Investment real estate is one of the oldest and most inefficient businesses. There I said it.
Despite my own common sense and at the risk of offending many, I’m going to continue. But first, let me explain a little further.
You know how the world is changing? Like it or not, it is. So grab your double tall Americano with soy paid for by simply shaking your iPhone. Deposit that check by taking a pic. Check on that drone delivering your organic produce. Snapchat selfies with your bestie from the Tesla. Video blog bacon-wrapped… something… I digress.
It used to be (ok, it still is), that real estate projects and investment would rely heavily on old school methods. By old school, I mean things like the real estate agent’s little black book of investors, handshake deals on the back nine, or promises made over drinks and cigars. I’ve done some of those meetings too. They work sometimes. Not my typical MO, but I get it.
THE TIMES, THEY ARE A CHANGIN’.
Enter Crowdfunding.
Second thought. Before we get into Crowdfunding, let me give you a real world example that we can all relate to. You may have heard of it. We call it…
The internet.
The nickel tour looks something like this: before every household had 40 different Apple products, the internet was aimed at secret intelligence, then educational use and large business, then expanded into individual’s daily use, and has now seemed to take over our lives.
This is a platform that is changing daily. Our world is changing daily. Even if I’m not an early adapter myself, I would like to think I’m smart enough to pay attention to where the markets are headed.
Even as our businesses and world are advancing on numerous fronts: technology, marketing, social interactions, research, development, and on and on…. there is a trend that seems so obvious I don’t know how I missed it before. What is it you ask?
People’s concern for privacy.
As more of our lives are available in the cloud, we are trying to get smarter about what we want accessed from anywhere and everywhere. We want to be protected from hackers and simultaneously have the freedom of obtaining data for everything right now. That requires innovation.
Know where there is a true master in advancement of this privacy thing? The Dark net.
What is the Dark net? It’s an anonymous free market. From an economist’s perspective, it is actually very elegant and is heading toward mainstream. Many of the sites sell products you shouldn’t buy, but look past that for a moment at the system. The system is advancing to meet the demands of the market. (I promise I’ll tie this back into real estate.)
GIVE ME THE GIST.
The Dark net uses things that are beyond my understanding, but essentially allows users to browse in secret, encrypting your location, and even paying for goods and services with crypto currency that can be easily converted to and from dollars. You can’t get there on Chrome or Safari. You need a special Tor browser to be super-secret.
The Dark net behaves like the internet we know in many ways, but gives you an invisible cloak… like Harry Potter. These anonymous pages offer hi-res photos, one-click ordering, have a “report this item” button, and you can even buy ad space. Vendors use pseudonyms. Yet there is a consistency of service and products which are ensured by good user reviews. Kind of like Amazon or Yelp, if you get good ratings, then other people know it’s ok to do business with you as a vendor.
Don’t get me wrong. The Dark net isn’t just about illicit activities. It attracts anyone who has a high concern for privacy. There are also whistleblower sites, political activists, architects who handle sensitive projects, musicians, and more. Facebook even has a Dark site! If Facebook is doing it.. you know you’re gonna do it too. Just a matter of time.
This whole Dark net world is a perfect market, and does exactly what you would expect. Product quality goes up. Prices come down. Vendors are polite. Consumers are king.
I think the internet will continue to change. It won’t be completely dark or light, but will be a gray area that takes components from each side. The privacy, the innovation, the consumer-centric model. All necessary components in an evolving environment.
WHICH BRINGS ME BACK TO REAL ESTATE.
Crowdfunding could change the financing landscape for investors by bringing greater efficiency to the process. It is innovation that can meet the demands of the market. Quality might go up. Costs might come down. Consumers will be in control. In a perfect world, anyway.
Real quick, what is this crowdfunding thing again?
Crowdfunding is linked to the regulations from the Jumpstart Our Business Startups (JOBS) Act of April 2012. It was initially aimed at helping small business owners acquire capital for their business. The purpose of the JOBS Act was so small business owners would be able to advertise on social media sites like Facebook and Twitter to raise capital and build their dreams. Real grass roots and folksy stuff. It worked. But we found a little hole in it for real estate that works wonders on the internet.
On September 23, 2013 the ban on general solicitation was lifted via Title II of the JOBS Act. Before this change in the system, you had to “know a guy, who knows a guy” kind of thing because advertising publically had been illegal for the previous 80 years for real estate investments. Now, instead of sharing drinks and cigars, you can search the web and browse different projects at your leisure with a screen name. (Hey, that sounds like kickstarter! Yup, except for real estate. The market wants what it wants. Consumers are king.)
Traditionally investors who wanted to participate in a direct real estate deal had to buy into a partnership or do it themselves, which was often a very sizeable amount to contribute. Now crowdfunding has flipped that market on its head. You no longer need $250,000 to invest. Now, you might be able to invest as little as $5,000, depending on the project requirements and market.
Ultimately, what crowdfunding or peer-to-peer lending has done successfully is allowed sponsors (those are the guys who put together deals and take their cut) to tap into a large pool of middle-market investors who were previously left out in the cold. (That sounds an awful lot like it will lead to customer reviews online.)
Is that a good thing? It might be if you’re the guy who doesn’t want to commit $200,000 to one project. As long as you are lucky enough to find a sponsor who knows how to formulate accurate projections and not lose your money. Can you do me a favor though? With all this changing and innovation in the marketplace, let’s focus on the sponsors who know what they’re doing. Make sure they have a good track record in the market they are working in. Ideally, you want get all your money plus a little extra back in the time they promise it to you. Don’t lose everything to a novice. (Hmm… if consumers are king, will they require portfolios of past projects as proof of success? They’d better.)
Just like video blogs, Crowdfunding is catching on. Over the past 7 quarters, we have seen $9 billion (that’s billion with a “B”) advertised in total real estate offerings with the SEC (Private deals are filed with the Security and Exchange Commission using 506c exemptions, so we know who is doing them). While it has fluctuated, roughly 20% of our real estate deals are being done with Crowdfunding today.
What will this do to our market? I can’t tell for sure. We’re still in the “odd couples” stage. But, I think it’ll be a good addition.
On one hand, there are SOOOO many old school guys in the market telling fish stories. On the other, if you know where to find it, you can get the big data for basically anything and everything. In my opinion, neither of these approaches will give you the full picture to intelligently move forward. So, when investing… Start small. See how well it plays out, then decide if you want to do it again.
We’re at a crossroads in the real estate industry, and one that is desperate for innovation. The data exists. The deals exist. The market clearly exists for both sides. My hope is that we find a way to bring these worlds together. Old school and new school approaches that benefit a single outcome.
I believe that in order to be successful in the future of this industry, it’s going to require a skillset of the “boots on the ground” approach for understanding the local markets, and also knowing how to use technology and interpret the data. Not just read the data off a sheet, but actually apply it in real life to the property or business you plan to invest in. That’s where the true value comes in. It is what customers will rate and review.
Similar to the internet and Dark net, I have faith there can be a balance between the different approaches in real estate. There are pros and cons with each. Let’s take the best of both worlds. Organic bacon-wrapped iPhones for everyone!
Each morning my work day is spent looking through projects and keeping up to date with the markets. (You thought I was going to reference bacon again, didn’t you?) If you want to know what’s going on in real estate, just ask. Call/text (206) 293-1005 or Jen@HudsonCREG.com.