In the old days (two years ago), a developer or real estate syndicator conceived a big project and then networked with friends and associates to garner investors. It all happened behind the scenes because of laws passed in the aftermath of the Great Depression that restricted how private companies solicited investments. The result was to perpetuate a system in which only those with money and/or connections were involved.
In 2013, the Federal JOBS Act instated new rules that opened up the investment process. Real estate investors still need funds to take advantage, but the process is now out in the open, allowing for greater participation. Entrepreneurs, of course, are figuring out ways to improve the process, and have adapted crowdfunding to real estate investment – think Kickstarter and other online sites that raise money from small investors for relatively small projects.
These new sites vet and post approved projects with forecast returns and solicit investments. Occasionally, investors commit large sums, but, in general, the process results in individual investments that are often smaller than those required in the past. Some of these sites only target “accredited” investors – those who have a net worth of at least $1 million or an annual income of $200,000 or more.
There are those who say that trusted practices are being replaced with activities that resemble a land stampede of the Wild West, and there is some truth in that. Middlemen have been cast to the side, creating upheaval as the new business practices mature. At this moment, it is clear that costs are going down because acquisition of investors occurs more quickly and directly, without a sales force or other intermediaries. There is more money for the project, and theoretically, more for the investors.
Potential investors appear to focus on the forecast yield without evaluating other key factors. For example, if two projects are available, one in Santa Monica with a six percent return, and one in the backwoods of a less affluent state with a 10 percent return, the backwoods project has the higher forecast return and so will draw more investors even though Santa Monica has a higher potential to deliver.
I learned about this new real estate trend at a panel discussion sponsored by the Moriah Society, a group of real estate professionals who support the American Jewish University. The panel was moderated by Lew Feldman of Goodwin Procter, LLP. The participants were Rishi Thakkar, vice president of Investments for Realty Mogul; Arthur Weissman, vice president of Business Development for WealthForge; AdaPia D’Errico, chief marketing officer of Patch of Land; and Tom Lockard, vice president of Real Estate Investment and Institutional Sales for Fundrise.
They all agreed that while we don’t know exactly what the future holds for real estate crowdfunding, the market will never be the same.