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Where Does Real Estate Crowdfunding Stand in 2020?

Real estate crowdfunding fell short of its original promise but a handful of companies are still flourishing

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The real estate crowdfunding space has been an interesting one to watch. Just a few short years ago, in 2015 and 2016, there were many companies that seemed to be doing well with funds flowing into some large financing rounds. Today, there are just a handful that have stood the test of time. The rest? Some have gone out of business and others have gone quiet. The most notable companies which have shuttered in recent years include RealtyShares, which raised $60 million and iFunding.

The Wall Street Journal recently published a piece highlighting some of the success stories and what has differentiated some of these companies from the pack. Fundrise was founded back in 2012 and is probably the most unique when it comes to the investors they serve and how the investments are structured. The different investment offerings spanning more diversified eREITS to eFunds which focus on a specific city. For instance the Washington DC eFund aims to capitalize on how Amazon’s HQ2 will effect local real estate.

AlphaFlow and PeerStreet are well known names in the crowdfunding space. PeerStreet is a marketplace for individual accredited investors to access short duration real estate loans. AlphaFlow partners with online platforms along with offline real estate lenders to offer investors access to real estate backed loans. Up until recently Alphaflow, was also open to individual investors but have since shifted their strategy to focus on institutional money.

One of the factors that perhaps stalled the growth of pure play real estate crowdfunding is simply the massive amount of capital entering real estate in recent years. The rebound of the economy has meant that real estate developers have had many options when it comes to financing. This doesn’t mean that these companies haven’t been successful though. Besides those previously mentioned, and not included in the WSJ article, LendingHome and Sharestates are two that have achieved significant scale in the market today. Sharestates crossed $1 billion in loans in 2018 and LendingHome recently shared that they have crossed $5 billion. Besides their short duration loans, LendingHome is also getting into the single family rental mortgage space. New York based Cadre is also a quiet achiever, requiring a $50,000 minimum investment.

Many companies as evidenced above who originally focused on accredited investors have since shifted to institutional money, a much more efficient way to grow a lending business. The exception being Fundrise and Groundfloor which have stayed true to focusing on retail investors. Overall, while many of these companies were born at a time when many thought real estate crowdfunding was the future, they continue to resemble less and less platforms to democratize real estate investing.

The Current State of the Real Estate Fintech Sector

We share recent news as it relates to innovation across real estate crowdfunding, digital mortgages and buying/selling homes.

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One area of fintech that doesn’t get as much attention as it should is real estate. It’s the largest lending category in the United States that still relies significantly on decades old technology. Over the years we’ve seen this sector transform from companies in the real estate crowdfunding area to companies tackling all sorts of interesting opportunities in real estate today. In this post we’ll provide a breakdown of each area and some of the interesting trends we’re seeing.

Real Estate Crowdfunding

Real estate crowdfunding has benefited significantly from the rebound of real estate since the financial crisis. These firms, although perhaps not as hyped as they used to be, are still a very interesting part of fintech. At the time when many companies in this space were founded, it was the first time that investors had direct access to real estate investment opportunities online, most notably in the fix and flip market. From my perspective we’re in a more mature phase as there has been some consolidation over the past few years with RealtyShares being the largest platform to cease operations. However, there is still very much an interest in income producing assets as we continue to be in a low interest rate environment.

The most recent news comes from Fund That Flip which recently raised an $11 million round from Edison Partners. Other notable achievements for platforms include LendingHome completing their first securitization. We also recently heard that PeerStreet, another popular platform crossed the $2 billion origination milestone. Outside of providing debt and equity to an online platform, a company called Roofstock is worth mentioning here. I recently had the chance to speak with CEO Gary Beasley to discuss their original offering which allowed for direct purchase of single family rentals and their new offering Roofstock One, which offers direct fractional ownership in income producing real estate.

iBuying and Improving the Buying/Selling Process

Many consumers are all too familiar with the pain points associated with buying and selling a home. This is the area that companies like Opendoor, Offerpad, Knock and Zillow Offers have targeted. These companies all fall under of a term which is being called iBuying. The individual business models of each company varies slightly, but they all focus on giving you a no hassle offer for your home so you can quickly sell your home without having to worry about realtors, showings etc.

