5 Things You Need to Know About Crowdfunding
The online real estate marketplace has evolved significantly in the last few years, with dozens of platforms springing up all over the Internet. But with so many options, it can be incredibly difficult to find a platform you can trust to protect your hard-earned investments. Here are five things you should look for.
1. The Team
Looking through a site’s staff and seeing the credentials of those underwriting the platform will give you a sense of who’s deciding what properties to put up for funding. Bisnow partner RealtyMogul.com VP of investor relations Heath Binder (shown) says that MBAs pale in comparison to decades of experience and a strong understanding of real estate fundamentals. Every deal must go through a "rigorous, consistent and multi-tiered investment committee evaluation process" that involves uber-experienced team members.
“By the time a deal makes it to the platform,” Heath says, “it's had very, very experienced people evaluating it from a variety of different vantage points. It’s not just about looking at the financial projections, it’s about looking at the underlying real estate and at the investment thesis.”
2. The Sponsors
While the crowdfunding industry is only a few years old, you should look for platforms that partner with the strongest sponsors in the business. Regardless of the whether it’s an institutional sponsor looking to diversify its capital sources or an emerging group looking for a larger capital partner, Heath says that the best platforms choose sponsors with sizable portfolios (we’re talking eight digits at a minimum) and significant transaction experience in their specific asset type. You should make sure platforms put sponsors through a strong level of background checks and require their reporting is up to snuff. In addition, unless you are comfortable underwriting deals yourself, you'll be more comfortable with platforms that act as a buffer between you and the sponsor, underwriting the deal and analyzing the transaction so you don’t have to.
3. The Volume
Look at the posted listings and ask yourself, how regularly is the platform providing new investment opportunities? Is this platform liberal with its guidelines, putting volume targets over quality, or are they staying disciplined, placing their reputation on the line with every listing? Heath says there’s even a simple “ratio” that can help you see any red flags: “Compare the number of underwriting staff at the company to the number of deals they’re opening for investment. The more seasoned real estate people around the table, the more comfort you can have with their underwriting.”
4. The Financial Projections
Heath says you should always be comfortable with the financial projections on the deal. With every new deal, ask the platform’s investor relations team to help you understand deal assumptions, including, for example:
- Is the financial model growing revenue in line with expenses?
- Are projected expenses in line with historical expenses?
- Are your rental rate assumptions supported by market leasing comps?
- Are vacancy assumptions in line with the market?
- What sort of exit cap rate is the sponsor using in the deal and how does it compare to the cap rate going into the transaction?
- How much of your projected cash flow is coming from operations compared to the projected exit?
- With debt, what is the loan-to-cost and loan-to-value?
5. The Customer Service Efforts
Whether it’s buying a lawn mower or investing in real estate, you need to be certain the person you’re talking to is both knowledgeable and courteous.
“Who are the people who are explaining the investment to you?” Heath says. “Are they just telling you what you want to hear, leaving you to shop blindly or are you getting someone with experience who is going to help you understand the finer points of a transaction?”
Checking the platform’s interactions with other funders and clients and seeing if there’s a high level of civility, promptness and intellect behind each email or phone call is the kind of customer service you want.
RealtyMogul.com has received a ton of national acclaim and attention for being the premier real estate crowdfunding platform for both commercial and residential loans. To learn more about our Bisnow partner, click here.