Crowdfunding 101 discusses some of the basics around the JOBS Act and how it can impact your Real Estate business. In this post, we will discuss the role of the Crowdfunding Portal as alternative to a hard money lender.
The Who
There are now over 100 Active Real Estate Crowdfunding portals which offer a variety of products and services to both real estate Operators and Investors. A recent market study found that more than $1 Billion was raised through Real Estate Crowdfunding in 2014! Real Estate is considered the fastest growing segment in this new crowdfunding market.
The What
At the core, a crowdfunding portal can be thought of as an online marketplace – meaning there are two distinct users – one who is “buying” and one “selling”. An online marketplace you’re probably most familiar with is Ebay.
For real estate, it’s better to think of the two sides as:
- The Real Estate Operator who needs funding and
- The investors who have capital to invest
All portals have some functionality around bringing these two groups together to help facilitate a transaction that meets both parties’ objectives. Some portals go beyond offering just the basics of online marketplace. Here are some of the additional services offered.
Portal Services
Due Diligence:
A portal that performs due diligence on your deals is generally beneficial to you for the following reasons:
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Quality:
It ensures that deals that are listed to investors meet some minimum set of requirements. This ensures that if your deal passes due diligence, it is more likely to be noticed by investors – therefore increasing your chances of getting funded.
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Efficiency:
Investors are going to have questions about your deal. The due diligence process should answer the majority of the questions an investor will have. This helps reduce the amount of questions and back-and-forth you will need to do with investors.
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Expertise:
The portals provide another set of expert eyes to look at your deal. They could help you uncover certain aspects of your deal that went unnoticed.
Pre-Funding
Time is of the essence when closing a real estate transaction – especially with single family fix-and-flips. Some portals have established credit lines or have access to other internal capital that allows them to pre-fund your deal prior to launching a crowdfunding campaign. This gives you a dual benefit in the sense that you can get the capital you need relatively quickly while also getting your deal exposed to a large network of crowd investors.
Servicing
Time is of the essence when closing a real estate transaction – especially with single family fix-and-flips. Some portals have established credit lines or have access to other internal capital that allows them to pre-fund your deal prior to launching a crowdfunding campaign. This gives you a dual benefit in the sense that you can get the capital you need relatively quickly while also getting your deal exposed to a large network of crowd investors.
Investor Management
Dealing with multiple investors can be time consuming. Most portals are set up to handle this for you. Here are a few investor management functions a portal should be helping you with.
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Verification:
The law is written in a way that you can only accept capital from Accredited Investors. The portal should be doing the verification for you so you don’t have to worry about this.
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Taxes:
Reporting interest or capital gains income generated from your deals is required by the IRS. The portal can ensure that all appropriate tax documents are being sent to the investors.
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Communication:
Investors are likely to have questions about your deal. The portal can act as an aggregator of these questions so that you don’t spend time answering the same question more than once.
Technology Tools
Crowdfunding portals are technology companies as much as they are financing companies. Some are investing in developing technology tools that they are making available to the operators that use their platform. These tools can help you find, manage and sell your properties more efficiently.
This is still a relatively new market, so many of the technology tools are still being developed. That said, keeping an eye out for new releases which may give you an added edge in your respective market.
The How
Portals structure their deals a variety of different ways. However, they generally fall into either equity or debt structures. What is important is that you understand which the portal offers and how standard their agreements are.
While each rehab loan will likely be different and require some customization around how the terms are structured, you want to have a framework that you can reuse for each successive deal.
Hard Money Loan versus Equity deals can also impact your cost of capital and how much of the profit you keep. Choosing a portal that supports a debt or equity offering is important to ensure the offering aligns with your strategy. In an upcoming article, we’ll discuss what to consider when determining whether debt or equity better suits your needs.
Crowdfunding for real estate is still in its infancy. There are now more than 100 portals offering services to real estate developers and investors. When determining which portal to fund your deals with, here are 3 questions that will help you make an educated decision.
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What type of rehab loans do they prefer to fund? If they have multiple types of preferred deals, ask for a percentage breakout of each. If your particular deal type isn’t in a category with a lot of deals funded, they may not be a good fit.
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How quickly can they fund? Depending on your project type, you may need quick funding. Some projects offer the ability to raise capital over 1-3 months. Others need funded in a matter of days. For quicker funding requirements, will the portal commit to pre-fund the rehab loan while capital is raised from the crowd?
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Who makes the final underwriting decision? Some portals rely solely on the crowd to determine which deals are funded. Others have in-house underwriters, which once approved, guarantee funding. In the case where the crowd does the underwriting, be sure to get a full understanding of how large their network is and come to your own conclusions on how likely you are to get funding.
Deciding which crowdfunding company to partner up with can seem overwhelming. Even though this new capital source is largely web-based, there are still people on the other side of the website. Send an email or make a phone call to speak with someone. While we can’t speak for all the other crowdfunding portals, we love talking to our customers.
Summary
The portal is a crucial piece of the crowdfunding puzzle. Finding one that has a similar deal appetite and offers services that support your business will be helpful in establishing a long-term relationship with this new way to fund your deals.
