Real Estate Crowdfunding - Experiences, thoughts, etc.

[Evan Kilbourne]

Hi All,

I just got back from a REIC meeting and the main presenter was talking about crowdfunding and it's use for investors and RE deals. Has any one used crowdfunding sites before like? What successes/pitfalls have they had? Are they easy to use as a project sponsor? What kind of experiences have you had with them?

I found the presentation to be excellent so I'm interested to hear any experiences.

-Evan

[Account Closed]

parch of land just came out with a 13% deal just now.

[Omar J.]

I have a friend who puts his money with another friend and they buy properties together. It makes it so much cheaper and easier to manage. And easier to build wealth. 

In today's day in age if you can do something like that online with strangers and eliminate the risk factors that would be incredible. 

[Evan Kilbourne]

@Omar J.That's what this crowdfunding site in particular was claiming. They said that their underwriting process was very diligent which supposedly lowers risk for investors.

Once I become an accredited investor (one day!) I'll likely be using the site to invest.

@Account Closed Are you familiar with their underwriting process at all? Have you used parch of land before?

[Ian Ippolito]

 endvest.com, is planning to have an offering for nonaccredited investors available in a few months.

Regarding underwriting: every site will tell you that their underwriting process is the best, but few sites reveal every single part of their underwriting process. 

But Patch of Land is a favorite of many investors I've talked to. They do a good job of laying out all of that underwriting on the site, where some competitors don't. I really like the fact that they pre-fund their investments, meaning that if the investment stinks and no one funds it, they will be stuck with it on their balance sheet. As a result, they have an extra strong incentive to do very good underwriting.

[Jim Groves]

Originally posted by @Ian Ippolito:

 endvest.com, is planning to have an offering for nonaccredited investors available in a few months.

Regarding underwriting: every site will tell you that their underwriting process is the best, but few sites reveal every single part of their underwriting process. 

But Patch of Land is a favorite of many investors I've talked to. They do a good job of laying out all of that underwriting on the site, where some competitors don't. I really like the fact that they pre-fund their investments, meaning that if the investment stinks and no one funds it, they will be stuck with it on their balance sheet. As a result, they have an extra strong incentive to do very good underwriting.

@Ian Ippolito - I agree with your comment regarding underwriting. If there is one takeaway I have in the CRE industry, it's that everyone thinks they're better at underwriting than the next guy. Although understanding their process would be helpful, I don't think anyone can predict what deals work out and which ones don't. All I ask is that you appropriately price the deal and check that the facts presented are true and correct.

In regards to the comment about pre-funding I want to be clear that this is not any criticism of PoL, a site that I respect a lot.  "Pre-Funding" is not risk retention.  Mortgage lenders and conduit lenders all prefund loans.  If that represented true skin-in-the-game, there wouldn't be a need for Dodd-Frank regs.  An exec from a major conduit lender once said to a large audience "A good real estate loan is one that I can sell".  Understand that these sites are in the moving business, not the storage business.  Risking their capital, even if on a temporary basis, is still better than nothing but does not represent the same risk that it does to you, the investor.

In the crowdfunding business we have to get comfortable with Asymmetric Information.  The sponsor will always know more than we do, so I want to see them risk more than I do.  If I don't see that from a sponsor, I would prefer to see a major investor with knowledge of the market risking more.  I feel more comfortable when a major investor has blessed a deal with their own capital.  That's the direction I see this business going.  

[Ian Ippolito]

Originally posted by @Jim Groves:

"Pre-Funding" is not risk retention.  Mortgage lenders and conduit lenders all prefund loans.  If that represented true skin-in-the-game, there wouldn't be a need for Dodd-Frank regs.  An exec from a major conduit lender once said to a large audience "A good real estate loan is one that I can sell".  Understand that these sites are in the moving business, not the storage business.  Risking their capital, even if on a temporary basis, is still better than nothing but does not represent the same risk that it does to you, the investor.

I believe that is not correct. Mortgage companies can easily resell their loans to others (as they did in the lead up to the great recession) because they package them as normal securities. So you are correct that they don't have any skin in the game.

But I believe there are restrictions on this sort of activity for crowdfunding companies, because they are not selling your average everyday security. As a result, I believe that they have to retain them on their balance sheet if they don't sell them to investors, which makes them a very good indicator of skin in the game. (I just talked to a CEO of one of the sites yesterday, who was not pre-funding and  he said the balance sheet issue was the reason why they are not doing it).

Any other legal experts on this forum who could weigh in?

[Ian Ippolito]

@Jim Groves, 

(I guess there aren't too many legal professionals on this forum).

I was wrong, and stand corrected. I just talked to one of the marketplaces that prefunds and they said that they have an internal policy of booking unsold investments on their balance sheet (rather than reselling), but there was no legal obligation. Right now there are four marketplaces that prefund, so I will talk with them all and see if it's the same for the others.

If you're right, and there is no contractual obligation on any to prefund, then it significantly weakens the protection for investors. In that case, I agree with you that I would want to see marketplaces putting skin in the game in some other way, such as co-investing.

Right now, there are a few marketplaces that coinvest on some projects, but only one that I know of that will do it on every project: Acquire Real Estate. I'll do some digging, and see if they disclose how much they: invest, etc.

[Al Wilson]

Has anyone dealt with FundThatFlip?