A Student of the Real Estate Game


My Latest Thoughts on Real Estate Crowdfunding Part IV

Sep 19, 2014 | Innovation, Passive Investing, Technology

It’s been a few months since I shared my thoughts on real estate crowdfunding. Interest in the space has continued to grow. I’ve had countless calls with real estate firms and investors looking to dip their toes in the space, although they approach the space with cautious optimism.

Earlier this week I was up in Boston where one of the founders of Atlas took part in MIT’s Real Disruption panel on real estate crowdfunding. You can watch the replay here. Other panelists included founder of RealCrowd, Adam Hooper, the Chief Compliance Officer of Colony, and founder of Sourced Capital, Bonnie Burgett. The diversity of the panel made for some interesting conversation.

Here are a few of my takeaways from the event, along with some general thoughts on the space today.

Real Estate Crowdfunding is Simple

In its simplest form, real estate crowdfunding is taking what most real estate investment firms or lenders are already doing and creating a technology platform to help them do it more efficiently. That’s it. For companies like Atlas that has been syndicating deals to groups of HNW investors, it’s a complement to our current model. We’re going to implement the same technology that’s currently being used on these platforms to efficiently manage and service our existing investors across all deals.

Investor/Sponsor Rating Systems

As a sponsor, one of our biggest concerns with crowdfunding is allowing investors, with whom we have no previous relationship, into our deals. If a deal were to go bad, even if it’s due to circumstances beyond our control, we’re not sure how these investors are going to react. Over time, I foresee crowdfunding platforms implementing an investor and sponsor rating system. In the same way you rate your Uber driver and he rates you as a passenger, sponsors will be rating investors and investors will be rating sponsors. This rating system will alleviate many of the concerns we have with bringing total strangers into our deals. Just knowing that they’re being rated will change the behavior of investors and sponsors alike.

Public Sponsor Track Records

As a sponsor that strongly believes in the quality of deals we’re doing and our ability to execute our business plan, we view crowdfunding as a way to publicize our track record. If we can beat our underwriting and our performance is public, it’ll be much easier to raise money on public platforms down the road. However, it’s yet to be determined what, if any, reporting requirements will be required by sponsors or crowdfunding platforms. Where will this information be publicized? Is it housed within the platforms themselves or will a third party rating agency step in?

The Push toward Debt Models

As crowdfunding platforms begin to focus on creating viable revenue models, I’m seeing a push toward debt financing. Debt financing is a great fit for crowdfunding because it’s highly fragmented, it’s a safer investment, there’s a fixed payment schedule, and most importantly, it’s scalable. AssetAvenue, RealtyShares, and PeerStreet and all new platforms looking to disrupt the mortgage-finance industry.

Companies will create their Own Platforms

While the ability to white label technology to easily create your own crowdfunding platform is not quite there yet, I think most investment firms and lenders will create their own online crowdfunding portals. Emerald Creek for example, a bridge-lender, recently launched MainStreet to raise capital for their short-term bridge loans. Carlton Group and Prodigy Network are crowdfunding equity for their own deals. These are just companies utilizing technology to grow their business, that’s it. It the not too distant future I foresee all firms having their own online portals.

These are just a few of the aspects and trends that I’m seeing in the real estate crowdfunding space. It continues to be one of the most exciting aspects in the real estate space, and one where I’m going to be spending a lot more of my time moving forward.

What are you seeing?