(THIS IS A REPOST – ACCIDENTALLY POSTED IT TO MY BLOG INSTEAD OF THE URDBP ONE!)
In the ‘The Real Estate deal that could change the Future of Everything’ – Badger raises some interesting points in explaining Fundrise’s initiative as being the future of crowdfunded real estate financing.
Real Estate crowdfunding already exists to some degree in the form of REITS- and what Badger correctly points out is that wall street and many REITS simply won’t look at smaller deals/projects – they just don’t suit the scale of capital that REITs typically command, or justify the miniscule fees they would generate.
In contrast, Fundrise at this point seems marketed towards equity raising for community based real estate ventures. The important takeaway is that this is in the equity space, and another key distinction is that it suits investors familiar with the site/product/market. Those out of the geographical zone aren’t ideally suited to the Fundrise model. So I wish to draw attention to some other companies that could possibly enter the same space with slightly different concepts.
These are some companies in the crowdfunded debt arena, and they are perhaps just as important to watch as Fundrise. Especially after the SEC sorts out its regulation of the crowdfunding industry.
The term used is essentially peer to peer lending. One such site is Lending Club (https://www.lendingclub.com). The model is one of an unsecured note, or a loan by investors to screened borrowers through the intermediary which is Lending Club. The company doesn’t specialise in real estate lending but rather runs the full gamut of possible lending. The riskiness and return of notes vary depending on the risk of the venture and the borrower but vary from 5+% (for an A1) to a 22% (for a G rated). This model is somewhat similar to corporate securities, in that you are purchasing a securitized note – with the place where you’re lending your noney – that borrowers screened/vetted and their riskiness calculated by Lending Club. Additionally, in line with this sort of lending, SEC requirements ensure the website discloses the potential loss – a key requirement which appears to be missing with Fundrise’s model -and in doing so, opens up the market to those investors who don’t know anything about real estate development enough to try equity investment through Fundrise. Another difference is that this is anonymous lending – whereby borrowers don’t know about the people funding them, and likewise with investors. So it again moves back to the anonymous CMBS sort of model. However more importantly: the key issue hobbling Lending Club is that most of the loans are up to $35,000 (likely due to SEC regulations)..so at this point is seems dubious whether a real estate development or investment deal could be funded. Given the large cashflow requirements of real estate deals and Lending Club’s maximum loan amounts, the company proposal is a more an interim cash-flow measure than a true funding source. Until this issue is worked out p2p debt lending will be hobbled.
Another interesting model is that of Money 360. http://www.money360.com. This is a service akin to real estate brokerage, and whilst the website appears clunky it claims to match lenders to borrowers. Essentially: ‘it is an eHarmony or Match.com for lending.” Potential borrowers are put through an on-line screening process to qualify them by experience, abilities and capacity and their loans by size and the quality of collateral. Money360 then matches borrowers with lenders who have been screened for their preferences in a similar manner. The lenders and borrowers contact each other and subsequently negotiate terms. The issue here again is limitations on funding amounts – one review of the Money360 website states the fact that it is limited to $25,000 for borrowings which is again far too small.
Lastly, another firm called realtymogul (started in Seattle) has a similar purpose as Fundrise – with the differentiator being that realtymogul is a platform for investing with both equity and debt (through loan repurchases) through vetted real estate investments. The minimum investment looks to be $5000, however the issue here is limitations by the SEC – in that the investor needs to be sophisticated and wealthy ($200k min income or net worth > $1 million exc. the primary residence) which makes it similar to the ‘clubby networks’ talked about in the Badger article.
What lending club and similar such p2p debt financing sites lack is the scale to finance larger developments – simply in terms of the $ that they can contribute towards any one investor/idea. At the moment, there is no current replacement for debt borrowing outside of the conventional banking system or CMBSs which are generally unpalatable to the everyday investor. So for now, Fundrise appears to be the only one catering to US investors in that $1-10 million segment of the market- At least until the SEC gets their Act together!