“Similar to traditional loans, borrowers need the same basic information they would for a crowd-funded loan, along with detailed records and documentation of their investment plans.”
The New Frontier: Real Estate Crowdfunding
DECEMBER 2015 n National Mortgage Professional Magazine n
form of investment. Even 3 World Trade Center, in Manhattan, was opened up to investors via online crowdfunding. Real estate crowdfunding has exceeded expectations. Well-established mortgage lenders and financial firms have expanded By Steven Kaufman, CPA, MsEDE their online presence by creating crowdfunding platforms for all types of Real estate crowdfunding has gained trac- GoFundMe and Indiegogo. These sites put investors—mostly as a result of the crowdtion in nearly every form of investment. crowdfunding on the map by allowing mil- funding clause in the 2012 JOBS Act, which From single-home flips to new commer- lions of investors, startups and individuals went into effect in late 2013. Title II of the cial builds, both seasoned investors and to raise the capital they needed to fund JOBS Act was created by the SEC and has novices are looking to get their foot in the their respective projects. Silicon Valley has paved the way for democratizing crowddoor. The $1 billion in crowdfunded produced several prominent real estate- funding in nearly every industry. This Act investments in the U.S. alone has proven it specific crowdfunding sites that rake in also opened up the possibility to advertise hundreds of millions in investments, crowdfunding, but restricted it to accreditneeds to be taken seriously. You may have heard of Kickstarter, which may now qualify it as a mainstream ed investors.
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The advantage of mortgage professionals Now, you’re probably wondering, is real estate crowdfunding right for me? While it may seem like a tech fad, this form of investment is legitimate and encompasses many of the risks and benefits of traditional investment. The often-low investing minimum (as little as $5,000 in many instances) makes it perfect for both established professionals who are looking to diversify their portfolio and for those with less financial resources to give it a try. For mortgage professionals, the sixth sense they acquire throughout their career in regards to borrowers, underwriting, and quality investments makes them the ideal candidate to jump in the game early. This sixth sense can become savant—so take advantage. Possessing the skills that enable you to identify possible issues and outcomes others may not see gives mortgage professionals a clear advantage. Mortgage professionals will have an easy-to-spot sign to know when they should begin thinking about adding crowdfunding to their portfolio: When there is excess liquidity that isn’t for day-to-day living expenses, consider exploring crowdfunding. While very few sites actually guarantee a full return, having property as collateral can offset some or even all of the risk compared to other forms of crowdfunding. Most crowdfunding sites also allow mortgage professionals to earn a fee for referring their mortgage transactions through the platform. This situation is ideal for professionals to use their skills to spot
great investments that would thrive in a crowdfunding environment and find properties and investors that will have an advantage over other borrowers in the marketplace. This scenario takes place when crowdfunding is the best option for a borrower. This also provides the opportunity to be a part of the influencers of investing. With such new technology, this is a platform that can advance professionals to the next level of investing, as much smaller investments can be made than with traditional lending. Adapting to new technology has never been easier.
Its own kind of risks, with its own kind of rewards While many may think this is the best route for them, investors may find some risk in inexperienced borrowers coupled with less-than-great platforms. Compared to traditional lending, most of the extra risk is associated with the platforms themselves. For example, if $5,000 is invested in a crowdfunding real estate deal when the site didn’t perform a proper appraisal and the borrower is foreclosed on, the investor could lose out on that investment. In terms of risk, there’s another possibility regarding the site itself: It fails. Most of the earlier crowdfunding sites were created by young tech entrepreneurs, rather than seasoned mortgage professionals. What if the site itself goes bankrupt? The investor would, of course, lose out on any investment made through the site. It’s recommended to start your crowdfunding investing with sites that have long-term investment experience at their core. In these cases, the sites have the expertise needed to weather a recession, perform the proper due diligence and often have a third party manage their payments should they fail. Between the risks, learning of a new tool and navigating a new form of investment lies far more benefit. So, what do you need to know about crowdfunding in real estate before getting started? Here are the basics:
What are the four main methods of crowdfunding? l In debt-based crowdfunding, investors lend money under the premise that they will receive a return on their investment over a certain period of