Real Estate Crowd Funding - Beware

9 Replies

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

While I understand the expectation of a market downturn, doesn’t the RealtyShares issue reflect a problem with their business model rather than of the underlying asset class they were using?  GM was bailed out, but it wasn’t because people weren’t buying and driving cars. 

My original comments do not implicate a specific asset class. My comments are about understanding the overall risk associated with these RE investing platforms, suspecting a lack of focus and attention to the fundamentals of real estate analysis and underwriting, which can be included within the framework of the overall business model. My comments regarding an expected market downturn are simply additional support to the  suggested risk.

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@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.

I think 'Beware' is fair.

Below is a recent update from a crowdfunding sight on an investment I made with them that stopped paying in 2016. As in all investments, risks exist. If you don't have the money to lose, crowdfunding may leave a sour taste in your mouth. I still invest with other crowdfunding sites, but all have loans that have fallen into default even with variations on the due diligence and information they provide.

"SFR Package II 1/16/2019

01/16/2019

The sale has closed. The portfolio of homes secured by this loan was coupled with additional homes that were part of the same court action. Allocation of the purchase price was determined by the buyer. Reconciliation of the sale price and expenses and a calculation of losses will take as much as an additional week. It is clear at this point that the investment returned less than $0.10 on the dollar. The reasons for the poor results are several.

The borrower's original plan was to do minor repairs and clean up and to re-market the properties to local investors interested in purchasing individual or smaller groups of these homes. Only a few homes were sold, however, under this plan. The balance of the properties was not well maintained and so deteriorated physically. The property values decreased accordingly. Additionally, tax liens accrued and some of the houses were foreclosed upon by the taxing authority. Due to the number of potential liens on the property, cleaning up the title so that the properties could be sold was a lengthy, costly and time-consuming process. As a result of the sale, the net proceeds are expected to be less than $100,000. The loan has a personal guarantee and we are continuing to assess a potential continuation of our suit against the borrower. As a reminder, RealtyShares already has a judgment in California against the borrower, but we will need to have it perfected in Florida. In order to potentially fund the further pursuit of this judgment against the borrower, RealtyShares will not be immediately distributing the remaining proceeds of the sale to investors but will be temporarily holding that money while assessing the benefits of using those funds to continue to pursue that additional claim. RealtyShares will update you with a reconciliation of the sale proceeds and with our findings on the chances of collecting on the guarantee judgment after we complete an asset search. The net sales proceeds will be promptly distributed if we determine that further litigation is unlikely to be of material benefit."

@Ian Ippolito , absolutely. I agree. Fair point on understanding the author of what one reads. That stated, given the failure of RealtyShares (investors will lose $) and the experience (lack of disclosure) I had with another platform, I believe my "beware" comment is valid. 

As an experienced lender and RE portfolio manager I knew the questions to ask, and was not satisfied with the answers I received. Understanding that there are a lot of inexperienced investors who are excited about starting their RE investing journey (this includes myself) at some point in the future, it was clear to me, as someone with experience in analyzing RE deals ( pro forma property performance, markets, submarkets, capital stacks, investment and exit strategies, etc.), that your average, "just-starting-out" non-accredited investor might not get the full picture of the risk associated with some of the investment opportunities offered on this particular platform.

But again, yes, you are right about understanding the author / writer.

Thanks.

I agree that there are some dogs out there. Where I disagree is that this is something special or unique about *real estate crowdfunding*. You mentioned you don't have much experience with investing. What I suggest is to look at 30 deals that are old-school syndication (either here on bigger pockets or through the "country club network") and see if you still feel the same way after. I strongly suspect you will find it's about the same proportion. Lots of so-so quality, a few really horrible, and a few really good.

In my opinion what people really need to beware of isn't crowdfunding. I feel what they should beware of is investing in *any* real estate when they don't understand how to do a proper due diligence. That includes crowdfunding, old-school syndications and/or buying real estate directly themselves.

I have also found that there are only a few good  syndicators,  but I think  that is true for almost  any  investment  or business, a few are good and lots are so-so. The trick is doing the work to find the good ones. Before I invested in my first syndication I did a lot of work finding the few good ones to invest in.

Hello @Thomas Loggins

I would recommend looking at real estate investments as a whole instead of leveraging just narrowing your criteria to the crowdfunding platforms.

I would agree with @Ian Ippolito and network with syndicators and see how they underwrite deals. You can see first hand the assumptions, criteria, business plan strategy, and learn first hand. Plus you may find a better deal through networking than the crowdfunding platforms.