Three Types of Real Estate Crowdfunding Sites

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After spending the last four years studying real estate crowdfunding, as well as successfully launching a real estate crowdfunding site in 2016, I have divided the real estate crowdfunding landscape into three main types 1. Portals that allow anyone to be a sponsor of a real estate deal 2. Portal that vett sponsors and deals and allow only the ones that pass muster to raise capital on their platform 3. Crowdfunding platforms run by a single sponsor (syndicator) as a way to raise additional capital for their deals The above can be divided into debt or equity. The platform may allow investment by accredited investors only or be open to almost anyone Each has advantages and disadvantages. The portals that allow anyone to post a deal have not been very successful and they will probably remain a fringe category Many investors are familiar with the big players in the industry that provide access to deals sponsored by numerous parties. As an example of a single sponsor platform I will use our own. In the last two years we crowdfunded/syndicated 26 real estate debt deals, raising just over $46,000,000.00 and two months ago completed our first equity raise, raising $1,700,000.00. Additionally, we did a co raise with a major real estate debt crowdfunding portal that was primarily residential and wanted to move into the commercial space. I will tell you that despite many similarities, no two portals operate the same, and there are major differences in deal type, vetting, costs, risks, returns, and transparancy. Keep watching this arena. If you can quantify the risk there are some good passive investment opportunities.

Nice summary and I agree with your segmentation. Another important segmentation are the platforms that act like a Craigslist and simply facilitate the connection between the sponsor and investor, and those that act as an intermediary between the two (So investors do not communicate directly with the sponsor during the vetting, and for the lifetime of the deal with communications, taxes, etc.). Initially I thought the latter would be the more successful model because it would provide more additional value. But in practice there have been a lot more investor complaints from the latter, and it's proven to be very difficult to pull off successfully.

@Don Konipol

Hi Don, curious if you can recommend from your research, any CF platforms that supply JV equity on ground up apartment development projects. Would appreciate your insights.

Thanks, Scott 

Thanks @Don Konipol !! 

Hi @Ian Ippolito , looking for help on finding effective CF JV equity platforms. Let me know if you might have any insights on who might be making that type of offer. We build ground up infill apartment communities in California.

Thanks!

@Scott Choppin , Scott, I would recommend starting with the top platforms first, because they have the most investor volume. The biggest ones that will accept non-affiliated sponsors are CrowdStreet and RealCrowd. They do have stricter requirements for listing than some of the smaller platforms, so depending on your situation you may then have to go lower down the list on volume to sites like Equity Mutliple etc. Good luck!

@Scott Choppin the issue you are going to face is two fold; one, very few real estate crowdfunding sites, if any, will take on ground up development because they are inherently higher risk, longer term projects that do not appeal to the majority of current crowdfund investors so are difficult to capitalize, and two, investor demand for real estate crowdfunding slants heavily towards current pay on preferred returns which don't make good economic sense for ground up deals.

These two issues may sound the same, but they are driven by different underlying dynamics. Crowdfunding platforms need to capitalize their projects to remain viable and so must bring projects to their platforms that investors demand. The new generation of investors, exposed only to crowdfunded deals as they are, have been conditioned to expecting immediate passive income gratification i.e. current pay on preferred returns. This works fine for value add multi-family or office where the pref can be paid from existing rents, but not for ground up where income must wait until the project is completed.

Where ground up is concerned, the only way to fill this investor demand on most platforms is by offering current pay on the pref from day one, but the only way to do that is to raise more money from the same investors.  Optically it looks just fine - 'we pay a pref as soon as you invest', but in reality, you are creating detrimental pressure on your project because are using investor money to pay investors their own pref.  

As you know, if your project is delayed it is the pref that will eat you up, putting pressure on the economics of your project and creating a misalignment of interests between sponsor and investor. Furthermore, the better platforms understand this quandary and are unwilling to support it.

For both these reasons you might want to consider promoting your project directly yourself in combination with any work you may do with a crowdfunding platform that will list your deal. It's permitted and promoting your projects directly will enable you to articulate better the benefits of ground up development allowing you to build better relationships with investors who understand your MO and who ultimately can become your most reliable capital sources.

Interesting read. My experience is almost 100% on the RE equity crowdfunding space for Don's 1st catagory (platform lets anyone raise funding). That said, I am only talking about UK regulated sites (available across the EU).

As someone who is not familiar with the USA choices, I am finding the regulatory differences very interesting. How the market reacts to the regulations is key to understanding the choices. If it is not legal, it will not scale. A few will try to get around the laws. They will get crushed sooner or later. That said, the laws are relatively new. Laws, regulations and best practice follows the thought leaders. So, some will innovate in ways that were not anticipated. Maybe in the grey. Maybe completely legal yet not what was intended so it will be stopped later when the laws are updated.

Assuming that the platforms are legal ...

There is market practice or what the audience is ready for.

In this thread there is talk about investors expecting a cash income stream early or immediately. That is a very USA market bias. 

In the UK, many investors expect to fund deals with zero cash flow and a lump sum when the deal is completed. Development deals (ground up or major refurbishments). If debt, the interest is rolled up and paid at the end. A construction loan. If equity, the deal is a pooled investment (collective investment) where the investors are passive JV partners. They get a share of the profit or a share of the loss. The entry point for the equity investments are commonly £100 ($127) and there is one platform that lets investors start with £1.00 ($1.27). Very much about letting the crowd engage.

Investors do make bad choices. This is because the barrier to entry is low and there is no minimum standard for competence. In some ways, the FCA, the UK's equivalent to the SEC, wants to have the doors open so investors can learn. Retail investors are allowed. They are limited to 10% of their investable funds. Sort of similar definition in the USA. 

We are very early days. I am an old-school tech guy from Silicon Valley. Stuff will be invented which is a bad idea. People will learn. There will be pain and suffering for those who go first. There is also first mover advantage - you learn how the market really works.

Very happy to connect, engage and discuss with others here. Online or otherwise. 

A very, very early stage project I am discussing with a friend is how to track and measure trust on the net. Eric and I are throwing around ideas. I was a beta tester for an earlier company where we touched on the issue. It was a long time ago. The problem is largely the same. Eric's was a co-founder of LinkedIn. The real estate sector could be perfect for testing the trust issues and seeing if we can make them scale.

There's another kind - digital securities. For instance, https://resolute.fund/ is a collection of distressed real estate that can be purchased globally. Each share is issued as a digital asset on SWARM SRC20 blockchain. These shares will be able to be traded on the open market after the holding period expires. 

Issuing digital securities will be a lot more common as time goes on. Some say it will become the standard. 

Been a while...

I've been navigating carnage in my personal life for the last 29 months so forgive my absence.  The industry still seems to have giant holes in my estimation that are keeping quality sponsors from adopting the new laws in earnest.  The marketplace model still is quite awful and it seems unsustainable, especially if we get a nice recession at some point.  This is sure to happen.

What is needed is a quality white label service at a decent price point that is coupled with lead generation and legal support.  Nobody is doing this well as far as I can tell.  

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