Crowdfunding Question

38 Replies

Hi, does anyone know anything about a crowdfunding group called Groundfloor? A friend of mine asked me about them and she wants to invest with them. I don't know anything about them. Any insight would be greatly appreciated. Thanks!

@Shabyna Stillman

They've been in the news recently.  They are using a new set of SEC rules to allow individual investors without being accredited. 

@Bryan Hancock would be the person I'd bring in to talk Crowdfunding of any kind.

@Shabyna Stillman if you have any questions, I'd be more than happy to answer them directly. 

Those companies that @Timothy Li mentioned do real estate crowdfunding, but there are some fairly important differences when it comes to non-accredited investors. 

@Shabyna Stillman, you are welcome. Please keep in mind that these real estate investments are highly speculative and risky. There are firms out there without legal, underwriting and financial engineering capabilities that will hurt you in the long run. You should ask these platforms about their vetting process and what type of rights are been negotiated on your behalf. 

Cheers and invest wisely!

Tim

Ahh....some half-baked sniping I see.  Most entertaining.  

Truthfully any funding platform that is doing deals nationwide is kidding themselves.  They cannot possibly be good at underwriting projects nationwide given the platform's current scope.  

I don't know much about Groundfloor other than they seem to be old Reg. A enthusiasts that pushed The SEC to do a state-by-state registration when The JOBS Act's intent was clearly to remove these nonsensical barriers.  I also spoke at some conferences with Brian Dally and thought he was very well-spoken.  Aside from that an a conversation I had with a developer from Georgia about them I know very little.  I like that they're focused on opening up investments to all investors.  

@Timothy Li is right about needing to vet the platform thoroughly.  The trouble is that very few investors know how to do this correctly.  There is so much to doing quality vetting.  You need to understand securities compliance well and be able to assess the strength of their vetting process.  Future platforms are likely to engage the crowd more as part of this process.

@Bryan Hancook

We will come out with an Investor Bill of Rights soon. You are right, it is our responsibility to educate the crowd on why we have invested in so much resources to protect our investors money. 

Cheers

Tim

Looking forward to it @Timothy Li .  When it is ready please post it for everyone to review.  We'll look for the part that shows clear underwriting expertise nationwide and how everything will be staffed to underwrite projects nationally.  

A blind man could throw a dart at a board right now and could return capital on debt projects with low LTC.  We'll see how things go for investors in deals underwritten outside of the locales they're familiar with when the market cycles.  Hopefully everyone does well.  I'm rooting for everyone.

@Bryan Hancock Great points on understanding the local market. It's absolutely key. We have offices in SF/NY/ATL/Houston, and our data budget is over a million a year. One of our officers also conducts an on-site visit for every deal that we ink.

Happy to continue the discussion, but I'm glued to the news sites... another senseless tragedy.

Cheers

Tim

@Bryan Hancock @Timothy Li Thank you both. Personally, I'm not interested in investing in crowdfunding but a friend asked me about Groundfloor because I'm a real estate investor. The information you provided will be helpful to her while she does her research. I have told her to be careful because I have already been scammed by a real estate investor.

Have a great weekend.

Groundfloor looks most like Patch of Land from what I can tell... short term (6-18 month), low LTV loans, but POL requires you to be an accredited investor. Both were founded in 2013, but it appears Patch of Land has raised significantly more capital ($24M from SF Capital). POL has also structured their loans from a legal standpoint in a way that protects investors if the company does not survive for some reason, and also requires personal guarantees on all loans. I'm not familiar enough with Groundfloor to know whether there are similar protections. I believe it's going to take a broad market correction before we see which platforms have been doing their diligence, but the amount of money being poured into crowdfunding is remarkable...

For the record I think all of the sites mentioned in this thread are probably fine.  You should seek platforms with expertise in specific deal types though.  Sites can't possibly be all things to all people no matter how much they puff about budgets, how much money they raised, and what their turn-down percentage is.  I could send out an email to my network right now and get hundreds of hard money requests and select one and say my turn-down percentage is 99%+.  What does that really mean?  Nothing.  