Over the past few years a number of these companies have raised enormous amounts of money due to the capital intensive business they are in. While clearly there is significant investor interest in this category, Steve Eisman of The Big Short fame recently went on record stating that Zillow is over its head in their home flipping platform and doesn’t understand the real risks. It’s an interesting contrast to the success we’ve seen these platforms report. Not surprisingly, Zillow is currently one of Eisman’s shorts.

Other companies I’d lump into this category are those which help with home affordability. As real estate prices have increased, companies have stepped in to take the burden of large down payments off of the borrower. One relatively well known company is called Unison which co-invests with a homeowner when they are looking to purchase a home. Other newer companies include ZeroDown which recently raised $30 million. This platform is tackling high cost of living locations like the Bay Area and allows homeowners to buy a home with zero down.

Digital Mortgages

The most interesting area that fintechs are covering in real estate is the mortgage process. If you’ve bought a home recently I’m sure you would agree that there are areas for improvement in the mortgage process. Companies like Better, Blend and Roostify all have traction in this space. Most recently, Better closed an astonishing $160 million Series C round which included some interesting investors like Ping An, Ally Financial, Citigroup, American Express Ventures among many others. The company has now raised over $250 million for their growing business. The company expects to originate $4 billion in loans in 2019.

Blend, which raised $130 million back in June has taken a different approach, working with 150 lenders around the country. The company processes around $2 billion in loans every day. Personally, I can’t wait for new technology, no matter which fintech it is from to reach lenders small and large across the country. With all of the potential for API connections out there today there is no reason for so much manual work when it comes to the mortgage process. Over time, I expect that closing costs will come down as a result and that the actual mortgage process will no longer be the holdup to closing on a house. While I believe we’re on the right track there is still a long way to go with some of the largest mortgage lenders in the country today.

Conclusion

The above companies featured are just a handful of the ones that have traction in the US today and it’s going to be interesting to see which ones transform into household names. If you’re interested, some of the rounds highlighted above are tracked in our 2019 fintech funding Google Sheet which tracks fintechs that have raised over a $10 million this year. If you know of other companies doing interesting things in real estate I’d love to hear about them in the comments below.

The Story of Sharestates: From Startup to $1 Billion in 3 Years

Sharestates is one of the most successful companies in the real estate crowdfunding space.

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Last year I wrote a piece about many of the companies who have participated in LendIt Fintech’s startup competition over the year. For that article we reached out to each company to get an update on the company’s progress. We shared that, given the information we had available, Sharestates was the most successful company to participate in PitchIt @ LendIt. Here are the stats they provided in March 2017:

  • 300+ loans funded
  • $250+ million in origination
  • 10% net return to investors
  • Zero loss of principal
  • 7 defaulted notes since inception (1 foreclosure)
  • $1.3 billion in debt capital commitments

All this was done in two and half years and what is more they were self funded and profitable.

$1 Billion Milestone

Now, just over a year later, they have announced they recently crossed the $1 billion mark in originations. The company did so in just over 3 years, having officially launched in February 2015, just before LendIt USA that year. They are the second company in the real estate crowdfunding space to do so and are on our list as one of the ten options available for accredited investors in the marketplace lending space.

Originations in the lending space is only one metric. Any lending company’s survival depends on the quality of the loans they are making. According to the Sharestates’ website, investors have earned an average 10.54 percent annualized return. They also report 0% loss of principal for their investors. As of last year when we checked in the company was profitable which sets them up for continued success going forward. We’ve seen very few companies in the marketplace lending space broadly achieve this goal.

