Crowdfunding is a 21st-century financing solution that pairs investment opportunities with funding. For most real estate crowdfunding, there is a platform, a sponsor, and an investor. A crowdfunding sponsor is the person or group of persons that work with the asset you’re investing in, including its acquisition, management, and disposition. The sponsor is responsible for:
- Asset due diligence
- Negotiation of the property
- Obtaining bank financing (if necessary)
- Hiring and managing contractors or on-site managers
- Working toward stabilizing or leasing the property
- Handling day-to-day management of the asset
- Determining the optimal time to sell the property
- Distributing returns and income to investors
The sponsor typically has a low financial investment in the property, with the majority of the money coming from the accredited investors or possibly a bank loan. The sponsor brings their expertise and sweat equity in finding, managing, and running an asset of this class. They also take on a large portion of the risk. If a loan is obtained as part of the deal, the sponsor would be the person held responsible if something were to go wrong.
Since the sponsor does the work, a crowdfunding investment is seen as a passive opportunity for the investor. So how do you know which investment, platform, and sponsor to choose?
What makes a good crowdfunded sponsor?
The goal is to find a sponsor that is competent, experienced, reliable, and honest. After all, crowdfunding is considered a higher-risk investment. There is no guarantee your return will be as high as originally planned, nor any promise that your initial funds will be returned in the event of bankruptcy or foreclosure. For this reason, knowing who is managing your funds and the investment is crucial. A good crowdfunded sponsor will have;
- experience in the sector and or geographic area,
- examples of positive past performances,
- strong reputation in their line of business;
- the ability to pass a background check.
Tips for choosing a crowdfunded sponsor
Most crowdfunding platforms vet their sponsors and conduct their own background check including criminal and credit checks, searching for any current, pending, or past litigation, in addition to verifying banking and legal references. But rarely do platforms follow the same procedures or set of standards.
Confirm with the crowdfunding platform on exactly what measures were taken to audit the sponsor and possibly conduct your own google search as well. Try to see what others are saying about investing or working with this person, it’s amazing what a google search can reveal.
Each investment opportunity on the platform should have an executive summary or offering memorandum (OM) that highlights the specifics of the deal in addition to sharing more about the sponsor’s experience, past performance, and track record. Look for a sponsor who has completed several successful deals in the same sector and geographic area.
Try to identify what similarities this opportunity has that may have contributed to the success of past holdings. For example, if previous purchases were acquired and funded at an 80% loan to value (LTV), l would want to see the current opportunity at 80% LTV or less. Additionally, if there were past holdings that performed less than anticipated, what is the sponsor doing differently in this acquisition than the last?
Just remember, because a prior investment was successful doesn’t mean this or any other in the future will be as well. While crowdfunding can be an incredible opportunity and vehicle for building your wealth, it’s important to choose the right sponsor to back your investment.