NEW YORK CITY—Real estate “crowdfunding” websites are multiplying like rabbits. Let's have a look at the different business models out there.
Online Syndicates.
The most common type of operation includes Realty Mogul, iFunding, and RealCrowd. Syndicates find a local operator that will build and/or manage a property and offer to raise (i.e. ”syndicate”) a significant portion of the equity for a portion of the deal economics (a “promote” and/or a management fee).
The advantage of this model is its passive nature: the syndicator vets and oversees deals through their lifecycle. The downsides of this model include the extra layer of costs and fees that the syndicator brings along and the lack of a direct connection between the operator and the investors.
Placement Agents.
Placement agents play matchmaker between investors and operators. Fundrise Networks is a good example. Placement agents must register as broker-dealers with the SEC and have to do some basic due diligence on all deals, but otherwise have no ongoing management responsibilites. A major advantage of this model, especially for the operator, is that he pays only upon delivery of the funds. The drawbacks include its cost (usually a 3% transaction fee) and, although there is a broker-dealer of record, its inferior investor protection compared to the syndicate model.
Vertical Integration.
Vertically integrated platforms not only syndicate deals, but also add value in some other way: usually by being the developer or property manager. Prodigy Network is a good example of this business model, which is probably one of the most sensible in the industry. I would only warn investors to take a close look at fee structures, since the platform and its related entities will be getting paid in many different ways.
Lead Generation.
These are PR/marketing platforms that seldom have execution capabilites or anything built on the back-end. This business model consists in promoting a deal and charging per impression (the online term for lead), regardless of whether an investment is made. It provides a direct link between investors and operators, but I deem this an inferior version of the placement agent model, since it neither protects investors, nor assures results. ForeFund Capital uses this model.
White Label.
White label companies create custom-branded crowdfunding platforms for their clients that want to adopt any of the four models listed above, as well as for investment funds seeking to expand their online capabilities. The client pays a set fee and manages the content and front-end operation of the platform. The technology company manages everything on the back end, from software updates and server maintenance, to reporting and compliance. GroundBreaker (which I co-founded) uses this business model and provides operators a scalable, fully operating crowdfunding platform within a day or two.
Which model is best? If you are fundraising, this will depend on whether you are raising funds for one project or looking to expand your investor base for the long term. Conversely, if you are an investor, it will depend on your experience analyzing and negotiating deals of this kind.
Stefano D'Aniello is co-founder and COO of Groundbreaker. The views expressed in this column are the author's own.
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