Along with their press release, the company also announced a $100,000 giveaway which will be awarded to one of their current or new investors investors. Investors earn entries by referring new investors and these new investors are also entered into the giveaway.

Looking back it’s amazing to see how far Sharestates has come having watched them compete in PitchIt @ LendIt all of the way back in 2015. They have solidified themselves as one of the leaders in the real estate crowdfunding space and have showed continued growth as some other companies have struggled. Congratulations to the entire Sharestates team on this milestone!

For additional background on the company, you can listen to our podcast with Sharestates CEO Allen Shayanfekr which was recorded in late 2016.

What is Blockchain and Why Should the Real Estate Industry Care?

In this guest post Tobias Briegel explores the intersection of blockchain technology and real estate.

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[Editor’s note: This is a guest post from Tobias Briegel, a cryptocurrency and blockchain enthusiast and National Account Manager at Chetu Inc. As an experienced leader and communicator, Tobias offers commentary on the changing tides within the finance industry, offering predictions on how emerging technologies will rattle the pre-existing system.]

Blockchain, the decentralized ledger behind the cryptocurrency curtain, is a force to reckon with, offering a compelling alternative to traditional exchanges of all kinds. Rather than compiling transaction records in a central hub, blockchain technology fragments this information and keeps records across an immense network of hard drives and servers—keeping a transaction as public record, but keeping the exchange anonymous.

In its infancy, blockchain represented an anti-establishment movement, putting a microscope to the deficiencies of centralized banking systems and building bridges where those gaps exist. Blockchain operates with a less is more ideology, keeping risk low by reducing the parties involved and increasing transparency.

Transactions are encrypted and verified in one of two ways: Proof of Work (PoW) or Proof of Stake (PoS). Crypto miners verify transactions through a series of sophisticated computations before the transactions are added to the public ledger. The miners are then compensated with fractional ownership of recently mined cryptocurrency.

Blockchain and Smart Contracts Save Real Estate

In 1996, over a decade before Bitcoin came to market, digital currency pioneer and computer scientist extraordinaire, Nick Szabo, introduced a contractual protocol that was entirely self-executing. We call this protocol a “smart contract,” an encrypted and trackable agreement between consenting parties.

Since the dawn of organized property exchanges, real estate brokers and legal entities have existed in pairs. Sometimes they coexist productively, but more often than not, the cross-industry dialogue is a pain point. We need legal representatives to outline the terms and ensure these terms are met by all parties—land registry, mortgage providers, surveyors, the buyer, the seller, an agent. With a high-value exchange dependent on the compliance of such an immense web of people, the process frequently encounters long-term setbacks and unexpected tribulations.

Smart contracts eliminate the number of hands involved by cutting out extraneous third parties. Who remains? The buyer, the seller, and the agent. The conditions are established and then coded into blockchain technologies. Met conditions (dollar amount or date of execution) trigger a reaction automatically, and the contract self-executes.

The process remains relatively similar to traditional contracts: property selections through blockchain MLS, negotiation of letter of intent, smart contract pre-lease, smart contract lease agreement, automated payments and cash flow, plus real-time statuses. However, this all happens without any legal involvement. [Read more…]

Innovative Approaches to Expanding Home Availability and Affordability

We look at two companies that are taking a unique approach to building new homes and providing down payment assistance.

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It seems like almost every day I see a story about increasing real estate prices in the major metropolitan areas of the US. Prices in cities like San Francisco, New York, Seattle, Washington DC have made homeownership unobtainable for many people. Some even call the current state of the market a housing crisis as housing prices outpace growth in wages. However, there are some companies that have made inroads into helping people buy homes with creative new products. I recently spoke to two companies who are taking a different approach to expanding home ownership and affordability.

