A Student of the Real Estate Game


My Thoughts on Real Estate Crowdfunding Part V

Nov 21, 2014 | Innovation, Passive Investing, Technology

It’s been a few months since I provided my thoughts on real estate crowdfunding. In that time interest from operators has only increased, the number of new portals is seemingly endless, and platforms continue to shift towards debt models.

While the real estate industry is talking A LOT about real estate crowdfunding, it’s one of those things where a lot of real estate people are hanging around the fringe, but haven’t actually participated in crowdfunding. While we’re still very early in the evolution of real estate crowdfunding, I wanted to share some of the interesting things I’m currently seeing and thinking about.

Deal Rating Systems

One aspect of crowdfunding I’ve had trouble wrapping my head around is how non-real estate professionals can make educated real estate investment decisions. Historically, syndication deals were done on a trust basis where the sponsor had personal relationships with each investor – the investor was investing in the guys behind the deal not necessarily the deal itself. However, in crowdfunding, that personal relationship is removed from the equation so investors have to make their investment decisions based on the validity of the deal, the structure, faith in the team, and risk-adjusted returns to investors.

Fundrise created the Fundrise Rating system, devised to provide investors with the ability to easily compare investment offerings (similar to Lending Clubs letter grade). While it’s an imperfect system, it provides a basis of comparison. My concern is that investors are making decisions and setting their expectations purely on this rating system.

Fundrise rating System

Standardization will continue, but I think we’ll see it more in deal structure such as setting market rate fees, preferred return, promotes etc.

Get Ready for a Shark Tank-Style Real Estate Crowdfunding Reality TV Show

It’s happening at conferences and it’s bound to happen in the mainstream media. Picture this. On live TV, a developer or sponsor gets in front of a group of experts (PE funds, lenders, members of the community, other developers etc.), and pitches his or her deal.  The panel of experts ask a series of questions to gauge the merits of the deal and validity of the operator’s business plan. Meanwhile, investors watching on TV or online can go to the show website and invest directly into the project. During the live show, viewers will be able to track the investment, submit questions, and engage with the sponsor in real-time. Cuban, call me.

Crowdfunding Makes the Real Estate Business Better

While there’s a lot of hoopla around crowdfunding, it does have a number of positive impacts on the business; more investors are exposed to hard assets, better data becomes available, the quality of sponsors improves, sponsor track records will become public, the business becomes more efficient/liquid/transparent, institutional investors access fragmented markets and smaller deals, and the list goes on and on.

There hasn’t been a more exciting time to be in the real estate business. What are you seeing out there?