How to Confidently Choose a Real Estate Sponsor

Overview

We typically look for signals of quality when we’re hunting for investments like stocks, mutual funds, or real estate. In the case of a certain stock, you might search for one with a solid track record. Or in the case of real estate, you probably want to settle on real estate sectors that have performed over time.

The same level of scrutiny should be applied to real estate sponsors. If you’re handling real estate investments for yourself or a client, you want to be assured that a real estate sponsor—whether it’s a company or a person—is adept at discovering, purchasing, and managing real estate assets. So, just as you should watch for signals of quality when you’re buying shares of stock or an investment property, you should watch for signals of quality when you’re handing over money to a sponsor to make real estate investments on your behalf.

Signals of Quality to Look for When You’re Considering a Real Estate Sponsor

We’re constantly on the lookout for signals in our lives. In terms of the stock market, we look for signals of stability. As it relates to the economy, we look for signals of growth.

In the context of real estate sponsors, investment advisors and individual investors should look for signals that a sponsor will be a dependable investment partner.

Here are 11 signals to look for when selecting a real estate sponsor.

1. Commitment to Self-Investment

Always seek out real estate sponsors that have skin in the game. A well-rounded sponsor should be willing to invest a fair share of their own money. When questioning a sponsor candidate, be sure to find out how much money they typically earmark for real estate deals. A healthy amount of skin in the game means a sponsor is confident in a deal and is willing to take financial risks alongside their investors.

2. Easy-to-Understand Fees

Sponsors normally earn fees on investments they handle for clients. The fee structure should be easy to grasp, and it should account for the financial interests of both the investor and the sponsor. Ask a prospective sponsor to go over their fee structure so you have a clear idea of what to expect.

3. Realistic Projections for Returns

When mulling which sponsor to pick, closely examine their projected returns. If a sponsor forecasts an annual return of, say, 8% to 10%, that’s realistic compared with a 30% return. A return forecast ground in real-world assumptions indicates a sponsor isn’t being overly optimistic and is properly analyzing the risks. Be sure to inquire about return predictions, including how those predictions were arrived at.

4. Upfront Expenses

A sponsor should be upfront—in writing and in conversation—about all costs associated with an investment. Carefully question a potential sponsor about fees and other costs that you’ll end up paying.

5. Wealth of Experience

When vetting sponsors, check into their experience. How long have they worked in real estate? What have they learned during that time? How much real-world experience do they have compared with textbook knowledge? Putting your trust and money in the hands of an experienced sponsor who’s weathered market ups and downs is a money-wise move.

6. Superior Business Planning

For every investment, a real estate sponsor should have a plan in place to upgrade properties, boost revenue, and keep expenses in check. A well-developed business plan can help protect your client’s or your own investments.

7. Vast Geographical Knowledge

Let’s say a sponsor plans to invest in a multifamily property in Las Vegas. In this case, you’d want to ask a sponsor whether they’re up to speed on such details about Vegas as apartment demand, rental rates, population trends, job growth, and zoning regulations. Ultimately, a sponsor should have an intimate knowledge of any geographic market where they do business.

8. Superb Communication

Is the sponsor quick to respond to questions about financial performance and other matters? Does the sponsor share requested documents in a timely fashion? Does the sponsor take a calm, sensible approach to reviewing investment decisions? If the answer to these questions is “yes,” you might want to do business with this sponsor.

9. Lots of Transparency

When a sponsor acknowledges shortcomings in their knowledge or is honest about the potential for market volatility, you should feel more comfortable with this sponsor. Find sponsors who honestly and frankly discuss their know-how and their market expectations.

10. No History of Legal Action

As you conduct due diligence about a sponsor, pay attention to the amount and types of lawsuits filed against them. A record free of legal entanglements should give you great peace of mind. Not only should you inquire about legal cases involving a sponsor, but you should also do some online research to search for evidence of legal troubles.

11. No Planning for Potential Disruptions

Sponsors should always be prepared for market slumps, unforeseen costs, rising interest rates, and other worrisome issues. If a sponsor has put together a contingency plan to handle these issues, that’s one more signal that they’re probably worth doing business with. Be sure to ask a prospective sponsor to see their contingency plan.