Analysis

Real Estate Crowdfunding vs. Bank Loans, a Developer’s Perspective

Despite institutional banks offering historically-low interest rates, the real estate crowdfunding market is quickly growing, outpacing forecasted results every year. Through crowdfunding platforms, investors are achieving more than 9% annual return on their capital. This high return comes directly from the high-interest rates that crowdfunding platforms offer developers for funding—so why are developers looking for alternative lending forms when banks lend with cheaper rates?

On the debt lending side, the best explanation is based on the strict requirements of institutional banks. After the real estate crash in 2008, banks became very cautious when lending to housing developers; the assumption was that the real estate market was too volatile, and that final project value may not fulfil developers’ expectations. Without a strong track record and well-established relationship with the bank, obtaining a loan was not likely. If the developer was lucky enough to receive funding, it was often with interest rates in excess of 9%.

Enter crowdfunding platforms, offering quicker and more streamlined lending processes. Underwriting standards for crowdfunding platforms tend to be more flexible and transparent. Such platforms can be ready to issue a loan in as little as 5 days, depending on project complexity. This is a significant factor when working with fix and flip projects or bridge loans which typically need financing sooner.

Usually, fix and flip or bridge loans are very dynamic transactions. Developers are constantly looking for good underpriced deals. Once found, actions to acquire such property must be expedited. Although a target property may be underpriced, its value is still significant for a developer to pay in cash when waiting for bank financing. That cash, or working capital, is better used as down payments to develop more than one project. No developer wants to freeze their working capital for a long period of time.

Crowdfunding platforms’ underwriting is more thorough than institutional banks, but with less bureaucracy. Banks have a very complex  management structure represented by multiple entities and borrowers must be submitted to all of them. In the case of crowdfunding, there is only one entity between lenders and borrowers: the crowdfunding platform. The loan issuance process is usually most dependent  on the borrower itself: how fast the borrower can present quality documentation for underwriting.

Another benefit that crowdfunding platforms can provide is mezzanine financing, which includes preferred equity and mezzanine debt. This attracts developers who are looking to fill the gap between equity and senior debt financing, with typically just bigger development projects requiring mezzanine financing. These projects include approximately 5–20% mezzanine and up to 70% senior debt financing, with the rest covered by developers’ equity. Mezzanine financing costs more than debt, but less than equity: investors usually expect 13–20% annual return.

In summary, crowdfunding is a good alternative for developers who do not have time to wait or do not qualify for loans from institutional banks, or when additional financing is required. Crowdfunding platforms connect developers with investors, whose combined capital can provide what historically only institutions could.

Author : Egle Nemuraite

Egle Nemuraite

About the author :Egle Nemuraite is a research analyst at Sharestates, a robust online marketplace for real estate lending and investing. Prior to Sharestates, Egle worked as a property analyst, and brings to the team her expertise in real estate strategy and finance management.

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About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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