It seemed 2 or 3 years ago, every month there was a new real estate crowdfunding site. You’ve got RealtyShares, Realty Mogul, PeerStreet, CrowdStreet, CrowdFlip, Fundrise, Patch of Land etc etc. If you’ve never heard of CrowdFlip, it’s ok because I just made that up.

With the recent news of RealtyShares shutting down I thought I should share my experience to help others decide if this a vehicle worth pursuing for themselves. The idea of pooling money together to invest in real estate is not exactly new, as people have been syndicating for real estate deals forever. Traditionally they were limited to accredited investors, meaning savvy investor that can afford to lose the money. However with the creation of JOBS Act, it opened up for non-accredited investors a new way to invest in these hard to access markets and potentially achieve above market returns.

***BTW, this is just an account of my personal experience, not an endorsement of any particular crowdfunding site or crowdfunding in general. Please consult with your own licensed financial professionals is this is for you.***

Investment Criteria

I had invested with a friend of mine in Atlanta and I was curious to find ways to diversify in different markets. Below were a few criteria I had. Feel free to comment below if you thought they were sensible or totally stupid:

  • Exit timeline < 2 years
  • 8% return or higher
  • Reasonable LTV
  • Low upfront investment
  • Low fees
  • Reasonable business or exit plan

Real estate was already getting frothy at the time I was considering investing through crowdfunding, hence I didn’t want to do anything that involves a longer than 2 year time to stabilize and turn around the property. If the deal is not over 8% return then I might as well invest with other traditional syndications since that’s kind of the norm preferred return you’d get. If things goes wrong I wanted to make sure there’s enough equity in the property and I was looking for something in the 70-75% LTV range depending on the asset class.

I understand it’s a lot of headaches to manage mom and pop investors and many sites had the standard $25,000 minimum investment amount, if not more. Ultimately I don’t know these people and the operators. I don’t care how air tight their contract is. I wanted to invest only an amount that if I wake up the next day and it has evaporated I wouldn’t even bothered to shed a tear.

Some of the sites once you look into the details you’re getting charged fees up your butt… the sponsor is charging 1 point acquisition fee, 2 point management fee, and then the site is charging another point to a point where the net to me is going to so much lower in those cases. Lastly I wanted to see if their assumptions are reasonable. A lot of the deals had unrealistic ARV’s or appraisals or you can kind of see they plugged in whatever exit value they needed to make the IRR or returns look attractive enough to investors.

The Investment

With those criteria in mind, I came across this fixer on PeerStreet:

This particular property seemed pretty good. It’s in Los Angeles, which I have some familiarity. I could see it was listed at $2.39M and purchased for $2.65M on the MLS back in 2015. They appraised the property at $2.9M and ARV I had estimate myself but I estimated well north of $3.5M. PeerStreet undewrote this at 75% LTV, 14 month term and 8% APR first position lien. I can invest almost any amount I wanted and I decided somewhat arbitrarily to try it out with $2,000. I believe on the back end PeerStreet charges the flipper 9% and keep 1% for themselves. Whatever, gotta keep the lights on somehow.

What Actually Happened

My investment started in September, 2017. It was pretty cool starting out. I got my prorated interest payment in October for $7.65 for doing pretty much absolutely nothing. November and December $13.33 was paid each month for again, doing nothing. But then my payment stopped 😱😱😱

Nothing was paid until March, 2018. April and May catch up payments were made. After that it stopped again. I actually didn’t look that closely… honestly kind of just assumed the worst or pretended it didn’t happen ostrich head in the sand style. While preparing for this post, I did notice they sent out updates to investors that they’re working to bring the loan current back in March. In April they notified that the borrower is refinancing and on June they filed a notice of default (NOD).

¯\_(ツ)_/¯

It wasn’t until November 26, another 6 months later before PeerStreet notified that all interest and fees have been paid back. Whew. Out of curiosity I did look up the public records for this property in Realist and did see in fact they had auctioned the property off.

Fortunately I came out of this one unscathed. Ultimately investors will need to be able to trust the operator or these site to right things that goes wrong. Thank you to the PeerStreet team on taking the proper steps to protect its investors. I don’t want to make it seem like every deal on crowdfunding sites defaults because this is just a sample size of one. I would ask this though, if an operator is so good, why would they need to turn to crowdfunding sites? Chances are they’re new or don’t have the track record so caveat emptor.

I want to say I took a pretty conservative approach to this. But what if someone wasn’t as savvy and just jumped in without really thinking about it? It’s going to be stressful if grandma is relying on the interest payments to retire but ended up not receiving anything for 6 months in this particular example. I do think crowdfunding is cool and there is a place for it in the world. I don’t want to speculate what happened at RealtyShares… from what I can pieced together they grew too quickly and they perhaps didn’t vet some deals as extensive as someone that didn’t take on VC money and needed to grow quickly would. Likely you will see consolidation in this space.

Have you invested with crowdfunding sites? What was your experience? Comment below and let me know.