Real estate crowdfunding (RECF) was a late entrant in the crowdfunding universe but has grown aggressively in the last few years. The industry size stood at a staggering $3.5 billion in 2016 and should cross $300 billion by 2025. Online real estate platforms are best suited to take advantage of this explosive growth.
JOBS Act Title III allowed crowdfunding companies to onboard non-accredited investors, but the 1 million dollar limit diminished its effectiveness. It was Title IV with a $50 million limit which turned the tide in favor of real estate crowdfunding companies, and it was an important piece of legislation to remove the stranglehold of institutional capital in this trillion dollar market. But even though the industry has been on a growth spree, previously established players have struggled to compete effectively. The real estate market has its own traditions, rules, and processes and has been unforgiving to technocrats who believe that putting everything online is the solution to all problems. iFunding is the latest casualty of this flux in the industry.
iFunding: Downward Spiral
iFunding, one of the early pioneers of real estate crowdfunding, has been dealing in commercial and residential real estate investments since 2012. It had managed to raise almost $6 million of VC and crowdfunding capital on the back of its “superior due diligence and underwriting procedures,” which were supposedly considered a benchmark in the real estate crowdfunding industry. The company was founded by William Skelley, an executive with almost a decade of experience in consulting and investing.
First signs of trouble started showing when investors irritated with the deal performance and inability to solve the underlying issues started venting out on BiggerPockets, a leading real estate social network. The first deal to come undone was a Milwaukee project involving five fix-and-flip properties with an Orange Group. Multiple projects started seeing a delay in even principal repayments. Moreover, iFunding’s management team could not address the complaints of the aggrieved parties, which led to further badmouthing over social media. As a result, the platform was not able to materialize even a single deal since late 2016.
The company was also slapped with a lawsuit by sponsor-partner CapStack as iFunding “failed to raise the agreed-upon sum through its platform, and then repeatedly lied about its performance in a series of intentional delays and brinkmanship, causing CapStack injury and detriment.” The compensation being sought is over $585,000.
Subpoena: the final nail in the coffin?
The SEC issued a subpoena seeking clarification with respect to some operational doubts about iFunding, as it discovered that the startup was operating as a broker-dealer without having an appropriate license. In early 2016, a law firm made an attempt to restructure iFunding, but the company continued to face major headwinds and Founder-CEO William Skelley decided to leave the company. Following his departure, attempts were made by a consultant as well as some investors to operate the platform, but they were also met with a similar fate highlighting the gaping holes in the platform.
Multiple online reports have declared iFunding to be insolvent or on its brink. There are almost $20 million of investments and 400 investors still stuck on the platform. To salvage the investments, one of the largest investors in the platform–Jazco Property Management LLC–has decided to step in to manage the remaining assets of the company´s portfolio. According to Jazco, lack of proper management, financial control, and intentional delays in payments were the major reasons for this financial misery.
The Impact: Present and Future
Insolvency of iFunding will drastically impact investors’ confidence in the RECF industry. Investors, both institutional and non-accredited, will be more circumspect and cautious while deciding whether or not to invest in a RECF platform. This cautious approach by investors might slow down the growth prospects of the real estate crowdfunding industry, and can even be a death knell if few more cases like iFunding crop up in the future.
This incident will also sour the venture capital industry’s infatuation with crowdfunding portals in general and real estate crowdfunding platforms in particular. The space should see a reduced velocity in terms of deals and money flowing from VCs. More importantly, the valuations of the entire industry might take a hit. Corporate governance and due diligence will be the “disruption” and differentiating factors in this nascent space. Players who can showcase compliance and regulatory acumen of the highest order will survive.
But the iFunding insolvency is also an opportunity for bigger players; they can now lead the much-needed consolidation in the industry. The market was becoming oversaturated with online players popping up every week. Investors will now focus on only the biggest and the best, thus restricting any newcomer’s ability to dictate the market. Experts believe that the coming year will see four-five players emerge as leaders in this sector. The RECF industry needs to mature and start focusing on performance rather than just deal flow.
Written by Heena Dhir.