To me if you're relying on the funding platform to curate your deal flow it defeats the purpose of crowdfunding.  The whole concept is to allow the crowd to vote with their dollars.  This should be tempered in some fashion with professionals reviewing deals, but most of the platforms don't have professional underwriters at all.  The ones that do have professionals don't have those that can underwrite deals in all locales.  I would try to find the product type you're seeking and then work backwards to find the right platform.  Try to find a platform that specializes in the place you wish to invest.  

It also amuses me when people are impressed by venture numbers because I know how venture financing works.  Most venture financing is toxic and probably imputes more risk to these portals and thus misaligns their interests with those of the crowdfunding investors they serve.  The pressure is there to make big returns and to exit quickly to make money for the venture financier.

I'd look for a platform that speaks about their EXPERIENCE, compliance, and underwriting expertise and not about their loan volume, how much money they've raised or how big their budgets are.  It isn't impressive to me that a platform has a giant burn rate.  What is impressive is that they can generate profits for their investors in their platform and know how to underwrite deals.  Look for:

  • Expertise in the deal type presented
  • Specialization in the area you're looking to invest
  • An experienced committee reviewing deals presented
  • Transparency about their fee structure and the process used to underwrite deals
  • The absence of a financing structure that will misalign their incentives with those of their crowdfunding investors
  • Clear workout procedures
  • An entity setup to immunize deals from the performance of the funding platform
  • Securities compliance and registration with the appropriate governing bodies for their level of production

Crowdfunding portals should be required to post their success rates, along with disclosing each and every funded deal that didn't meet the original advertised terms; those being worked-out; and any losses incurred on their sponsored deals - along with the Operators/Developers names involved.  Many of the portals represented on BP and even discussed in this thread have slow paying, workouts, and losses but no one seems to want to discuss those openly - or when anyone does, someone always gets their panties in a wad and the discussion becomes unproductive.  That veil needs to be lifted. 

I'm curious what makes Groundfloor different than several other crowdfunding sites that only allow accredited investors to invest.   Does anyone know the answer?

@Shabyna Stillman many of the crowd funding platforms are really just doing HML.. IE loaning to rehabbers.

I was asked to help on a few BP members who somehow got in the middle of some  Ground floor deals in Atlanta that were all buggered it was apparent that a lack of due diligence in the front end led to the situation they find themselves in. . .. If like David states if one was to have full disclosure I would want Groundfloor to talk to you about those deals... it was small money but from my research and many others there were issues.. and you had some pretty un happy folks on both sides of the transaction.

POL from what I can see is the most straight forward IE HML... Realty Mogul in my dealing with them is on another level than most of the Crowdfunding floors... And I personally know some of the BOD of Realty Mogul and they are pretty sharp folks.. And RS is run by competent folks I have done deals with them...

But anyone as @Bryan Hancock mentions in the debt business right this MINUTE  is probably doing OK.. But there are always defaults ALWAYS in all markets... No lender is 100% perfect  myself included  LOL...

At the end of the day your relying on a third party sponoser to execute and not all folks can execute.

@Daniel Kenney Generally speaking PG's are worthless in these deals.. if the people borrowing the money were that strong personally they would in most instances be borrowing from a bank ,, or insurance company etc.. they would not be paying premium rates for these deals.. POL deals as stated are HML rates.. In my day I had 100's of PG's from my borrowers when they turtle up your not collecting on them I can flat tell you that. So if you think making an investment based on a PG is some sort of security I personally disagree with that, and others who may not be that sophisticated in lending should disregard PG's as some sort of security blanket . Again my personal opinion and experience... I mean I look at my own personal PG's with my commercial bank I have close to 10 million out with them at any time if it all went bad at once.. do you think they are going to collect.. if I had 10 million liquid I would just build my projects with CASH and take Zero risk with borrowing money. I hope that makes some sense.

Originally posted by @Willem Young :

I'm curious what makes Groundfloor different than several other crowdfunding sites that only allow accredited investors to invest.   Does anyone know the answer?

 It is because they were using intrastate exemptions to start out with.  Texas has an intrastate portal that likes to tout that they were Texas's FIRST real estate crowdfunding platform.  This is inaccurate or misleading at best, but they can also sell securities to non-accredited investors under the intrastate exemptions.  The rules vary by state, but as things evolve I don't see many funding platforms (or the new "portals") using the state rules.  

