What Crowdfunders Need For Longevity

LOS ANGELES—Crowdfunding platforms are taking the capital markets by storm, and in their short history, have seen some pretty major successes. However, Haider Nazar, CEO of LendZoan, says these platforms need sound technology fundamentals and full transparency in deal flow and funding to grow into a credible and longstanding real estate marketplace. To find out more about the future of this new and prospering industry, we sat down with Nazar for an exclusive interview. Here, he outlines advice for crowdfunding—or crowdfinance and peer-to-peer lending—platforms, talks about what this shift means for traditional lending sources and offers his forecast for the future.

GlobeSt.com: How are crowdfinance platforms changing the closed real estate investment industry?

Haider Nazar: First and foremost, crowdfinance platforms are creating more awareness of the private placement market. Retail and institutional investors are now beginning to see real estate as a viable peer-to-peer asset class. This shift will result in more inventory, more options for borrowers, and ultimately, a more efficient marketplace. New crowdfinance real estate platforms are bringing speed, access and liquidity to the highly desired but traditionally slow and closed real estate investment industry. As these two worlds collide, they hold incredible promise for investors and project developers of all sizes.

GlobeSt.com: What does this change mean for traditional financing sources, and how should they adapt?

Nazar: The cost of doing business for traditional banks continues to increase.  We have already seen partnership deals with traditional banks and platforms. I think this trend will continue; however, to truly replace longstanding retirement vehicles like the 401k, crowdfinance marketplaces must build for the long term. A successful real estate marketplace must provide a secure and compliant trading environment for brokers, borrowers and investors. This includes not only regulatory oversight, but also sound technology fundamentals and full transparency in deal flow and funding. This is especially true in light of possible new rules and amendments to the JOBS Act. Meant to spur business creation and enable small business—like real estate project borrowers—to more effectively fund operations, it has become mired in oversight and head scratching. But as clarity begins to emerge on possible paths forward, so will new rules and requirements for both lenders and borrowers.

GlobeSt.com: Crowdfinancing platforms are new. How can they grow and maintain longevity in this industry?

Nazar: Ultimately, sustainability is all about delivering consistent quality deal flow.  Specifically for real estate, this means having a business model that drives efficient borrower acquisition. A winning real estate marketplace is characterized by strong deal flow and deep inventory. P2P lenders realized this early on as their marketplaces vacillated between lender heavy and then borrower heavy. As real estate crowdfinance platforms rise in popularity, the market leaders will deliver a robust number of deals across a wide spectrum of deal types—commercial projects, residential fix and flip investments, multifamily housing units and more. This type of inventory is only available when borrowers and project leaders win in a marketplace. So the best platforms will provide a win/win environment that delivers returns for investors and easy access to capital at attractive terms for borrowers. To effectively serve borrowers, successful marketplaces will also need to balance capital sources. The natural ebb and flow of borrower demand will require access to both institutional and individual capital. The source of the funds will influence pricing, but it is critical that borrowers not be left wanting for capital.

GlobeSt.com: What are some of the legal challenges these platforms have that traditional financing doesn't have?

Nazar: The biggest challenge is that the laws are not yet set.  People are building their platforms based upon where they think regulatory policy is heading.  That is always risky.   Specifically with real estate, local expertise and knowledge is critical to ensure quality deal flow.  These deals cannot be done virtually without people on the ground that understand the local market. To ensure that individuals are comfortable and protected investing in real estate projects outside of their home market, next gen crowdfinance platforms will enlist local real estate experts. Acting as point on each deal, these experts can evaluate investment opportunities, serve as an information resource for investors, and shepherd projects through to completion by checking on progress and reporting back to investors. This role will be unique but vital to real estate crowdfinance, and will become a defining feature of the best platforms.

GlobeSt.com: What is your forecast for the crowdfunding industry over the next year?

Nazar: Significant growth.  New asset classes, including business loans, real estate and student loans are all especially attractive and ripe for disruption. P2P lenders Lending Club and Prosper have demonstrated the staying power of these alternative investment vehicles. Lending Club's recent IPO launched a number of fintech and lending related IPOs and investment. But to reach this scale and impact, the industry had to go through its own growing pains. Negotiations with the SEC, privacy standards, and more forced P2P lenders to grow and evolve into sophisticated organizations trusted by consumers, investors and regulators. For crowdfinance real estate to grow and reach this same level of credibility, it must mature to better serve and be trusted by investors, realtors, brokers, and project owners. A terrific example is the UK crowdfinance marketplace. By all accounts, the industry has moved forward in a regulated and successful way that is having a critical impact on small business capital formation.