Who lies more, real estate sponsors or politicians?

Question

Hear me out, because I think it’s closer than people want to admit.

Politicians at least have opponents, fact-checkers, and a voting record anyone can look up. When they stretch the truth, someone usually calls it out by the next news cycle.

Real estate sponsors? A lot of them have a nice website, a podcast appearance, and a pitch deck full of projected returns. “Projected” is doing a lot of heavy lifting there. Nobody is fact-checking the deck, and most investors never ask to see what actually happened on the last five deals.

Some of the classics I’ve heard over the years:

• “We’ve never lost investor money” (they’ve done three deals, all in a market that only went up)
• “Conservative underwriting” (assumes rent growth forever and exits at a lower cap rate than they bought at)
• “We have skin in the game” (their “investment” is the acquisition fee they paid themselves)
• “20+ years of real estate experience” (owned their own home for 20 years)

“We’ve never lost investor money” (they’ve done three deals, all in a market that only went up)

“Conservative underwriting” (assumes rent growth forever and exits at a lower cap rate than they bought at)

“We have skin in the game” (their “investment” is the acquisition fee they paid themselves)

“20+ years of real estate experience” (owned their own home for 20 years)

To be fair, plenty of sponsors are honest and run solid businesses. But the big difference is accountability. A politician’s record is public. A sponsor’s record is whatever they decide to show you, unless you go ask for it.

So before you wire money to anyone, ask for full-cycle results, audited financials, and references from investors who’ve been through an entire deal, including one that went sideways. If they get vague, you have your answer.

What’s the best line you’ve heard from a sponsor that didn’t hold up?

Don Konipol · Answer

Chris, I mentored a mortgage broker wanna be who within a few years was regularly bringing us loans and earning commissions. He told me he had partnered with a rich family and was going to enter the hard money lending business himself, I wished him luck and he did appear to have some success. After 2 years he put out an internet post where he claimed to never had a loan that missed even one payment. Since this was 2009 and I, along with everyone I knew were dealing with multiple delinquencies, foreclosures, bankruptcies, etc. I found this incredible (unbelievable). When I questioned him as to how this was possible he told me that all his loans were 24 months, provided for 2 years prepaid interest, and the first loan he made wouldn’t mature until the next month.

Later, I found out that (1) he was underwriting greater risk than anyone else and (2) he merely added 2 years interest to his max loan amount thereby raising LTV from 70% to 96%. 2 years later 100% of his loans were in foreclosure and he was back to submitting loan requests to me.

I think the biggest “gap” in the misinformation of syndicators is in the experience claim. Many lightweights, marketing specialists, small time flippers, and residential investors try syndicating large commercial property deals, with results ranging from disappointing to disastrous.

Unless an investor has personal experience/relationship with a sponsor, or has the time, inclination and ability to do thorough due diligence, they’d be better off investing in publicly traded REITs.

Jay Hinrichs · Answer

AS it relates to lending there are very few of us that made it through the GFC IE we were runnin and gunnin in the mid 2000s I suspect 90 to 95% of HML went out by 2011 and what you have today is companies with track records that start at 2012 or so.. @Chris Seveney has mentioned to me he is seeing distressed debt come on the market from current HML and DSCR lenders so the cycle is kind of repeating as it always does.. Lets see how all these lenders that jumped in the last decade or so are at come 2030.. Lenders that claim to never have a bad loan or take a loss to me is something that is simply not believable unless they are doing very small volume and very low rates and maybe 50% or less ARV or LTC .. For HML today to compete the competition Kiavi LIma one those dudes are advertising 100% or 95% etc etc.. so they will have some defaults coming up and or are already dealing with them.. I know I have paid off I think 3 Kiavi loans this year alone were the seller had to bring in money to close so my buyer could buy. And or I suspect the big HML took a short pay.. it just happens it happens to all of us.. We all know that taking a little hair cut up front but living to fight another day is far better than a full blown foreclosure and thinking your going to sue on the PG>

Craig De Borba · Answer

This was spot on. I've heard all 4 of those bullet points in one pitch!

Max Comperatore · Answer

Chris nailed it. The classic line is conservative underwriting. But you can fact check that instantly.

Pull the latest earnings call for any public REIT in that market. If the big institutional guys are handing out 2 months free rent and crying about insurance costs, but the sponsor deck shows 5% rent growth, you have your answer. Politicians have voting records. Sponsors just have spreadsheets.

Richard Neese · Answer

Never had a sponsor but this is great! I love that you are calling it like you see it. Too many snake oil salesmen in the Real estate industry. Predators and prey. Thank you for holding the line.

Who lies more, real estate sponsors or politicians?

Who lies more, real estate sponsors or politicians?

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