Real estate crowdfunding platforms are increasingly shifting towards pre-funded deals to increase their market share and deal flow. Pre-funded deals occur when a crowdfunding platform gives a real estate developer who needs capital right way a loan guarantee without having to first take the risk of raising the entire loan amount from online investors. Crowdfunding platforms are opting for this strategy to meet the needs of developers who need to raise capital quickly in order to close lucrative deals in a short amount of time. In such situations, pre-funded deals come in handy because raising funds online can take longer - usually a few weeks or even months. While pre-funded deals enable real estate developers fast funding, it also benefits investors who get returns faster because deals with developers are closed prior to the commencement of the fundraising process online.
Financing Requirements
The challenge with the innovative idea of funding projects upfront is that a crowdfunding platform needs to have substantial funds to back the projects. This cash flow requirement has seen crowdfunding platforms run funding rounds and accept financial backing from institutional investors and VCs so they can maintain a solid credit line that they need to drive, as well as sustain, loan facilities before turning around to offer online investors a stake in the pre-funded deals. Patch of Land became the first platform to offer developers an online investors pre-funded deals. The firm ran a series A funding campaign that saw it raise $23.6 million. A significant amount of these funds went towards securing a solid line of credit to sustain its loan facility. Fundrise is another crowdfunding platform that adopted the pre-funded loan facility strategy at an early stage. Like Patch of Land, Fundrise ran a funding round that raised $3.6 million to drive, as well as sustain, its pre-funding loan facility announced on its portal.
Real estate crowdfunding platforms that are also using pre-funded deals strategy include:
Acquire Real Estate
Prodigy Network
Crowdventure
CityFunders
Sharestates
The Benefits
The pre-funded deals trend has already started altering the competitive landscape in the crowdfunding industry. Crowdfunding platforms that have adopted this strategy are benefiting from increased deal flows as well as rising revenues. Patch of Land, an early adopter of pre-funded deals, acknowledges the strategy has offered it an important competitive edge in the crowdfunding industry. Patch of Land recorded an increase in deal flow and transaction volumes since it adopted this strategy.
According to Fundrise co-founder Daniel Miller, who left the company late last year, the pre-funded model is a business model that's more like investment banking as opposed to a pure technology platform where people post their deals and wait to see what comes in. Fundrise has grown to become a leading real estate crowdfunding platform in the United States. To date, $136 million has been raised on Fundrise with $75 million of that amount currently deployed to projects.
Pre-funded deals are also addressing the problem of delays in deal closings, uncertainty and failed targets among deal sponsors. Realty Mogul's Chief Executive Jilliene Helman acknowledges that financing for crowdfunding platforms allows them to fund deals as soon as they are closed. Availing funds without delays offers sponsors the certainty they need. Realty Mogul is the first of the real estate crowdfunding platforms in the industry to surpass the $200 million mark in invested funds. Having financed more than 350 properties, Realty Mogul provides developers with a simpler way to access capital with its membership now exceeding 80,000. It also has returned over $40 million to its investors in returns and principal.
The Future
Whether crowdfunding platforms can sustain pre-funding deals as a strategy or not is yet to be seen. There is no doubt however that crowdfunding platforms will be requiring financing from VCs and institutional investors to sustain their loan facilities in the near future. This is an aspect that investors who have already put substantial amounts in past funding rounds might not find appealing. Even so, crowdfunding platforms that have successfully leveraged on this strategy have increased their competitive advantage and gained and substantial market share over platforms that have not offered pre-funded deals due to financial challenges. Pre-funding deals guarantees the crowdfunding platforms increased transaction volumes and a steady deal flow that translates to more profits and bigger market share. Going forward, crowdfunding firms will need to keep evolving their strategies to remain competitive in the dynamic crowdfunding industry.