Inside the real estate crowdfunding land rush

by Ryan Smith10 May 2016
Last month a Texas entrepreneur took to Craigslist with a surprising offer: For $50,000, the author of the listing would part with 5 percent of a real estate crowdfunding startup that he said would generate profit within three months.  Seemant Nakra, who posted the ad, said it hasn’t led to new investment in his Austin-based company, Equity Brick, but has generated interest from people who want to make crowdfunding investments in Texas apartment complexes. It doesn’t take a lawyer to suggest that Craigslist might be a bad place to source startup investments, but the post illustrates what some real estate investors have noticed: These crowdfunding platforms are everywhere. 

Investors used U.S. real estate crowdfunding platforms to pour $484 million into real estate projects last year, according to research published last month by the Cambridge Judge Business School. That’s more than three times the amount in 2014. Meanwhile, the U.S. has more than 125 real estate crowdfunding sites, according to Jason Best, a partner at Crowdfund Capital Advisors, who helped conceive the framework for crowdfunding. Less than three years after the JOBS Act made it legal to solicit investments online, real estate crowdfunding sites are all over the place.

Kind of.

The idea behind crowdfunding, whether for gadgets on Kickstarter or medical procedures on GoFundMe, is to create an online place where people who need money can meet people who have it. In the case of real estate, that often means house flippers who buy, renovate, and sell single-family homes seeking loans from accredited investors—roughly speaking, people who make enough money that they can afford to lose some of it. Some platforms also let investors buy equity stakes in real estate projects or fund loans for larger commercial projects. At least two companies, Washington-based Fundrise, and Atlanta-based GroundFloor, have created mechanisms to let anyone invest, not just rich people. 

But calling yourself a crowdfunding platform and actually functioning as a marketplace are separate things, according to Ian Ippolito, a real estate investor in Florida who has been tracking the proliferation of real estate crowdfunding platforms. Last summer, Ippolito evaluated more than 100 sites for transparency, low fees, active investment opportunities, and venture capital backing, among other criteria that make a crowdfunding site attractive to investors. Only one in five of the sites passed the sniff test. “Real estate crowdfunding is still in the hype phase, where everyone has an inflated opinion about it,” Ippolito said. “I think it will be at least another year or two before the expectations become more realistic. In the meantime, hordes of these platforms feel that ‘if I build it they will come.’”

There's good reason to think the field will keep on growing. On May 16, new Securities and Exchange Commission rules take effect, allowing nonaccredited individuals to invest on crowdfunding platforms. The rule limits the amount of money that ordinary joes can plunk down in a given year and caps the amount that a given project can raise from nonaccredited investors at $1 million a year. That will limit the appeal for most real estate developers, though a bill has already been introduced in Congress to raise those limits. 

Just as with traditional real estate investing, crowdfunding platforms will likely vary in composition and scale. “When you go into a town there’s a couple big real estate brokerages and there’s a couple boutique brokerages, and I think that would be true in real estate crowdfunding as well,” said Marshall Saunders, managing partner at SaundersDailey, which specializes in crowdfunding investments in small apartment complexes in the Minneapolis area. His company has raised money from 40 investors for eight property deals. 

Bigger platforms may be better equipped to solve the conundrum common to marketplace businesses: To attract investors, crowdfunding sites need projects for them to invest in; to persuade real estate developers to post deals, crowdfunding sites need investors ready to throw down dollars. "In 24 months, I think we'll be down to three platforms," said Nav Athwal, chief executive at RealtyShares, a San Francisco-based company that’s placed more than $150 million across 330 investments.

Best, who's company has advised government agencies and financial institutions, thinks there could be room for as many as 50 real estate crowdfunding platforms, because investors like asset-backed securities in general and property in particular. Even at that size, investors will have to be careful to pick the right deals on the best platforms. Said Best: "They need to carefully look at what they're considering."

Bloomberg News


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