SoFi comes to mind with their jumbo mortgage which allows borrowers to put just 10% down and offers loans up to $3 million. The product doesn’t require PMI like other mortgages would. For people who work in high salaried positions like tech, it is easier to make these types of loans because the borrowers have an income to support it. SoFi has certainly had success with this product, but some still argue that lowering down payments allows borrowers to stretch themselves too thin which could result in problems down the road.

Landed is taking a different approach. I spoke with Alex Lofton who is Head of Growth and Co-founder at the company. They first came on my radar this summer when TechCrunch profiled them. They are similar to companies like Unison (who recently was on the Lend Academy podcast) and Point with a slight twist. Currently, the company focuses on teachers to help purchase a home, providing up to 50% of the down payment. Like other similar products, Landed participates in either the upside or downside when the home is sold.

It’s interesting problem that many areas face. While essential professionals once sought out areas with higher wages, there is now little incentive beyond location to live in a high cost of living city. This is unlikely a problem that will go away by itself so it’s important for companies like Landed to exist. The Chan Zuckerberg Initiative (created by Mark Zuckerberg and his wife Priscilla Chan) committed $5 million to Landed which will help about 60 educators at three schools near Facebook’s headquarters purchase homes.

Fundrise is taking a completely different angle with their relatively new offering called eFunds. They aim to expand the amount of housing available in cities and they are taking a unique approach to getting it done. The investment functions similar to their eREITs where investors can purchase shares in a fund, but the investment goes towards developing new housing in urban areas. Investors are purchasing equity in residential real estate. Beyond personally purchasing a home, this asset is something new available to the retail investor market. Historically, debt investments have been the focus of most investment opportunities.

Their thesis is that millennial home buyers aren’t interested in buying homes in the suburbs and that their needs are not being met. Traditional developers focus on larger scale buildings whereas Fundrise is creating homes on smaller lots that developers may not be interested in.

Fundrise is also encouraging investors to become active in lobbying cities to change zoning laws, something which is a big problem in Los Angeles where Fundrise has focused one eFund. Besides being able to further Fundrise’s efforts in expanding housing, an investor can complete the circle so to speak. Investors will have an option to buy a property that they have invested in, saving on costs associated with the transaction. While expanding access to housing is a good thing there is still the question of affordability. If you’re interested in learning more about what Fundrise is doing I recommend listening to our podcast with Co-Founder and CEO Ben Miller. He is truly passionate about this space.

Conclusion

As a millennial and an owner of several residential properties it is always fascinating to follow the trends in the major US markets and reports on millennial home buying. Clearly there is somewhat of a crisis going on in these cities as real estate prices have continued to climb faster than wages. Both Landed and Fundrise are taking action to do something about what’s happening and it’s going to be interesting to see how it shakes out.

P2P and Marketplace Lending Options for Non-Accredited Retail Investors

We share the platforms across consumer, small business and real estate that allow for retail investors.

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For online platforms there is considerable cost to be able to accept retail dollars. This is one of the reasons that Lending Club and Prosper were the only two platforms that allowed for retail investor participation for many years. Since many firms are just a few years old it’s much easier to target accredited individual and institutional investors due to the capital those investors have to deploy. However, there are now online lending platforms spanning almost every lending vertical that are open to retail investors. Below we share all of the opportunities retail investors should be aware of.

Lending Club – Consumer Lending

Lending Club allows retail investors access to consumer loans and has the most loan volume out of any other platform on this list. Investors can purchase fractions of loans starting at $25 and so can build a diversified portfolio with a relatively small investment. Borrowers are given loan grades from A-G and investors can decide which grades they would like to invest in. Lending Club advertises historical returns between 5%-7% with 99% of investors with over 100 loans achieving positive returns. In addition to the primary market, investors can buy and sell loans on Lending Club’s secondary market FOLIOfn which provides liquidity to investors.

Lending Club’s state and financial suitability conditions can be found on their website.