Fundrise used the old Reg. A rules to sell to non-accredited investors, which proved to be ridiculously expensive.  That is, I am sure, why they stopped doing it.  I'm sure Fundrise will be a leader in offering securities to non-accredited investors given their point of view and resources.  

Groundfloor's counsel wrote a letter to The SEC trying to convince them to use the old Reg. A rules, merit review, do state-by-state review, etc.  To me this is completely ridiculous and is diametrically opposite of the original intent of The JOBS Act.  

Anyway....enough side-railing of the OP's thread ;-)

Originally posted by @Bryan Hancock :

For the record I think all of the sites mentioned in this thread are probably fine.  You should seek platforms with expertise in specific deal types though.  Sites can't possibly be all things to all people no matter how much they puff about budgets, how much money they raised, and what their turn-down percentage is.  I could send out an email to my network right now and get hundreds of hard money requests and select one and say my turn-down percentage is 99%+.  What does that really mean?  Nothing.  

To me if you're relying on the funding platform to curate your deal flow it defeats the purpose of crowdfunding.  The whole concept is to allow the crowd to vote with their dollars.  This should be tempered in some fashion with professionals reviewing deals, but most of the platforms don't have professional underwriters at all.  The ones that do have professionals don't have those that can underwrite deals in all locales.  I would try to find the product type you're seeking and then work backwards to find the right platform.  Try to find a platform that specializes in the place you wish to invest.  

It also amuses me when people are impressed by venture numbers because I know how venture financing works.  Most venture financing is toxic and probably imputes more risk to these portals and thus misaligns their interests with those of the crowdfunding investors they serve.  The pressure is there to make big returns and to exit quickly to make money for the venture financier.

I'd look for a platform that speaks about their EXPERIENCE, compliance, and underwriting expertise and not about their loan volume, how much money they've raised or how big their budgets are.  It isn't impressive to me that a platform has a giant burn rate.  What is impressive is that they can generate profits for their investors in their platform and know how to underwrite deals.  Look for:

  • Expertise in the deal type presented
  • Specialization in the area you're looking to invest
  • An experienced committee reviewing deals presented
  • Transparency about their fee structure and the process used to underwrite deals
  • The absence of a financing structure that will misalign their incentives with those of their crowdfunding investors
  • Clear workout procedures
  • An entity setup to immunize deals from the performance of the funding platform
  • Securities compliance and registration with the appropriate governing bodies for their level of production

 Wow, this escalated quickly.  @Bryan Hancock I think we're in agreement on most of these comments.  The amount of projects funded and invested dollars returned doesn't really speak for itself until I see how these deals perform in a downcycle, which hasn't happened yet.  I saw a recent post that compared this industry to health science startups--it's not really about user growth or deals funded, it's about efficacy.  It needs time to prove it's performance, so it's premature to suggest that anyone is winning in this space yet.

I've also noticed in my 20 years in this business that everyone thinks they know how to underwrite real estate better than the next guy.  It's really hard to tell which professionals are better than others but I'm a big skeptic that these platforms are somehow better at underwriting than a local investor or property specialist.  For example, senior housing is a very specialized property type that requires years of inside industry experience in operations to determine a good investment from a bad one.  But that doesn't stop newbies from trying.   So I'm in total agreement on your points above.  Some other points you mentioned:

-Alignment of interests: This is my biggest hot button.  A number of deals I've reviewed have sponsors putting in little equity (in some cases no equity after acquisition fees are paid out).  Debt deals are inherently misaligned as the sponsor keeps the upside while the lender/investor has majority of the capital at risk.

-Clear workout procedures: What happens when these deals go bad?  I don't see a single platform that has a workout professional on staff.  This could get ugly.

Finally I disagree with Bryan somewhat on the venture backing issue.  The venture backing is huge at this stage because it helps extend the life and viability of these platforms when we go through a slowdown.  If the platform runs out of cash, there is no one there to communicate with investors, workout the problem deals, or worst case result in a bankruptcy that consolidates the SPEs in with the platform creditors.  The entity setup is equally critical to provide investor protections in this event.  A "living will" for these investments would be even better.

Yes.....everyone in the investment business in general thinks they're smarter than the next person.  Any business with smart individuals and egos is like that.  

