GROUNDFLOOR

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I would really love an expert opinion on investing in some of the loans offered on GroundFloor. I was thinking of allocated 5-10% of my investment portfolio in a real estate crowdfunding platform and this one seems okay. It's based out of my home state.

If any of you have any experience investing in any of their loans or have delved into other platforms, I'm open to any advice and recommendations.

Thanks!

I have looked at a lot of loans on the site and have not been impressed with the quality of the due diligence. The after repair value are inflated. One loan I turned down another buyer due to the value was featured as Grade A loan when it should have been a D. 7.4% interest rate for a loan that I would rate at a 50/50 chance for default and the loan amount would be around the after repair value. If the borrower defaults I think the investors would be lucky to get 80-90 cents back on each dollar invested. I have bought pieces of a few loans but only in Atlanta where I can judge risk.

from what I saw with 3 transactions they did they were clearly going through learning curve and were not experience lenders.. ( Ie Brokers) which is all a crowdfunder is in a debt scenario.. there is one very well publicized on BP account of a nightmare scenario.. total miss on the portals due diligence from what I could see.

Firstly the ARV bothers me as it has no verification that the repairs will actually be made nor a real good assessment of a true appraisal before or after. Secondly, there is no payout until the deal is complete - usually a year down the road. Other crowdfunding sites hold more promise.

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if you are looking to get into Debt CF deals, I would recommend looking at Patch of land. I have been investing with POL for the last year in 6 or 7 deals, all very successfully so far. Peer Street is also a top tier site.

As always, do your own DD, there are always better and worse deals.

I am an investor in Groundfloor. Groundfloor.us has a very specific and interesting business model which is utilizing Reg A+ to enable retail investors to invest in short term loans to fix and flip rehab developers. They are expanding this model state by state, and are far ahead of the other sites in this process. The retail investors get good risk diversification by being able to make small investments in many short term loans which are backed by liens, and an average return so far of 12%. Groundfloor is building a good base of well qualified repeat developers and a strong underwriting model, and the management team is one of the best in the crowdfunding space.

@Robert Davis   In essence they are acting as brokers.. they are bringing a developer or flipper together with investors and receiving a fee to do so... NOt sure what other definition of broker there is but that's a very common one.

in our state of Oregon the only crowdfunder that is here is Realty Shares and that's because they got a lending license in the state.. the crowdfunders are loaning as brokers and need to be licensed in certain states other states the commercial purpose loans require no licensing.

? There are a number of companies that do more than bring a borrower together with investors for a fee - they underwrite, fund, and service the loan, none of which a broker does.

@Robert Davis   that simply is not true... Brokers if they want to stay brokers underwrite the files ,  they fund or coordinate the funding through escrow just like a crowdfunder, and many service the loans for their investors just like a crowdfunder.

CF that does Debt deals is simply a broker with a different moniker... granted its a new and unique way to go about finding your loans and your investors.. just a little different twist on it.

But the core results is CF are brokering other peoples money.

Well I guess we just have different definitions of what a "broker" is. My definition has always been what you initially stated - basically brings two parties together and collects a fee. If he underwrites, funds and services, he is more than a broker to me  but would be interested in what other members think. 

@Robert Davis   I have been one in two different iterations one in the late 80s in CA were we ran under the CA real estate broker license.. I had 250 investors and about 35 million out at anyone time.

and we were 30 years ahead of CF.... We found the deals we underwrote them and presented to our investors.. this was done on the phone and in person generally.. and fax's were just coming in.

We collected the payments and sent them to the investors  WE also funded the deals the investor money came into our trust account just like it does with CF and then the money is sent to title.

in CA you can and could legally fractionalize DTs 10 lenders per loan.. just like CF do .. WE did not fool with the 5 and 10k investors most had 25 to 50 minimum.  So we had split payments on each deal... just like crowdfunders do.

Now todays HML will use a PPM.. just like Crowdfunders but they get their clients not by saying they are crowdfunders .. and having a portal All just semantics.. They have websites were you can look at potential loans etc. and docs or underwriting is transmitted via computer. ( e mail)_..

