At the beginning of 2013 I wrote a blog post and predicted that with the demand for money being so high, and the supply so low, that private funding solutions will emerge.  Crowd-Funding is one of these private funding sources that is now available to real estate investors.  I had the honor to interview Jilliene Helman, CEO of Realty Mogul, one of the first crowd-funding sites for real estate investors, and this is what I learned:

Crowd-Funding Rules are not too different from Hard Money Rules

Don’t expect a big discount in your loan from crowd-funders.  Their up-front points, interest rates and loan-to-value (LTV) are very similar to hard money lenders.  They look at each borrower on a case by case basis.  They tend to want to lend to experienced rehabbers in states where foreclosures are “non-judicial”.  There are some states they flat out will not lend.  First, find out if you are investing in a judicial or non-judicial state, then look at how long it takes for the foreclosure process to complete.  They will definitely  lend in Texas, for example, because the foreclosure process is extremely fast.

You have to remember that the crowd-funding company has a duty to protect their investors first and foremost, and they spend a lot of time making sure they comply with the myriad of rules demanded by the Securities and Exchange Commission (SEC).  Jilliene admitted to me that as a CEO of a company some would be shocked how much time is spent dealing with these regulations.

Crowd-Funding Performance is very similar to Hard Money Performance

Currently there are a LOT of Hard Money Lenders sitting on cash and want to put that cash to work for them quickly.  Many promise a quick turnaround for funding and crowd-funding is no  different.

Some hard money lenders are private investors that lend their own money.  Conceivably that one resource could be “cash constrained”, meaning all of their cash is out there performing at high interest rates.  Other hard money lenders have formed companies around multiple private investors that allows more flexibility, more negotiation and most likely won’t run out of funds for your project.

Then there are the Trust Deed Investors.  Companies are formed to connect one investor to one project.  The Norris Group is an example of such a company.  They advertise for investors and lend money, matching the private lender to a private borrower to achieve a high rate of return for the borrower and all holding real estate as collateral.

So What’s the Difference?

For the real estate investor/rehabber, the difference is more money is now available on a nationwide scale.  You now have one more choice to fund your projects.  Everything else is about the same.  Will this create more competition for the hard money lenders?  Not immediately, but according to your basic model of supply, demand and price, the more supply that meets the demand, the lower the price.  Adding one more option for real estate investors may seem to be a drop in the bucket, but over time will affect some change.

For the money investor, the difference is incredible.  To be involved with a hard money loan, you had to be a single investor, pool your funds in a company with other wealthy individuals or have enough money to invest in single trust deeds.  With Crowd-Funding, multiple investors can be involved with one project, all sharing the return and NOT have to invest in a company or entire project.

If you are an accredited investor, (meaning net-worth of over $1 million or earn more than $200k/year), then you can diversify your investments to include investing in real estate projects.  Let’s just say you are an accredited investor and have $50,000 you want to invest.  Finding a real estate project at that level is unlikely.  However, with crowd-funding, that smaller investment can be pooled with other smaller investments to fund a reasonably sized project.

Did I leave anything out?  Do you have any questions?