Real estate developers seeking capital have traditionally weaved through a maze of potential capital providers, oftentimes finding wildly disparate terms amongst different sources. Although banks and other conventional lenders often provide debt financing in a priority position on terms within a fairly narrow range, sources such as hard-money and mezzanine lenders often request a much-wider range of compensation in the form of points, preferred returns and even a share of the equity or upside. These terms can be challenging to compare, and this muddiness extends to determining the particulars which other developers obtained on similar projects. Correspondingly, investors seeking to analyze the merits of different offerings side-by-side often encounter the same opaqueness, frequently coupled with large minimum investments. The rapid growth of real estate crowdfunding ("REC") platforms can be attributed to both the low minimum investments of $100 - $10,000 as well as the transparency which both developers and investors now benefit from as they compare terms and opportunities on platforms, and even across platforms.
The total value of all real estate in the U.S. is around 40 trillion and the total raised by REC platforms to date is less than half a billion. Although there does not appear to be an imminent risk of the nascent REC platforms supplanting longer-established sources, the convenience and predictability of REC platforms is likely to propel their proliferation, similar to Prosper and Lending Club in the consumer loan space.
Today, developers and investors have a ever-expending array of REC platforms to consider, including:
Jorge Newbery is Founder and CEO of American Homeowner Preservation, which purchases pools of distressed mortgages from banks at discounts, and then offers sustainable solutions for homeowners to stay in their homes.