So investors can buy whole loans or can just invest in the PPM just like CF..

its just soup de jour when it comes to debt deals.. nothing different than we have all been doing for 40 years I have been around it.

you maybe confusing it with say a note broker like to you in FCI exchange or those that buy existing paper.. no originating it like crowdfunders do and HML do

Others on this thread have already pointed out some of the issues with Groundfloor. I'll add one more consideration to the list. 

Since they're using regulation A+, they are forced to make some of their information public (unlike other sites who generally tend to keep their information private). I personally love to see the transparency, however in this case the picture doesn't look very flattering.

It looks like they had to abandon $4.3 million in loans, which I am presuming is because they were unable to sell them. (Maybe there was another reason, but it's difficult for me to think of another reason to avoid making additional revenues) . And in 9 months they only sold $7.4 million. If you calculate the tiny revenue they make on that, it does not seem very much money to keep the lights running, let alone make an actual profit.

And then it appears to get even worse. Regulation A+ has gargantuan expenses (around $1 million), which is the reason so few companies have used it for real estate crowdfunding. So unless I'm missing something, this looks like they are taking a bloodbath of a financial loss.

If all of these things are correct, then if I were investing with them, I would be very concerned over whether or not they were going to be around in the long-term with this current business model.

https://www.sec.gov/Archives/edgar/data/1588504/00...

@Ian Ippolito    yes based on what I read  the bigger fund has done OK on defaults the smaller one has a default rate at 15%... not that they are losses but they are work outs.

NO lender or crowdfunder can be perfect.. I know that for a fact and personal experience.

your correct though a 10 million dollar a year funding generates minimal revenue unless they are VERY expensive on the loan side.. I don't know their rates but lets assume they are netting 4% apr 2 on points and 2 on servicing that's 400k a year to run the railroad.. you can probably run staff with that but your principals if they have more than one are not really making near enough to take on all this liability and risk.. Not to mention the legal and accounting that is spent on this type of offering.

this company needs to get to 20 then to 50 million as fast as humanly possible other wise their burn rate is going to consume them... For these kind of returns a very well seasoned and respected HML in your market is I would think a better and safer bet. Like in LA Norris group.. etc.

I have a test investments with Groundfloor at the moment. I treat Groundfloor like lending club...I invest a small amount per investment and diversify myself. I only have 2K in Groundfloor but have stopped and will not be adding more. I had a bunch of my loans returned because the flipper backed out (so, no pre-funding). I also hate the fact that a balloon payment is made at the end and I don't see any interest payments until then—increases the risk of default IMO. 

I prefer making fewer investments with higher minimums via fundthatflip...no balloon payment, a 3-month pre-payment penalty with bonus interest for extensions. 

Edit: By the way, GroundFloor states they charge 2-6% of the loan raise. So @ 10 million = $200-600K. Assuming they are a small time shop (<5 employees), the higher end of that number would certainly be great for such a young company. 

@Andrew Noway ,

You said:
>>Edit: By the way, GroundFloor states they charge 2-6% of the loan raise. So @ 10 million = $200-600K. Assuming they are a small time shop (<5 employees), the higher end of that number would certainly be great for such a young company.

Except for the very important fact that there are huge expenses with running a real estate crowdfunding company that you're not taking into account.

For example, the legal expenses on regulation A+ filing is $1 million. So even if they made the best case scenario of $600 K, they would be MINUS $400K. And that's not even counting all the other expenses that are required to perform adequate due diligence. The subscription services for market research, etc. can add up to hundreds of thousands of dollars a year.

Thank you Ryan for starting this thread and for all of you who have weighed in with your experiences and opinions. As a tech startup, we at Groundfloor thrive on all types of feedback from all sources. Because BiggerPockets is such an influential community, it's especially important that we address some of the points being made here. As co-founder and CEO of the company, I'd be happy to continue this conversation on this thread and/or offline.