Prosper – Consumer Lending

Prosper’s platform is similar to Lending Club’s. Investors can purchase consumer loans ranging from grades AA-HR. One difference is that Prosper shut down their secondary market recently which means investors must hold notes to their maturity once purchased. Estimated returns vary from 3.83% to 13.04%

There are additional suitability standards for certain states which are outlined on Prosper’s website. [Read more…]

Potential Applications of Blockchain For Real Estate

Blockchain technology could have a large impact on how real estate is transacted.

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Last week I spent the week at MIPIM, the largest conference in world dedicated to real estate. The conference is focused mostly on traditional real estate, but a portion of it was dedicated to what is often referred to as PropTech in Europe. What’s most interesting to me is how companies are applying technology to real estate and one of the big opportunities is bringing blockchain technology to real estate.

The session I enjoyed the most was dedicated to this, titled “Blockchain: What are the opportunities & challenges of peer to peer real estate?”. Although the general consensus was that we are still early when it comes to widespread adoption of blockchain for real estate there were several interesting takeaways.

One of the panelists was Achim Jedelsky, who works for Daimler Real Estate, a division of the auto company. The company is currently looking at what improvements can be made for existing processes, including transactions. While it was clear they are only exploring a few use cases internally and he didn’t get into specifics it’s interesting that a company that focuses on automobiles is exploring blockchain. Daimler is a company that may not strike you as an innovative company, but they are clearly forward thinking even in their auto business having recently invested in auto finance startup AutoGravity.

One of the companies focused on blockchain applied to real estate that is making more progress is velox.RE. Founder Ragnar Lifthrasir spoke on the panel explaining his company’s open real estate platform that includes property transfer, recording, and payments. He is also the Founder & President of the International Blockchain Real Estate Association which aims to help the real estate industry adopt blockchain technology. [Read more…]

GROUNDFLOOR Expanding Footprint to Real Estate Borrowers

GROUNDFLOOR doubled the states they lend to and is seeking to accelerate growth for 2017.

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GroundFloor-Logo

Last year we featured GROUNDFLOOR who was the first p2p lending firm to leverage Regulation A+ in Title IV in the JOBS Act. Now about a year later there have been many companies who have taken the same path, but GROUNDFLOOR remains unique in their structure. Today, GROUNDFLOOR announced that they are opening lending to 12 more states. I had the chance to talk with Brian Dally, Co-Founder and CEO to learn more about the news and what the company has been up to.

GROUNDFLOOR previously only offered loans in Georgia, Alabama, Florida, Illinois, Maryland, New Jersey, North Carolina, South Carolina, Virginia, Tennessee, and Texas.

They have now added Rhode Island, Massachusetts, New Hampshire, Michigan, Missouri, Minnesota, Colorado, Arizona, Utah, Nevada, Oregon and Washington. The states chosen were ones that met their underwriting criteria and they also focused on states that were not too far away for a control group.

What’s important to understand about GROUNDFLOOR is that they are different from many of the real estate crowdfunding companies that exist. They are focused only on retail investors and the platform is open to both accredited and non-accredited investors. When I spoke to Brian he said that the best source of capital next to depositors are non-accredited retail investors.

Loans are fractionalized where investors purchase pieces of loans similar to that of buying a loan on Lending Club. This is structured differently than the REIT products that have been launched recently under Regulation A+. Investors from the following states can invest in projects, with a $10 minimum per deal: Georgia, California, Illinois, Maryland, Massachusetts, Texas, Virginia, Washington State and D.C.

Brian noted that they have carefully controlled growth as they learned about losses, default rates etc. Now that they feel confident, the next step was to expand to these 12 states. Currently just under 2,000 lenders have invested on average $6,000 for a total of $12.5 million across over 100 loans. Loans average $125,000 across loan terms of 6-12 months and 45 loans have now been repaid. The platform has experienced no defaults and zero loss of principal. Investors have earned a weighted average annual rate of return of 14% over the 9 month average term. [Read more…]

SoFi Weathering the Marketplace Lending Slowdown Well

Like pretty much every online lender SoFi's growth has slowed but they are positioned better than most.

