Cracks In Real Estate Crowdfunding Starting To Appear
By JD Esajian on July 3, 2015
Real estate crowdfunding is taking some hits. Is this the long anticipated end of the trend? Or are those investing in these deals to blame?
The Rise of Real Estate Crowdfunding
Crowdfunding is no longer new. Although it continues to evolve every quarter, crowdfunding has been around for quite a number of years. In fact, there are now over 75 different crowdfunding platforms to choose from. Some have proven themselves very successful for a number of years and over thousands of projects. Others are brand new. More will come now that individuals can virtually set up their own crowdfunding platforms with just a couple of clicks.
New SEC regulations and rule clarifications, as well as states green lighting intrastate crowdfunding, are only likely to fuel more growth among these platforms ahead. Unless there is too much bad press.
New Cracks in Crowdfunding
In the last few weeks there have been at least a couple of complaints about crowdfunding campaigns gone wrong. In one case, a government agency stepped in to legally pursue one promoter who failed to deliver, and spent the money on himself and other projects. In another, the promoters failed to resell fix and flip properties. They even abandoned marketing the properties in favor of renting them out. Until that happens, there are property taxes and other holding costs that investors may have to come up with if they don’t want to lose their sizable initial investment.
Some amateurs have been happy to jump on the “I told you so” bandwagon. In many ways, it is pretty surprising that there haven’t been thousands more of these cases in the last few years. It’s so easy to put up a campaign and ask for a bunch of money. Someone was bound to misuse it, or flop.
While this is unlikely to slow down the crowdfunding engine, it could trigger negative consequences – especially if there are more cases like this. The government will have no choice but to step in and make a serious example of someone to scare other unscrupulous individuals off. New regulations could also make it more difficult to use crowdfunding. Bad PR could turn regular investors off. Big banks and investment houses that are losing business to real estate crowdfunding platforms would certainly be happy to fuel that.
For now, we’ll just have to watch and see how it plays out. What is important now is that both fundraisers and investors considering putting money into these investments get the right perspective on why some crowdfunding campaigns don’t work, and how they can invest more safely.
Why Real Estate Crowdfunding Doesn’t Work
1. It’s Too Easy To Crowdfund: It’s really easy to hop online and set up a real estate crowdfunding campaign. Virtually any teenager can put up a page in a few minutes. That means that there can be a lot of campaigns and promoters out there that have no real experience. They may not have bad intentions, but real estate can get complicated. Plans don’t always work out. Some just don’t have the real estate education and in the field experience to deliver. That can be extremely costly for those that put their money on the line.
2. Promoters Don’t Have Crowdfunding Experience: While it is easy to put a real estate fundraising page up on the web, there is a big difference between just launching a campaign and successfully funded campaigns. Some data shows that only 50 percent of campaigns actually get full funding. Success requires some crowdfunding smarts, marketing savvy, and strategy. Expect to invest heavily in marketing your campaign if you are going to launch one.
3. Poor Property Choices: Cheap doesn’t always mean a good deal in real estate. While out of area real estate investing can be very beneficial for investors, it is important to understand what the neighborhoods are like, and how their properties stack up to the competition. Prioritize numbers over looks, but also get to know the local market, and real costs involved.
4. Investors Not Anticipating the Challenges: Those that are investing in real estate crowdfunding campaigns need to equally be aware of the challenges of development, fixing and flipping pools of properties, and even operating pools of out of area rentals. Things happen. Pivots will need to be made in order to hold it together and deliver returns. This doesn’t mean the promoters aren’t doing their job – providing they are making every effort to make it work and deliver.
Summary
Crowdfunding can and does work. It can be of great benefit to all sides, but both need to approach it with care and common sense, and from an educated position.