As a matter of context and factual background, GROUNDFLOOR is the first and only product that allows the non-accredited 90+% of U.S. households to invest directly in real-estate backed loans on a fractional basis. We started the company in February 2013, made our first loan in March 2014, raised $7.6 million in venture capital, and have grown to 24 employees. We've funded over 100 loans and returned capital with no loss of principal on 40 of them so far. We're the only platform never to have used institutional capital to fund loans, and the only for which 100% of our loans have been open to participation by all.

Why does all of this matter to you, and how is it germane to the discussion on this thread? As members of BP, you're very likely an experienced real estate investor, or aspiring to be. Frankly, Groundfloor wasn't built for you--but our mission when successful will certainly impact you for the better (see below). On one hand, the world does not need another real estate lender. There are plenty. It's a competitive industry that will only change through structural means. On the other hand, those with enough means to be an accredited investor and/or with enough experience to buy whole loans rather than participating in a fractional security have many options for deploying their real estate investment dollars. Our $10 minimum investment and unit size are purpose-built for those who don't have the inclination or time to get deep into real estate investing. We built a Lending Club-style grading heuristic to boil down the essentials into something everyone can understand without diving into the details.

But don't let our focus on serving the mass market of self-directed investors fool you. We've also grown our expertise in real estate lending significantly over the years, with several key hires and--like any real estate investor--lessons learned through application. Our head of risk management joined us with 27 years experience at Prudential in algorithmic lending and asset management. Our lead underwriter spent 10 years in the hard money lending business. Two of our newest staff members in originations helped build the largest online balance sheet lender in the business. 

We take exception and would like to correct the record with those who would impugn our underwriting and due diligence. As Ian Ippolito points out, we have "abandoned" $4.3 million in loans that we could have done, but for the most part chose not to, sometimes to the disappointment of investors like Andrew Norway who received refunds. Gary Headrick's comment is factually incorrect--we do use ARV, but never disburse draws without verification of the milestones required to support it through the course of the project. Any ARV is debatable, but ours is backed by expert analysis of several industry-leading data sources, and frequently supplemented by a certified independent appraisal (for larger deals) or at least a Broker Price Opinion (for smaller ones).

That said, it is true that our focus on creating a mass market investment product has left us with a few shortcomings relative to other options that may be available to you as an investor. We're in this for the long haul, and are a self-aware, disciplined management team. As Ian points out, we've spent over $1m on qualification of our public offering and have been dependent upon very supportive, deep pocketed venture capital investors and partners to do that. In the process, we've accepted offering securities in only nine states (so far) and not publishing all the supporting documentation on a loan that a $5,000-$50,000 investor might want to see. Those two factors are what lead some, as Greg Garish points out, to judge us harshly. Having spent so much time, capital and energy on the securities offering, we're also frankly behind where we want to be with features such as monthly payments, as Gary and Andrew Norway point out. We are, however, rapidly catching up.

Why should you bother with GROUNDFLOOR? Our early adopters, including accredited investors with many other options, choose us pragmatically because we're the only investment product that is fully disclosed under SEC governance. With Groundfloor, you get unmatched transparency and accountability. That's probably the biggest reason we sell out of loans faster than we can produce them, and have to limit participation on an invite-only basis. But our investors and borrowers also choose us because of the importance of our mission. Broadening opportunities for capital formation, and doing so in a way that allows radically more people to participate directly rather than through a REIT or other fund, will ultimately restructure the real estate lending business. In the long term, we'll see a much lower cost of capital, especially for the best borrowers among you. Indeed, in April, Groundfloor announced our first quarterly rate cut in an environment where everyone else has been raising them. That's just an early taste of what buying power through breadth of capital promises. 

Being a part of something as audacious as this, one should expect a few bumps in the road. Does Groundfloor always look good? No. Do we make mistakes? Of course. We're willing to be misunderstood for long periods of time. If you're on board with what we're really up to and want to be a part of it, I'd enjoy connecting with you--as a critic, as a supporter, or ideally as both. At Groundfloor, everyone's welcome--and we're not going away. I hope you'll join us.