We'll have to agree to disagree on the venture financing part.  You know what happens in venture financing during market downturns?  It dries up, there are down-rounds (or no financing), and the businesses burning ginormous amounts of cash trying to grow quickly and impress everyone will get crushed.  The economics will no longer work because the musical chairs financing their poor business model will no longer work.  The acquirer (if there is one) may salvage some folks when they pick up the mess that is left, but it will certainly be a much different animal than it was during good times.  

Juxtapose that with the platform that grows slowly and organically with very little staff and thus does not need venture financing.  This outfit will presumably specialize in certain markets and verticals as well where the people running the portal understand it all well.  They won't be spouting off about how big their budgets are and how much cash they've raised.  They'll instead be focused on making money for both the portal investors and the investors in the deals they present.  To me this is a much more sustainable model.  In general anything built to hold is necessarily going to be built better than something built to shoot full of steroids and sell quickly.  

The Angel Capital Association has a lot of webinars that folks that are interested may watch and study for themselves about the viability of companies financed with angel or venture financing.  Suffice it to say that the likelihood they'll operate for an extended period of time is very low.  Giant gobs of capital thrown at businesses that lose money quickly while attempting to get acquired by people turns out to be a risky proposition.  The bulk of the companies that get acquired are NOT financed with venture money.  They, instead, grow organically by financing things by selling stuff or making money.  

@Bryan Hancock  Bryan, you've been very involved with crowdfunding from the beginning and appear to be very knowledgeable.  Can you tell us if you've had any project, either those you've sponsored on portals such as iFunding and/or deals on your own RealStarter portal, that didn't meet published investor expectations; or where investors experienced a loss; or the deal had to be worked out and investors didn't get repaid timely and less than originally led to believe?  If so, how were those handled and were underwriting deficiencies a factor?  Were the portals transparent so that other potential investors would be aware of problems or deficiencies?      

@David Begley   at the end of the day I would suspect that each of these portals has had deals go bad and has had to do work outs.

one cannot be perfect when lending money to 3rd parties.. Since these are portals to raise money I don't think they are obligated to give results.. like a mutual fund disclosure.. maybe I am wrong.

Honestly our first investment on iFunding has not gone perfectly.  We tried to scale a builder and he has flat-out sucked.  We'll still deliver good returns to our investors, but it remains to be seen how much.  I don't think anything iFunding did was deficient in underwriting, but they have certainly evolved in managing the project as it has rolled out.  Some of this learning curve on the project has delayed the project more, but honestly the bulk of the delays were our fault or attributable to historic weather delays in Austin.  We have had two major floods in Austin and it has rained for what seems like weeks at a time here.  

I can also tell you that we report what is happening in excruciating detail biweekly.  I am not privy to what iFunding reports to their investors after we send things to them.  I have given them this feedback, but I am not sure what they're doing with it.  

The two deals we have funded on our own platform have gone much smoother, primarily because we have controlled the whole process and we're using different builders on these projects.  We're also in the process of rewriting our entire site because the white label provider we're using doesn't allow us to do things we need to do for our investors and business.  Again, we need to be in control of things.  All of this takes time to do right and costs money to do.  

Overall what investors need to understand is that these projects are risky.  Some of our projects have only delivered 6% or so.  Others have delivered 48% without even accounting for leverage or the financing structure.  Investing in ground-up development projects is risky and the dispersion of returns is much wider than it is with a hard money loan and a first position trust deed.  We have never lost money on a project in my close to 13 years of investing experience.  Some certainly have been more trouble than they're worth though.  

Originally posted by @Jay Hinrichs :

@David Begley  at the end of the day I would suspect that each of these portals has had deals go bad and has had to do work outs.

I'm pretty sure you're correct Jay, they are not obligated to post losses, poor results, and crook operators; however, the good ones will in order for investors to make informed decisions.  Mutual Funds are obligated to post their performance in excruciating detail and it is an open book - same with federally regulated banks.  Crowdfunding Portals that refuse to pierce the veil will not succeed in the long run - investors will make the very correct assumption that they have something to hide.  It is a problem now and will get worse if they are allowed to proceed unfettered without necessary transparency.