PeerStreet – Wealthfront meets E*Trade for Real Estate Investing

Joe Stampone Featured, Innovation/Technology, Invest Passively 4 Comments

While real estate crowdfunding is still in its infancy, we’re beginning to see new entrants introducing innovative models to the space. The biggest challenge early on has been the fact that investors typically don’t have the expertise to analyze deals and assess risk, while understanding the legal and tax implications of direct equity real estate investment.

Many platforms have shifted to investing in debt, which provides a higher level of safety, fixed return, and scalability. One of the platforms I’m most excited about is PeerStreet, best described as Wealthfront meets E*Trade for real estate investing. The PeerStreet model allows investors to set their investment criteria, then using proprietary underwriting algorithms the system will automatically allocate them into loans that fit those parameters.

I caught up with PeerStreet co-founder, Brett Crosby, a former Google employee, who set out to disrupt real estate investing.

Enter Brett:

Describe PeerStreet in 140 characters or less.

PeerStreet is a marketplace for investing in real estate backed loans.

Why did you opt to tackle this sector/problem, when you could have started any business? What is your goal with PeerStreet and why is that important to you?

My co-founder, Brew Johnson, is the one who had the initial vision for PeerStreet. He identified a number of flaws in the housing system prior to the 2008 financial crisis and came up with the idea for PeerStreet as a way to improve the industry and make it more transparent. He approached me about the business because of my background building successful products and marketplaces at Google.

Brew and I actually first met in college at USC where we had a lot of classes together. We’ve kept in touch over the years, and periodically discussed working together. PeerStreet presented the perfect opportunity to do so. Leaving an established company like Google is not an easy decision to make, but the more I looked into this idea, the more I believed in PeerStreet’s vision and our ability to transform real estate finance in a positive way. We are attacking a Google-sized problem and there are many important lessons I learned from the technology world that can be applied to the real estate industry. That’s why I decided to take the leap and start PeerStreet with Brew.

More on the business. We focus on private, non-bank real estate loans because we saw tremendous opportunity to unlock value in an industry that was ripe for transformation. Real estate has generally been slow to adopt new technology and our model uses marketplace dynamics, data science and a tech company mentality of creating a platform that benefits many players in an ecosystem. Our underwriting algorithms allow us to process loans very efficiently. For example, we stress test our loans against 20 years of historical data in each submarket. Then we apply a predictive model that forecasts submarket performance at the time we put a loan up for investment. Put that together with our in-house real estate analysts that double check each loan manually, and a third-party valuation on each property, and it is a powerful combination. It sounds like a lot of work and like it would be too expensive to build all this for a few one-off deals, but the system we’ve put in place is designed to scale.

Of course, none of this would be possible without having the right team in place. Brew’s background in real estate, law and technology coupled with my operational experience at Google provides a good foundation. Both of us also have previous experience, building (and selling) successful companies. But the real key is that we’ve built a best-in-class team with expertise across real estate, engineering, product management, law, compliance and finance.

Can you discuss some of the unexpected challenges you’ve faced and how you’ve overcome them?

Every new business has its challenges, especially when they are reinventing industries. We’ve had all sorts of interesting hurdles from technological challenges to building the right legal and compliance framework to operate this kind of business. One of the interesting challenges has been figuring out the most effective way to articulate what PeerStreet is and the asset class. Investors have never been given such direct access to real estate loan investments so there’s a big educational piece that comes with that. We use our help center, FAQs, blog, glossary, press and “How it Works” page to communicate these things to prospective and current PeerStreet investors. Additionally, we have a responsive team that constantly fields incoming investor inquiries. What I’ve been most surprised about though is that hiring great talent hasn’t been more of a challenge. If anything, we’ve had trouble turning great candidates away because we’re focused on building a lean, efficient business. And the talent we’ve hired, we’ve been extremely happy with. Our churn has been very low.

I’ve heard PeerStreet described as a Wealthfront for real estate investing (CEO of Wealthfront Adam Nash is even an investor). Is that a fair characterization? What does this mean for the retail investor?

To take your analogy a step further, PeerStreet has a bit of both Wealthfront and E*Trade for investing in real estate backed loans. Our Automated Investing feature allows investors to set their investment criteria, then our system will automatically allocate them into loans that fit those parameters. In that respect, we are similar to Wealthfront. However, PeerStreet investors can also hand select their investments if they prefer, adding even more flexibility to the investment process, and is much more analogous to an E*Trade or Charles Schwab.

