Last week, I came across this article. Just so you don’t have to go through the entire thing (and most of you likely won’t), I am including below a list of the arguments made by the author, Prof. Leonard Baron, a lecturer at San Diego State University, as well as my thoughts and conclusions. At GroundBreaker, we have spent considerable time talking to both sides of the equation and trying to come up with the best possible way to create a transparent marketplace with quality operators.
1. “Real estate investing, and particularly development deals, is very high risk.”
Yep. We get it. But why are we singling out real estate? Is it any safer to invest in tech companies online? Do investors understand technology any better than they understand real estate? After all, when tech companies go bust, you wind up with a worthless piece of code. In real estate, at least, there may be something tangible left (after all debt is repaid).
All investments entail risks. Real estate development is high risk, unlike T-bills, but also unlike T-bills, real estate investments offer the opportunity to make double digit returns. The key to taking these risks, without compromising all your savings, is diversification. What real estate crowdfunding offers (for the first time on a large-scale basis) is the opportunity to make relatively small investments in real estate projects. Now you can invest in private deals and have an opportunity to achieve higher returns (yes, by taking bigger chances), without having to invest the large minimum sums that used to characterize these offerings.
2. “Good developers and investors with proven track records will propose quality development or acquisition projects and can get cheap financing from banks that compete vigorously for such deals”
True. That covers the debt. But how about the equity? Banks will only lend up to 60% or 70% of the value of the property. After that, the entrepreneur is on his own, especially for those smaller projects that will not get institutional funding. The lack of institutional funding, based on first-hand experience and research, is not because of deal quality but because institutional investors will not look at smaller projects – it is just too much work for too small a portion of their investable dollars. Not every entrepreneur will have the connections or personal wealth to finance these projects on his own. It is this equity portion of relatively small projects (say, up to $5M in equity) that is the most difficult to finance. This is where real estate crowdfunding will play a prominent role and grease the wheels of the economy, at least initially.
3. “These are typically inexperienced developers and investors, or ones with limited financing options due to pitching low-quality, high-risk deals. Some may have even lost prior investors’ money.”
Ouch. That’s a pretty harsh statement. But we will let the quality of listed deals and entrepreneurs do the talking. Investors can then decide whether the deals are worth investing in or not. (We tend to think that investors are not as dumb as the government has traditionally deemed them to be, so we may digress with Prof. Baron in this respect.)
4. Some closing remarks.
Prof. Baron lists a variety of concerns in his article, many of which can be addressed with disclosures and some basic due diligence. At GroundBreaker, we will list deals from entrepreneurs who have gone through a robust vetting process, have a verified track-record, and have skin in the game. This will minimize the possibility of hosting deals from scam artists or incompetents. In addition, we have adopted, and will be continuously enhancing, many measures to improve the quality and transparency of the disclosures (and this should be further enhanced by the quality and quantity of the investors participating on our online fora).
In other words, while we all agree that there are risks, Prof. Baron, some people may be willing to take their chances. And Congress has finally given them a chance. Who’s in?