while keeping their tenants content.
Taking into account the type of labor that creates value is also significant.
A sponsor may be a reason for concern if their only successful acquisitions have been fully stable properties that have increased in value while riding macroeconomic trends and requiring no effort.
Geography
Geographical knowledge is another crucial consideration.
When a sponsor purchases real estate in a specific place, it’s crucial to confirm that they have prior experience owning or selling a property there.
Even if it’s not impossible, it will be more challenging than if the sponsor were located in Los Angeles for them to complete a contract there.
Thanks to technology, it is now possible to quickly solve the challenges of being a remote owner, but still have to overcome this obstacle, which investors should know.
Lender Experience
Sponsors may occasionally experience financial difficulties.
They could run out if the bank stops distributing draws for some reason, or maybe the sponsor goes beyond budget and requires more money than they planned.
A skilled sponsor will be able to navigate the lender-working process, show that if something were to go wrong, they would know how to manage it, and exhibit their ability to contact the lender to ensure their difficulties are solved. This sort of circumstance may be disastrous.
A sponsor should also ensure the quality of the lender they select.
It is simple to become fixated on debt conditions like interest rates and terms for construction finance, but it is also crucial to investigate a lender’s reputation.
The underwriting practices of some lenders are infamous.
Some have a reputation for being too bureaucratic.
It might be beneficial to speak with a sponsor to get their perspective and learn about their dealings with their lender.
The sponsors’ track record and intelligence may also be learned by listening to them discuss their interactions with lenders.
Conclusion
These are a handful of the numerous factors to consider while assessing a sponsor.
Before investing, read, watch, and listen to anything the sponsor has made public.
It may include their social media accounts, website, and any real estate crowdfunding platforms they may have used for syndication.
This data collection will give an overview of the background, experience, and sponsor investing philosophy, laying the groundwork for a sponsored review.
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