LOS ANGELES-Real estate crowdfunding websites are plentiful, and with the SEC’s recent lifting of the ban on general solicitation of funds, potential investors and real estate operators may find themselves inundated with pleas for their business from these platforms. GlobeSt.com spoke with David Manshoory, CEO and founder of Asset Avenue, who gave us these five questions to ask when evaluating crowdfunding sites, from the perspective of both real estate operators trying to raise funds for a project and the investors looking for deals.
- Is there transparency in the site’s previous deals? From the operator perspective, you should be able see all the details about past deals when you register on the site. Many players will hide these details after a deal is funded, but you should be able to see them. Trust is important, or you lose investors. From the investor perspective, not every accredited investor is sophisticated, so the information should be readily available to them. If there is something to hide, you should know about it.
- Is the company being honest with its numbers? Some sites will say they’ve funded a certain size deal, but they actually didn’t raise all the funds for that deal themselves. “Real estate is a long-term play, and every significant industry player who has lasted through downturns has built a track record on honesty and transparency,” says Manshoory. “It’s important for operators and investors to question the validity of the numbers being presented to them.”
- Do the team and founders have significant real estate industry experience? “I’ve spoken with over a couple dozen real estate operators who are hesitant about working with a lot of the crowdfunding companies now because the founders haven’t been part of the industry like they have,” says Manshoory. “You can’t just be a Web person and just show up. Proven real estate operators want to work with people who they’re comfortable with, have been with them a long time and are passionate about the industry.” Also, investors should look for a company with real estate experience that knows how to separate the good apples from the bad.
- Are they primarily a commercial or a residential real estate company? Real estate operators who are raising money for residential deals should look for a company with primarily residential real estate experience, and vice versa for commercial deals. They are more likely to raise money on sites that focus on the proper asset class for that deal. In addition, investors interested in commercial deals should go with sites that focus on those deals, and vice versa.
- Is the site compliant with SEC regulations? If a site is in violation of SEC regulations, the SEC can unwind deals on that site, which can be devastating to an operator. “Operators should educate themselves on how the platform is complying with SEC regulations in terms of verifying investor accreditation,” says Manshoory. “Once you raise money from a crowdfunding platform, you are attached by the hip to that platform until the property is sold.” For investors, a site that is not SEC compliant can wreak havoc with investments and cause financial and legal turmoil, he adds. “Make sure you’re walking into a deal where all the i’s are dotted and the t’s are crossed. Crowdfunding companies need to educate people about how they’re complying with 506(b) and 506(c). What it really comes down to is the company giving you enough upfront information to make sure your money is safe in accordance with SEC compliance.”