Real estate crowdfunding is disrupting real estate finance by moving real estate capital raising online and making it open to everyone, thus disintermediating the middlemen. While I’m a huge advocate of real estate crowdfunding, (having said that) I’m really concerned about the space in the near-term.
Financial technology (fintech) start-ups are hot and it’s relatively easy to raise capital. However, we are in a high valuation environment for quick growth fintech companies due to the low interest rate environment, availability of capital, and the attractiveness of the fintech space. Real estate crowdfunding start-ups are valued based on top-line revenue and growth, so they have little incentive to focus on profitability. Therefore, most real estate crowdfunding start-ups are doing as many deals as possible, with little focus on underwriting standards. Compounding the issue, there are so many real estate crowdfunding companies competing with each other, VC’s are comparing who has the highest growth trend and assigning those firms with the highest valuations, creating a vicious feedback loop.
On the heel of big valuations for companies like Fundrise and RealtyShares, real estate crowdfunding companies will continue to pour into the space, raise capital, and do as many deals as possible in an attempt to boost their valuation.
The concern with this is that many deals/sponsors are being funded that probably shouldn’t and the retail investor, who often doesn’t understand the risk, will be in for a rude awakening when these deals go up in smoke. Further compounding this risk is the fact that we’ve been riding a hot real estate market, which has covered up a lot of bad deals/sponsors.
Deals will go bad, investors will lose money and unfortunately I think that’s needed to weed out the good real estate crowdfunding companies from the bad, and push the space forward.
There are some crowdfunding firms doing quality deals, however of the 140+ real estate crowdfunding companies, many are run by entrepreneurs who don’t understand real estate investment.
What aspect of real estate crowdfunding are you most concerned about?