Most retail investors don’t understand the complexity of real estate debt or equity and have never invested in real estate (outside their personal residence which I don’t view as real estate exposure). What words of wisdom or advice do you have for a new real estate investor?

Interestingly enough, most investors have exposure to real estate debt in their investment portfolios. They just may not be fully aware of it. Many fixed income mutual funds, 401Ks, etc contain mortgage-related securities but because of the fees extracted in the process, the returns are much lower than what you may see on PeerStreet. PeerStreet makes the process of investing in real estate backed loans more transparent and we pass through much more of the upside to investors because of our low fee structure and fewer middlemen.

That being said, for those investors new to direct investment in real estate investments, I would suggest they do their own research on each platform they’re considering. It’s important to be aware of underwriting standards, the team’s experience and the various terms/risk metrics associated with investment offerings. Like anything else, investors should collect as much information as possible to make the most informed investment decisions they can.

Michael Burry (of Big Short fame) is an investor. What have you learned from him and other investors in the company?

Michael Burry is best known for the foresight he had leading up to the financial crisis of 2008. Not only was he able to identify flaws in the mortgage system before most people, he also had  the fortitude and wherewithal to stick to his beliefs when everyone tried to tell him he was wrong.

Brew wanted Dr. Burry to be involved with the business from the beginning and, in some regards, he serves as a role model because of his deep industry knowledge and understanding. Every new PeerStreet employee is given a copy of The Big Short and is encouraged to read it when they start at the company. It is important because we took lessons learned from the housing crisis, both good and bad, and applied them to our business in an attempt to push the industry forward in a positive way. You can read this CNBC article or the PeerStreet blog to learn more about how the story influenced PeerStreet and Dr. Burry’s involvement in the company.

Where do you see PeerStreet/real estate crowdfunding in 10 years?

We believe this will be an extremely large industry that will change many traditional ways of doing business. We at PeerStreet plan to play a major role in that transformation.

Brett’s Bio:

Breet CrosbyBrett crafts the strategy, product and message behind PeerStreet and is responsible for product, marketing, PR, sales and business development. Previously he was Director of Marketing at Google where his 10-year tenure spanned many of Google’s most prominent products. Most notably he co-founded Google Analytics, helped start Google’s mobile advertising business, ran the founding marketing team that launched Google+ and most recently ran the marketing teams responsible for the dramatic growth of Chrome, Gmail, Docs, and Drive. Before Google he co-founded Urchin Software Corporation, a web analytics service acquired by Google in 2005. Brett advises and invests in startups and is an active real estate investor. He graduated USC with degrees in international relations and political science and furthered his education with programs at Georgetown, Michigan State and Semester at Sea.

  • Mark Kennedy

    Hey Joe, outstanding! Love the interview.

    I grew up in the town they are based in, Manhattan Beach CA, cool little beach town. I don’t know that much about their loan portfolio other than all of my former spec builder (one-off infill residential) associates and clients use them as opposed to the local community banks. The areas in and around the beaches of LA have become very exclusive and new SFhomes start in the 2million+ dollar range, so as you can imagine there is a lot of activity in the spec building game.

    I’ts a great concept. When I used to do spec building in CA, we had to go around to all the accredited/wealthy professionals and pass the hat and come up with 30% of ADC costs and along with our 10-15% skin, submit to local bank and wait 45 days to break ground. Now all these wealthy locals can play the hot residential market and actually invest in development in their backyard without any active involvement and be able to scale their risk. Now builders can take down multiple lots by pre-selling and converting the ADC loans to perms as soon as they get buyers to qual, due to the ability to pool all these loans and spread the risk. Previously, this was not possible: banks would hold back draws and reserves (10-12%) until you got COO (cert of occupancy).

    Ironically, you could actually be an accredited investor and still not be able to qualify to buy a home in some of these areas (in the case of wealthy millenial techies flooding into So Cal), therefore leaving this platform as the only option to passively invest in so cal real estate.

    I’m telling you Joe, it is an awesome little town – 75 degrees all year, great surfing. I think we should get you a long board and go out there on a scouting mission and get some specs going.

    Mark K.

  • Count me in! As always, thanks for the insight, it’s such an exciting time to be in the real estate business.

  • It’s an amazing interview by brett.It is very helpful to newly entered into the real estate business.
    @ http://www.timerealty.com.au/selling/why-sell-through-time.php

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