Crowdfunding continues to grab many investors' attention, as well as those seeking funding away from conventional institutions such as banks. This type of funding takes advantage of situations where many people come together to fund investment opportunities.
With this new funding method, small business owners can now access capital directly from investors, something that was a fantasy back in the day, especially with banks.
Similarly, investors can also identify investment opportunities they deem profitable directly from their seat. In fact, with crowdfunding, the process is fast, efficient, and convenient for both parties.
Real estate is one of the many industries looking to crowdfunding to connect with potential investors. Crowdsourcing.org said that in 2016, real estate crowdfunding reached a whopping $3.5 billion, and according to industry trends, real estate crowdfunding continues to turn heads.
However, even with such revolutionary technology and innovation, there are people who still have doubts about these platforms. With such doubt come myths and misconceptions about the platforms, some of which we'll discuss in this article, but before that, let's take a look at the advantages of real estate crowdfunding.
Real Estate Crowdfunding Advantages
- Improved transparency — Crowdfunding platforms scrutinize every deal before offering it to potential investors. This means the investor will have enough information to make the best decision.
- More Diversification — With a variety of asset classes at investors' disposal, they have a chance to sample various investment choices before they make a decision.
- Improved accessibility — Back in the day, you'd need many thousands of dollars to make any meaningful real estate investment. However, with crowdfunding, you can become an investor for as low as $5,000, although the minimum amount will vary from one platform to another.
1. Bad Deals Often Find their Way to Crowdfunding Sites since Sponsors Can't Secure Capital from Other Institutions
Most of the time, the choice to move to a crowdfunding website has everything to do with how big the deal is and not the quality.
According to the small balance commercial market, equity or realisticloans that range from $1million to $5million were undeserved after the financial crisis due to regulatory costs imposed by the banks.
However, with crowdfunding, sponsors and borrowers have the chance to skip past the investor relationships tax reporting and distributions, since these crowdfunding platforms take care of that on their behalf. Crowdfunding is a favorite for these parties because of the convenience it offers.
For a real estate company, variety is important when seeking funding. This is a factor many lending institutions don't offer. However, crowdfunding websites bridge this gap by consolidating numerous investors in a single platform.
This makes it easy for the real estate company to reach out to as many investors as possible for potential funding. However, keep in mind the platform will analyze the deal to make sure everything checks out because bad deals are a threat to its reputation.
2. All Crowdfunding Sites Are Similar
Not true. The people and the product presented on the platform represent the type of people running the platform.
These sites vary, and when searching for a platform to drive your agenda, it's critical to consider a platform that scrutinizes each deal and investment offered. For instance, there are platforms which only approve of deals that offer cash flow, while others will look at appreciation after developing the land.
Also, other platforms will underwrite all transactions, and others will visit the site. In short, a host of factors must be considered before settling on a certain crowdfunding platform. Besides, there are platforms that only deal in a specific industry such as technology, finance, or real estate.
3. The More the Deals, the Better the Platform
While a high deal volume may indicate some level of success and popularity, it doesn't always mean the platform is better.
Analyzing deals to their core is a critical function and may require a lot of time to finalize. Therefore, a platform with numerous deals could mean the team behind the platform might have weak systems to screen deals.
They could also approve many deals to boost their numbers in a bid to pull in more business. A classic example of quantity winning the battle against quality.
In such cases, there's the potential to lose your money as an investor or get bogus deals as a real estate company. As such, when searching for a crowdfunding platform, look for those offering strict underwriting and vetting procedures. Also, transparency is a key factor otherwise, you may end up losing a fortune.
4. Crowdfunding Sites Are Simply Markets Displaying Third-Party Products
First off, crowdfunding sites vary, and just like other competing services or products in a market, there are bound to be rotten apples. In this case, the rotten apples include those that fail to carry out due diligence.
The good ones are those that vet each deal on their platform and underwrite them. To identify the legitimate platforms, it's important to look out for third-party reports, market data, and proformas, not forgetting the history of the sponsors to determine their eligibility.
A legitimate platform is transparent and will share this information with both parties before you can settle on a suitable choice.
5. You'll Lose Money If the Platform Closes
In any business, it's important to consider various threats to its existence such as bankruptcy. A good company will put measures in place to avoid ending up in such a situation. However, in the event that it does end up bankrupt, it should have a contingency plan to protect its clients.
The same is true for a crowdfunding platform. When seeking the best platform, check whether they use Special Purpose Entities to offer bankruptcy remoteness. Also, do they have connections with a third party that will salvage the situation?
Researching these options before joining the platform will save you from losing your money should the platform go under. Keep in mind investing doesn't come with guarantees.
6. It's Better to Work with the Sponsor
This is true to some extent but there are benefits when you work indirectly with other investors. Remember, online platforms bring together many investors together, thus increasing your chances of landing a potential investor.
Also, you can land a deal with more than one investor, which can be great for your business. This is because you can tap into the expertise of these investors to build a strong business, as compared to you investing alone or with a single investor.
Moreover, you have the platform's protection on your side to guard against exploitation. On top of that, the platform ensures you have a seamless experience while on it, giving you maximum output.
While real estate crowdfunding continues to attract many, information about it is still scarce among the general population. For this reason, tons of myths and misconceptions have come up, misleading more people.
Nevertheless, even with such mystery surrounding this form of funding, it is guaranteed to be a big break in the future.
Also, now that we've debunked the top myths peddled about crowdfunding, you can go ahead and join one of the many platforms available and start experiencing the benefits of crowdfunding in the real estate industry.