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SoFi

Last month SoFi quietly crossed $10 billion in total loans issued. A remarkable achievement for a company that is less than five years old. For comparison, Lending Club took almost eight years to get to that milestone and Prosper has still not reached it.

Now, to be fair SoFi has not built their business on unsecured consumer loans, although they do offer that product. SoFi’s initial loan product has been refinanced student loans, which have a much larger average loan size. They invented this product and it still remains core to their business. But they have since expanded into personal loans and real estate mortgages, including jumbo mortgages, which obviously also have a large average loan size.

While SoFi does not provide publicly a breakdown of their volume by loan type there was this graphic in a Wall Street Journal article featuring the company earlier this week. This doesn’t have Q2 numbers but we can see that student loans is roughly 50% of their business, unsecured personal loans is 40% and real estate around 10%.

In SoFi’s latest fact sheet, that is available on their press page (it is current as of this month), we see that SoFi has originated $3.5 billion in the first six months of this year. The Wall Street Journal stated that SoFi did $1.85 billion in Q1, which means it did $1.65 billion in Q2. While these numbers reflect a downward trend from the roughly $2.3 billion they did in Q4 last year this trend is far less than most other marketplace lending platforms.

[Read more…]

Part 2: The State of the Union in Real Estate Crowdfunding

Ray Sturm, a real estate crowdfunding veteran, gives us an update on the current state of the industry.

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Ray Sturm

[Editor’s Note: This is a guest post from Ray Sturm, the Co-Founder and CEO of AlphaFlow, which helps investors build and manage real estate portfolios across the crowdfunding industry. Prior to launching AlphaFlow, he co-founded RealtyShares. His early career in finance included investment banking at Bear Stearns, restructuring at Lazard Frères and private equity at CCMP Capital.]

Real estate crowdfunding has absolutely exploded since opening up to investors in 2013 (see Part 1 here). I see that growth – 150% per year the last 3 years! – continuing and with that comes amazing innovation and challenging consequences. I wanted to share 5 important things you’ll see come to real estate crowdfunding in the next year:

1. Automated Underwriting

A number of platforms raised enormous rounds of venture capital in 2015. Many of these rounds were much larger than their performance metrics might garner in other industries. Fintech is hot right now though, and P2P/crowdfunding is on fire. However, large rounds come with similarly big expectations. If real estate platforms are to hit hyper growth, as Lending Club did around 2010 and Prosper did soon after Aaron Vermut and Ron Suber took the helm in 2013, you’ll see one big change. Specifically, I think you’ll see many more companies adopt some form of automated underwriting that allows them to evaluate exponentially more applications without growing their headcount proportionally. PeerStreet is a leader here, utilizing sophisticated data analytics that co-founder Brett Crosby honed at Google. To truly demonstrate the “tech” in fintech and not simply build real estate companies with websites, more platforms will move towards automated underwriting.

2. Auto-Invest

While Lending Club and Prosper offer very different products than the real estate platforms, they are nevertheless the world leaders in P2P investing. As such, many of us studied them closely in our earliest days as we looked for the roadmap to success. Most investors on these platforms that I know – at least those not in the P2P industry – choose to use automated loan picking instead of pouring through thousands of loans themselves. As the real estate crowdfunding market has started to pick up and sites have increased volume, many have begun to launch their own versions. Actually executing this in real estate is proving to be much more difficult than many founders expected though. The real estate platforms are working with tiny statistical sample sizes and long feedback loops compared to the massive wave of loans Lending Club can pour through in developing its grading system. Add in a lack of standardized metrics between platforms, and it’s going to be a tremendous challenge. For those who pull it off though, it could produce an inflection point in the ability to quickly fund deals! I’ll think you’ll see many try in the coming year. [Read more…]

ABOUT LENDIT FINTECH NEWS

LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

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