I’ve heard estimates that there are over 100 companies in “real estate crowdfunding”. I place that in “quotations” because this label contains such a wide array of companies and business models. The field is fragmented yet still dynamic because of the diversification of strategies and offerings.
Crowdfunding vs. Marketplace Lending
Some platforms are marketplaces, some are proprietary sites selling their own investments, some are directly originating, others are brokering, and others still, act as a secondary market. Some sites are software providers, while others specialize in offering fund structures under Title IV of the JOBS Act, also known as Reg A+. In terms of scale and reach, some are national, some local, with a handful operating within State-specific crowdfunding regulations.
The biggest distinction is whether a platform is offering equity or debt investments. There is a bifurcation of how these platforms are categorized and consequently also of the tracking and quantification of investments. Whereas Fundrise, RealtyMogul and RealtyShares fall into the category of real estate crowdfunding because they are focused on equity offerings, companies like Patch of Land, PeerStreet and LendingHome are in the category of real estate marketplace lending because they focus only on debt.
Real estate Marketplace Lending
Based on the recent study “Breaking New Ground: The Americas Alternative Finance Benchmarking Report”, real estate marketplace lending grew 480% in 2015 over 2014. In comparison, real estate crowdfunding grew 250% and equity crowdfunding grew 120%.
At this year’s Lendit, Richards, Kibbe & Orbe presented its 2nd Annual Survey of U.S. Marketplace Lending. Of the survey respondents (investment professionals and fund managers) only 5% were “not at all familiar” with marketplace lending and a full 45% were “very familiar”. Furthermore, 37% of funds/fund managers already invest in real estate loans, which was the third largest category behind consumer unsecured (52%), and small business (46%). Student loan/education debt came in at 24%.
Opportunities for Scalable Growth
With all this growth, there are two recurring questions, “What’s next?”, and, “How do we build a viable business?” I believe the answers fall into these main categories:
1. Implementation of scalable systems, processes and procedures
2. Build-out of value-added technology
3. Standardization of data and performance reporting
4. Diversification of funding sources
5. Diversification of product
6. Strategic partnerships & proprietary origination methods
As a young and promising industry, we are moving from the market of early adopters to the market of the early majority. I’m confident that platforms focused on growing responsibly and building a sustainable business based on transparency, smart utilization of data, development of useful technology, and diversification of both product and funding will be poised to be leaders in the years to come.