Why do so many real estate deal sponsors fail — while others seem to effortlessly raise and close deals?
In my experience, these are some of the catalysts that have caused sponsors, real estate syndications, and crowdfunding campaigns to fail (or at least not meet projected expectations).
1. Not Structuring Deals Correctly
There are many ways to structure syndicated or crowdfunded real estate deals and partnerships. There’s donation based, debt, and equity crowdfunding opportunities. There are Regulation A, D and A+ filings and other variations. Sponsors can make their money in a variety of ways and choose to offer a variety of different returns. Just make sure it is structured well, competitively, and in an appealing way that your target investors will understand. If not, the market will let you know. I encountered this on my second syndication, in which I had to restructure the deal to complete the raise.
2. Real Estate Syndication Software
Today sponsors can choose to try to raise money manually offline, leverage existing third party real estate crowdfunding portals (if you qualify and can stomach their fees), or launch their own portals online with white label syndication software.
The more efficient you can make the process for your prospective investors and your in-house team, the better things will run. You’ll be able to attract more money from the right investors, put it to work effectively, and deliver on your promises.
3. The Legal Stuff
This is a really dangerous game to be in if you don’t know the laws and have the paperwork right. The SEC, feds, and CFPB do not play around. A good law firm with experience in this area — and the right software — can greatly simplify this and help streamline everything.
Be sure you have an attorney who is a specialist. And make sure you’ve budgeted for their legal fees, which may be substantially more than your expect, depending on how you will file with the SEC. Be sure to know the cost upfront so you can structure your ask and raise correctly.
4. Not Offering Enough Deals
Investors can get impatient. You’ve got to keep their attention and offer enough options to retain them, convert them while they have the capital to invest, and keep them and their friends coming back to you.
If you only have one deal and it isn’t really a match for their needs or tastes, you may never get the opportunity to win their business again. Yet, having a consistent deal flow and well-rounded menu of opportunities can make all the difference in making it and surviving as a sponsor.
5. Not Raising Enough Money
Having too much money can seem like its own crisis sometimes. Yet, it is far better to have too much than to go back to your investors to ask for more cash at a later point. There can be a lot of additional costs involved in syndicating real estate deals. Especially if you don’t have a good, well-consolidated internal system. These costs can range from legal work, research, and marketing to staffing, servicing investor clients, payment processing fees, accounting, property renovations, and more. The last thing you want after you’ve done all the work and raised the money is to realize those costs mean that you can’t deliver on your promise.
6. Poor Marketing
Technology has made it easier than ever to raise money online. It also means there is more noise and competition out there than ever. You can’t just post an investment opportunity on a website and expect the world to find it and fund it in a flash. Sponsors need a good branding and marketing budget and a strategy to get in front of people with capital, follow up, and to convert them too.
Did I miss anything? What are some other reasons real estate syndicators fail?
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