Solving the "Dirty Secret" of Crowdfunding

LOS ANGELES—"One of the dirty secrets of peer-to-peer funding is that it always starts out with the crowd and then moves exclusively to the institutions," Jason Fritton, the co-founder and CEO of Patch of Land, tells GlobeSt.com. Fritton is trying to avoid that outcome by finding a balance between the crowd and institutional investors. In essence, his company Patch of Land, which, to date, has not lost any investor capital, is acting as a strict filter, originating what the crowd and approved institutional investors can handle together.

"We have built a niche in single-family rehab and refi, as well as small multifamily markets, and now institutions can see our successful two-year record," he says. "The institutions that we are talking to could easily outlay $200 million a month, and even a quarter of that would allow us to grow originations with instant and massive scale. The demand for our lending products has grown so quickly that it can outweigh the capacity of our crowd to fund it, so institutional capital allows us to run a more balanced marketplace with more loans and more diversification for all investors.

"At this point, we are working to bring in both institutional investors as well as accredited individuals," he continues. "We sign up between 40 and 50 new individual investors a day, and we are actually moving the needle in the industry by bringing on an institution that will participate alongside of the crowd through fractional participation, made possible because of our legal structure."

Fritton didn't name the institution with which he is working, but he did say that this institution is willing to play with the crowd. As a result, he can responsbily expand the amount of loans Patch of Land originates, and makes available to all investors. The company has been originating between $7 million and $10 million a month since June of this year, which has all been funded by the "crowd." With the addition of this institutional investor that could initially fund upwards of $10 million per month, the company could double funded volume very quickly, without kicking out the crowd. "We won't just squeeze out our loyal, accredited investors. We want the two to play right alongside each other," he says.

It wasn't always that way. As Fritton says, institutions are not early adopters of emerging platforms, but the fact that institutions are now looking to invest shows the validity of the crowdfunding market. "Institutional investors are knocking down our doors now," he says. "When we first started, there was some interest but we didn't have a long enough track record. Today, we have proven that we can originate loans nationwide and that the demand for our lending products is an opportunity for the institutions to get double-digit returns secured by a hard asset, in a first position. We are discussing with a number of institutions right now, but we are still focused on cultivating our crowd. The origin of Patch of Land, and of the crowdfunding industry, is to create access to good investments for individuals who previously could not or did not have the network and in-depth information to add this kind of investment to their portfolio."

Investors aren't only attracted to the success of the crowdfunding space, but also to Patch of Land's co-investing strategy, which involves the company putting its own funds in the investment. "The idea is that your interests are all aligned; we all have our own skin in the game," says Fritton. "Because Patch of Land is pre-funding the loan, investors are earning interest right away (after funds clear escrow with 1-day ACH); you don't have to wait for the crowd to fully fund the loan on the website, which solves the need-for-speed issue for borrowers, as well eliminating cash drag for investors."

Patch of Land has done so well with co-investing strategies in the past, it has re-launched investments multiple times on the site to open up to more investors. In one recent instance, a $1 million tranche of a 330-unit multifamily complex in Tennessee, sold in less than three hours, so they released another $500,000 tranche that sold out in 2 hours. Patch of Land takes an interesting approach because they begin every transaction with their own money, although they often eventually sell it off, so it isn't always a true co-invest strategy. They call it pre-funding, and they were the first real estate crowdfunding company to employ this mechanism.

In the end, whether balancing capital from institutions and the crowd, pre-funding, or implementing a true co-invest strategy, Fritton says their main goal never wavers. "Our job is to make good decisions, to underwrite appropriately and price risk appropriately, and not to over-leverage ourselves."