@Ryan Beasley , crowdfunding makes real estate easily accessible, however, in regard to real estate investments (especially in the institutional grade landscape), the advice of an expert who works in the industry every day, knows all the players and their track records, and performs due diligence on each offering is a great benefit to you.

@Brian Dally - Thank you for your thoughtful post. 

Even though I am an accredited investor, I do believe Groundfloor can be great for anyone. For me, all I would need to begin investing again is the stated interest paid monthly instead of a balloon fashion. I know that isn't practical for smaller investments/developers, but every other site does it...so it's an opportunity cost thing (unless interest rates are higher with this risk—something I can't determine because there isn't enough information provided with your offerings). 

Originally posted by @Jay Hinrichs :

@Robert Davis   I have been one in two different iterations one in the late 80s in CA were we ran under the CA real estate broker license.. I had 250 investors and about 35 million out at anyone time.

and we were 30 years ahead of CF.... We found the deals we underwrote them and presented to our investors.. this was done on the phone and in person generally.. and fax's were just coming in.

We collected the payments and sent them to the investors  WE also funded the deals the investor money came into our trust account just like it does with CF and then the money is sent to title.

in CA you can and could legally fractionalize DTs 10 lenders per loan.. just like CF do .. WE did not fool with the 5 and 10k investors most had 25 to 50 minimum.  So we had split payments on each deal... just like crowdfunders do.

Now todays HML will use a PPM.. just like Crowdfunders but they get their clients not by saying they are crowdfunders .. and having a portal All just semantics.. They have websites were you can look at potential loans etc. and docs or underwriting is transmitted via computer. ( e mail)_..

So investors can buy whole loans or can just invest in the PPM just like CF..

its just soup de jour when it comes to debt deals.. nothing different than we have all been doing for 40 years I have been around it.

you maybe confusing it with say a note broker like to you in FCI exchange or those that buy existing paper.. no originating it like crowdfunders do and HML do

 I'm in agreement with Jay on this one.  Unless the platform keeps their own investment dollars in the transaction, they are a broker.  Whether or not they underwrite does not change that.  All reputable brokers underwrite, but without their own skin in the game they are nothing more than intermediaries.  Prefunding does not change that either.  My mortgage broker prefunded my home mortgage too.

Originally posted by @Andrew Noway :

@Brian Dally - Thank you for your thoughtful post. 

Even though I am an accredited investor, I do believe Groundfloor can be great for anyone. For me, all I would need to begin investing again is the stated interest paid monthly instead of a balloon fashion. I know that isn't practical for smaller investments/developers, but every other site does it...so it's an opportunity cost thing (unless interest rates are higher with this risk—something I can't determine because there isn't enough information provided with your offerings). 

 Andrew-

Whether or not the interest is paid monthly will not change your investment risk.  A fix and flip transaction by nature will not have the cash flow to make currently interest payments (leased properties will).  If you were to pay out interest on a monthly basis, it will come from an interest reserve which is nothing more than accrued interest capitalized at Day 1.  Either way the borrower will have more principal to pay back.

The biggest risk you face with this structure is in execution and timing, as delays will eat away at the equity cushion.

@Jim Groves - I disagree. In a pure debt scenario, I look at LTV and ARV the same regardless of how the funds are dispersed. If the LTV is 75% and they default after 9 payments, I have received 9 interest payments + we sell the property...I'm probably not losing principal. If the LTV is 75% and they default after 9 months in a balloon situation, all I have is the property.

The above doesn't even take into account the opportunity cost of the monthly distributions. The only variable that would make up for the increased risk of not receiving monthly distributions would be a higher interest rate for the balloon option. 

I've had over 20 deals with them and never lost any money, a few performed at 16%. Some of them I just got my principal back and no interest.  For what you get a very low investment entry point Personally for me its a great diversification vehicle as I usually invest 500.00 to 2k per deal. On the other hand I had 1 deal with Patch land where I invested 5k while I was getting mo. interest at 10% of my principal, now the house is foreclosure and I've been waiting to get my principal back for the last 3 mo.

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