Real Estate Crowd Funding - Beware

[Thomas Loggins]

Good morning, folks.

Disclaimer: I am not a real estate investor. So obviously take my words with a grain of salt. However, I have underwritten real estate deals and managed portfolios of real estate loans for over 20 years.

We see a handful of RE crowdfunding sponsors advertised on RE websites and blogs. It's the hip and exciting avenue for individual investors to get a piece of the action when they don't have the traditional relationships with experienced sponsors and other accredited (or not) investors. This source of capital has grown significantly over the past 5 - 7 years due to a combination of improvements in technology, changes or easing of regulations, and a real estate cycle upswing that has outlived the norm. 

For someone who is just beginning their journey into the existing world of real estate investing, these RE crowdfunding platforms make it easy to get into the game and create excitement. However, if you are considering investing in RE via one of these vehicles, please make sure you do your research. There is no substitute for underwriting based on sound, fundamental real estate principles, including local market and submarket research. 

Recently, just reviewing one of the RE deals offered on an existing crowd funding platform, I provided a few questions about the deal. I wanted to see the sponsor's construction budget, the certified independent appraisal, the project sources / uses, and a few other items. I got the "run around", so to speak, when the response was that they don't make that information public.

Researching this one specific project / property, there is no way I could justify the projected ARV this platform was advertising on the project summary page. And given that we are about 10 years into a 7 or 8 year real estate cycle, it's hard to believe this ARV, in addition to industry-wide ARVs in general, are going to hold up (understanding that RE is local). Just look at the Case-Shiller historical index.

I had already opened / signed up for an account. I'm glad I never funded it.

Just my $0.02. Take it for what it's worth. See link below if you wish.

https://www.nreionline.com/finance-investment/examining-first-crack-real-estate-crowdfunding-industry-s-fragile-foundation

[Ian Ippolito]

@Thomas Loggins , you're certainly entitled to your opinion. 

I'm someone who invests extensively in both old-school syndications and crowdfunding and here's mine:

1) In my opinion, both old-school syndications and crowdfunding are exactly the same, in that there are a small number of very good sponsors, a small number of horrible ones, and most are just so-so and in between. In both areas you have to do the same due diligence.

2) For the same reasons as the above, I'd suggest it might be a mistake to look at one deal and then make an assumption about an entire class of investment.

3) The article you included as a reference is not a neutral article. Look at who wrote it. It is actually written by a platform that is trying to bash others to promote itself and get more business. ArborCrowd does happen to be a very good platform in my opinion. But, my point is that I believe it's important to understand who writes something before you take it at face value and take into account what their biases may or may not be.