Real Estate Investing and Crowdfunding

Real estate investing is capital-intensive. It should be a natural area for crowdfunding. The big concern is fees and conflicts.

With a tech startup, you are investing in an idea and the people with the idea. It may grow exponentially or blow up, leaving little behind. Part of the investment is paying the people to run the business. With real estate, the cost of managing the investment may be an additional expense beyond the investment. The people managing the investment may be connected with the people selling the investment. That can work well, or be a conflict.

The Wall Street Journal highlighted crowdfunding opportunities in real estate: Real-Estate Crowdfunding Finds Its Footing. The Securities and Exchange Commission has not enacted crowdfunding regulations yet, so the investments will have to be limited at accredited investors, or otherwise exempt from securities registration. Of course, if the investor has enough rights, it’s possible that the investment might not be a security.

The stories highlights three real estate crowdfunding platforms:

• RealtyMogul
• Fundrise
• Prodigy Network

So I decided to take a closer look.

Realty Mogul

After logging in, the site asks for self-reporting of income and net worth to determine if the user is an accredited investor. The final step is a click wrap agreement that:

“By checking this box, you represent that you have such knowledge and experience in financial and business matters that you are capable of evaluating the merits and risks of this investment, and you are able to bear the economic risk of this investment including the risk of complete loss.”

Then the site imposes a 21 day delay. I presume that this is set up to distance the site registration from a general solicitation. By coming back 21 days later, I assume the firm is trying say that there is now a relationship.

Even with the delay, you can browse available investments. There were 5 available when I viewed the site, ranging from $510,000 to $760,000 of equity sought. Each sets up a Realty Mogul subsidiary to invest alongside a property operator/co-investor. The site discloses the operator’s compensation and Realty Mogul’s compensation.  The available assets all had a $10,000 minimum investment.

Fundrise

This site also has you self-certify as an accredited investor. I was surprised to see the no option as “No – most people choose this option”. I chose this first, then went back to switch it to accredited investor.

Apparently, Fundrise has seen the SEC rule on general advertising and requires verification that you are accredited. The site requires a verification letter from a broker-dealer, registered investment adviser, attorney, or CPA before granting you status as an accredited investor.

The platform has regulation A offerings available for non-accredited investors, but limited by state. The documentation is substantial. The offering document for one investment was over 100 pages.

Fundrise is less transparent about fees than Realty Mogul. The Reg A investment allowed an investment as little as $100. The private placements required a minimum of $5000.

Fundrise has a social network aspect, allowing you to see the investors in an investment and to join investment network within the platform.

Prodigy Network

Offered little detail behind its introductory pages.

Summary

Here is the big problem with real estate crowdfunding. To purchase or sell real estate, you need to act and convince the other side that you can close. If you are buying a property and sourcing the capital with crowdfunding, there is the possibility that you won’t raise the money and not be able to close. Presumably you would have to include the successful crowdfunding as a closing condition, or have a backup source of more expensive capital to cover the failed crowdfunding. As a seller, why would you accept an offer contingent on crowdfunding?

The alternative is that the real estate is already warehoused with a party and is looking to lay off some of the equity or fund capital improvements.  Then you are looking to crowdfunding as a cheaper source of capital or a quicker source of capital. I have a hard time believing that crowdfunding is cheaper or faster than other sources of capital. And if other sources of capital are not interested in the investment, perhaps that is an indication.

However, I applaud the efforts of these sites and think they offer an interesting opportunity to make an alternative investment.  I had only a short opportunity to see what these platforms have to offer and how they go about offering their investments. There is lots more to see and learn.

References:

• Real-Estate Crowdfunding Finds Its Footing by Andrew Blackman in the Wall Street Journal