Data and Reputation in the Real Estate Crowdfunding Space
The real estate crowdfunding space is a booming industry. This can be a good thing for borrowers and real estate investors as online marketplace lenders provide fast, efficient and transparent offerings.
Bloomberg, quoting Jason Best, a partner at Crowdfund Capital Advisors, noted that last year the U.S. online lending volume more than tripled between 2014 and 2015 to more than $36 billion, according to a 2016 study by the University of Cambridge and the University of Chicago. This underscores the outlook for online investing and borrowing in the crowdfunding space.
The opportunity is for online investors to find the platform that offers the services best tailored to meet their needs. What are crowdfunding platforms doing to stand out, attract borrowers and investors, and provide meaningful results?
Like many investment vehicles, real estate crowdfunding investments need to effectively communicate why these online investments are trustworthy. Platforms need to find a way to tell their story on their website in an “About Us” tab that is easy to find. Here, companies have a good opportunity to explain how they got started, who’s behind the effort, the mission, and their business approach to real estate crowdfunding. This is important, as the real estate online lending marketplaces may offer vastly different deals, and have different goals and philosophies.
Potential investors or borrowers will be looking for others who have used the site and whether they had a good experience. Some companies may choose to make this effort easier by directly offering some investor/borrower feedback, links to trade journals, customer testimonials, and authoritative articles that mention the platform.
If finding other crowdfunding customers proves difficult, third-party reviews are one way investors can gauge the reputation of a platform. The Real-Estate Crowdfunding Review ranks real estate crowdfunding sites based on in depth reviews of each site using its own methodology and includes hands-on testing of each site. They note that a company backed by a venture capital firm has already had its business model and strategies successfully vetted by an independent investment professional — something that sites with backing may want to highlight as this provides some strong documentation on reputation.
Prospective clients will also want to know if a site is delivering on its promises and which ones have staying power. Investors and borrowers will be looking for those sites that they believe will be around for the long haul.
It’s also important to know who is running the show. Investors and borrowers looking for a crowdfunding real estate platform will want to read the biographies of the platform’s executive leadership, Google their names to find out where else they’ve worked and assess their qualifications to lead a company in this space. They’ll want leaders with extensive experience leading rapidly growing enterprises. Look for a range of skillsets among a company’s executives that would help a real estate crowdfunding venture grow and prosper. Some examples of valued executive expertise for this particular sector include fintech experience in leveraging technology for online applications; big data and analytics expertise; residential or commercial real estate experience as brokers, investors and asset managers; product development competence; mortgage lending expertise, access to the capital markets, and marketing know-how.
Transparency, data and technology
Got data? Sites that can crunch and provide analytical data to would-be investors and prospective borrowers will likely have the most staying power in the long run. Sophisticated investors — those who are accredited or backed by institutional funds — — will want to analyze a variety of data to properly vet a crowdfunding platform before committing significant capital. A site that uses technology to write advanced algorithms for underwriting shows its prospective clients that it knows how to properly assign risk to borrowers and thus be able to accurately ascertain risk to the deals it’s offering to investors.
In order to attract investors, marketplace lenders would do well to make sure they are giving potential customers the information they need to make informed decisions. A debt site, for example, will want to provide monthly or quarterly data on the dollar value of loans originated, the number of loans funded, the weighted average LTV on Day 1, the realized rate of return and the average loan size. Potential investors will also want to know if there are deals in which borrowers went delinquent or into default. Patch of Land is a great example of how to effectively provide this information via their Stats page.
Platforms that offer equity often provide detailed information about each property to allow a potential investor to properly evaluate the deal such as monthly rent, gross yield, unlevered cash flow, unlevered net yield and forecasted appreciation. Online marketplace lending platforms must have a robust technology department to provide this level of analytics if they hope to attract sophisticated investors.
For single-family rentals, besides the basics of the property (year built, square footage, number of bathrooms and bedrooms, lot size), investors will want to know details about the neighborhood such as whether the home is near a major employment center, a university or highly rated schools. The same goes for lease terms, including additional details such as how long the current tenant has been in place and whether they have ever been delinquent on rent payments. Commercial real estate deals, from multifamily to office, will have their own set of analytics.
Platforms that fund both residential and commercial real estate deals frequently provide a breakdown that shows the concentration in certain subsectors, so potential investors can make more informed decisions.
They should also be transparent about all fees related to the investment. Transparency leads to trust. The more transparency a marketplace lending platform can provide into its data and processes for either investing or financing a deal, the more potential customers are likely to trust it. With the advent of the JOBS Act and the ability for nonaccredited or inexperienced investors to jump into real estate crowdfunding, it’s more important than ever that platforms be crystal clear about their project descriptions, financing, market analysis, sponsor analysis, and legal information so that these first-time real estate investors don’t dip their toe in without understanding the risks.
Functional, convenient and secure website
Investors and borrowers that invest online are savvy and have come to expect ease-of-use and functionality as core tenants of the experience. Lending platforms should be easy to navigate with simple and streamlined interactions within a professionally designed website. The FAQ section of the site should address the most common questions and answer them succinctly. The application process should be quick and simple to complete as this is one of the main differentiators that online marketplace lenders have between themselves and traditional lenders, many of whom have gravitated to the Web but have yet to streamline and simplify the application and approval process.
In today’s world, security is top of mind for investors and borrowers. Consumers who are asked to provide personal and financial data such as their Social Security number, home address, bank account routing number and credit history will want to know it’s being protected with advanced firewalls so it’s a good idea to look for site security verification to provide peace of mind.
Crowdfunding platforms are succeeding in attracting borrowers and investors by providing meaningful data and results to those interested in online real estate investing.
As the crowdfunding industry matures, the best-in-class firms will continue to rise to the top by providing innovation and delivering exceptional results for their customers.
ABOUT THE AUTHOR
Jason Fritton is Co-Founder & Executive Chairman of Patch of Land, responsible for setting its vision and leading the team's efforts to accomplish the company's mission of building wealth and growing communities. Fritton launched Patch of Land when the SEC implemented Title II of the JOBS Act in 2013 based on his vision to evolve real estate financing to be tech-enabled, data-decisioned, and easily accessible to a marketplace of borrowers and investors. Jason has decades of experience managing and growing startup companies. Prior to Patch of Land, Fritton founded and developed a telecommunications design and procurement firm active in the public sector. Previously he served as Director of Digital Marketing for a national retailer. Additionally he founded and developed several technology-based startups including Startingline Networks, Tech@Cost, and Virtual Realities. Frittion studied biology at Cornell College.
This contributed article originally found on: Private Lender.