LOS ANGELES—A total of 84% of respondents to a GlobeSt.com online poll said they consider crowdfunding to be a legitimate and reliable source of fundraising for real estate transactions—with qualifiers. The results indicate that crowdfunding is gaining ground as a capital source among industry professionals.
A full 31% of respondents indicated that they see crowdfunding as legitimate and reliable source, but only for certain types of deal. An additional 23% said they view crowdfunding for real estate in a positive light, but only after heavily vetting the crowdfunding platforms.
While 46% of respondents indicated that they do not see crowdfunding as a legitimate fundraising source for real estate at this time, 30% of the respondents said this view might change in the future, while 16% said they would never consider it legitimate or reliable for this purpose.
David Manshoory, CEO and founder of Los Angeles-based Asset Avenue, tells GlobeSt.com, “The results indicate that there is a healthy appetite from members of the real estate industry to understand how they can benefit from crowdfunding. Based on the relative ‘newness’ of this type of crowdfunding, it should be expected that the community would want to thoroughly vet the different crowdfunding platforms before aligning themselves with one of them. On that note, anyone looking to invest in real estate or offer a deal via an online crowdfunding platform should really consider the leadership behind the platform. Review the real estate depth and the background of the executives in each crowdfunding platform, as well as the quality of deals presented.”
Manshoory attributes the qualifiers in the responses to mean that not all deals deserve to be invested in and that crowdfunding isn’t right for all types of investors. “Crowdfunding has already proven itself in other industries and verticals, such as fundraising for businesses and loans, because of all the benefits it brings to both sides of the marketplace—in our case, the sponsors and the investors. Crowdfunding for real estate breaks down all the traditional barriers to getting involved as an investor and allows sponsors to raise capital more efficiently. Although we are only scratching the surface of what’s possible today, I predict that real estate crowdfunding will become mainstream in the US in the next 12 to 24 months.”
Despite the industry’s cautious attitude, crowdfunding is gaining acceptance in the real estate industry. As GlobeSt.com reported earlier this week, Realty Mogul is ringing in its first anniversary with investments of $104 million in commercial real estate property values. The crowdfunding platform, which launched in March 2013, is the largest investment network of its kind, and CEO/founder Jilliene Helman says her firm thinks of crowdfunding as democratization of access to deal flow. “We want to get hundreds of millions of dollars of deal flow in front of investors who would otherwise not have access to it,” she adds. It seems to be working. The company is on a roll, hitting major benchmarks throughout the year. In February, the company announced it had $85 million worth of properties funded nationwide.
Also, as GlobeSt.com reported exclusively in February, Realty Mogul told us that over the four-year period from 2009 to 2012, aggregate capital raised for real estate private placements accounted for $63 billion, excluding capital raised under private-equity and hedge-fund indicators. During the same time period, there were 5,617 separate Reg D offerings for real estate, 1,900 separate offerings in 2012 alone, and the median offering size for real estate offerings was $2.3 million, while the average was $15 million.
Of course, privacy concerns are an issue for real estate investors using online crowdfunding platforms. Helman told GlobeSt.com that before investing, investors should be aware of the security measures sites take with this information.
Manshoory tells GlobeSt.com that crowdfunding companies led by teams with the deepest industry experience in underwriting and due diligence will likely have the highest-quality investments on their platform. “Investors and the real estate community should review the backgrounds and biographies of the executives running a crowdfunding company and question whether they have the proper real estate experience to be the right platform for their deal or investment.”
He adds that vetting a platform’s history is critical. “As an investor, it’s about knowing the right questions to ask. In January, Manshoory gave us 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.
“Trust and transparency are of the utmost importance, and some platforms seem to be glorifying their numbers to appear more successful than they really are,” Manshoory says “It’s also equally important to take a look at the quality of deals being presented and ask yourself if they are of the caliber you would want in your portfolio. The quality of past deals may be indicative of what to expect in future deals on the platform.”
Another issue with crowdfunding is protecting private investors from unsafe investment vehicles. Stefano D’Aniello, co-founder and COO of Groundbreaker, told GlobeSt.com in January that technological and social pressures gradually rendered the regulatory regime from the 1930s obsolete and impractical. This forced the SEC to relax its once black-and-white advertising restrictions and turn them into a gray mess of guidance, known as the JOBS Act. D’Aniello outlines in that story the changes created by the JOBS Act that are most likely to affect private real estate fundraising.
Manshoory adds that crowdfunding is an excellent way to open up fundraising to a wider audience. “If you look at the richest people in the world, you’ll see one common investing thread—they all heavily invest in real estate. Until now, investing in large deals has been limited to those in the inner circles. With the advent of crowdfunding, and especially with Title III opening general solicitation to unaccredited investors, that inner circle is opening to a wider audience. Crowdfunding is giving more people the opportunity to access and invest in more deals.”