I had the pleasure of interviewing Adam Hooper, the CEO of RealCrowd, one of the prominent real estate crowdfunding sites. Adam has spent the last ten years working with a spectrum of real estate professionals including operators, lenders, investors, developers and institutional clients. Prior to RealCrowd, he founded two national platforms for brokerage, consulting and joint venture equity investments.
As investors and developers look for education about crowdfunding, I’m pleased to be able to share in-depth thoughts from an executive at the forefront. In this interview:
- About RealCrowd and crowdfunding
- RealCrowd’s benefits and differentiators
- For investors: requirements, risks & rewards
- For real estate developers & promoters
- Crowdfunding regulations
- The future
- When and how did RealCrowd start?
We initially came up with the idea around late 2011 when we were continually working on transactions that were beyond where most real estate operators could efficiently and effectively syndicate, yet were too small for institutions to get involved. At the same time, we had friends and family reaching out to us regularly with smaller amounts – $15k-$50k – that they wanted to invest directly in commercial real estate. Unfortunately, there really weren’t any options for them. So we had the “ah-ha” moment of realizing both sides of this equation existed, we just had to build the platform for them to exist together.
- What exactly has changed with the JOBS act to permit sites like yours to exist?
The biggest change is of course lifting the ban on general solicitations. Real estate has been syndicated for decades if not centuries, but the basic mechanics haven’t changed over that same time. Investor networks have been historically limited to growth by the fact that one could only solicit investors they had a pre-existing business relationship with. That is no longer the case, and issuers can offer their investment opportunities to anybody and everybody – a major shift in how operators can access capital and how investors can access opportunities.
- Can you share any information about the amount of activity on your site, such as # of deals? It looks like your offerings are consistently being over-subscribed, so that must feel good.
We have done 6 deals so far, totaling over $62M of total asset value. And yes, it feels great that we’ve come that far in only a few months of being live with the platform!
RealCrowd’s benefits and differentiators
- What differentiates you from other real estate crowd-funding sites?
We take a very different approach in that we are not forming individual investment entities for each deal. That is, we don’t create a “Crowd Shares III, LLC” type of entity in order to control investors’ money being placed in “123 Main Street, LLC” for the property. We feel that is a terribly inefficient approach (having to replicate all of the diligence, accounting, reporting etc. that is already being completed at the asset level) that adds unnecessary complexity and uncertainty to the investments – if that platform implodes, unwinding those deals will be a nightmare. Another is our product focus. We came from an institutional background (with a combined 20 yrs and nearly $3B of transactional experience) and want to bring deals of that caliber to Main Street investors that traditionally would never have the opportunity to participate in those assets.
- Some crowdfund sites invest in their own deals and/or serve as general partner. One might justify that this provides more skin in the game and better control. What are your thoughts on this approach?
Why should investors have to pay another layer of fees, overhead and risk additional complexity to roll dice on the hope that Crowdfunding Co. will be in business for the life of their investment? We reduce that risk and provide the opportunity for direct investment in real estate, not investing in a fund manager.
For investors: requirements, risks & rewards
- A low minimum investment level should encourage new investors to include real estate in their portfolio. Your minimums range from $5-10K, correct?
Minimums on the platform are set by the real estate operator, remember these are their offerings on the website, not ours. Offerings have ranged from $10k to $50k minimum investments.
- What is the typical range of investment amounts you might see on, say, apartments with several hundred thousand in equity up for investment?
Average investments have been in the $35k-$40k range, but keep in mind that’s a spread from the $10k investors up to six figure(+) investors.
- Do you offer debt and equity deals?
Right now our focus has been on equity deals as that’s our background and expertise. We also feel the debt markets are so aggressive right now at historically low rates, that to provide an attractive return to investors you have to go way outside on the risk spectrum (hard money loans, major rehabs, house flips etc). This will likely change in the future and we do have our eye on debt opportunities as the markets shift.
- For equity deals, if the deal goes insolvent and the assets need to be liquidated then would you have a significant number of physically-separate individuals, and their lawyers, who have to agree on next steps?
While I am unable to give legal advise, typically in real estate deals there is a managing member of an LLC, or a general partner of a limited partnership, that would control the unwinding of the assets. Every deal may be structured differently depending on the circumstances however.
- What could you advise someone like me, familiar with east coast 4-family units, about investing, say, in apartments on the west coast? Is diversification a good thing for me, or taking me out of my zone of expertise? Is it better to be in travelling distance to the property, “just in case”?
I think the biggest benefit of platforms like ours that are emerging is to provide the ability to diversify. Yes, one can diversify somewhat locally, but to build a truly diversified portfolio, one can now take advantage of this new reach to look at other asset types (office, retail, industrial, multifamily etc) and geographies. The benefit of investing with best in class operators is that they are the ones doing the “on the ground” work at the assets – passive investors don’t need to be just down the road to handle the day to day maintenance or hassles that can come along with property ownership.
- Do you get a sense that the majority of investors are experienced enough to understand the opportunities and risks? For example, I think I see more multi-year commercial deals involving equity with 16-20% IRR being funded more quickly than, say, house refurbishments with a 1-year maturity and a secured loan. And one web commentator noted that investors won’t really know how real estate works until one of their deals encounters challenges. …On the other hand, I’m told that crowdfund investors ask as sophisticated questions as traditional, direct RE investors. What are your thoughts on participants’ understanding?
Education is a big part of our mission. E-books, regular blog posts and eventually seminars are all in our roadmap. Real estate is a fundamentally simple asset class to learn – tenants pay rent, expenses are paid from that cash flow, the remainder is distributed to investors. Granted, that’s a VERY simplified view, but you get the point. I do think the crowd is smart however, and would agree that questions we see coming through on specific deals are sophisticated.
- I like one of the benefits you promise: “[Online,] investors will be able to track the many benefits of owning real estate, including net cash-flow distributions (distributed quarterly), adjustments in net operating income through changes in the property tenancy and potential growth of their investment through property appreciation.” Is this information now available on your Portfolio dashboard?
For real estate developers and promoters
- I’m colleagues with smaller developers, typically refurbing houses, 4-families, or small apartment buildings, interested in getting better terms than from a typical hard money lender, through crowdfunding. It appears that your site focuses on larger developers, however. Do you have a sense of whether the effort and costs of getting involved with crowdfunding are worth it to the smaller RE developer?
Absolutely. This is the most revolutionary change in the real estate capital markets in generations.
- How do you perform due diligence? I understand you focus foremost on the developers. Your site says that “typical sponsors will have been involved as a principal in a minimum of $50 million of real estate, bought and/or sold at least 10 transactions.”
Our level of diligence is heavily focused at the operator level. We feel this is ultra critical and we strive to have a platform with best in class operators. We also feel that it is impossible for anybody to be an expert in all asset classes in every market across the country. Therefore we cannot believe that some of the platforms in the space are recommending what is a good deal or a bad deal. That isn’t our position as a platform to make. Now, we do know how to find and attract operating partners that are experts in specific product categories in specific markets across the country. The best operators tend to do the best deals over time.
- I read that “RealCrowd will charge a nominal fee to the operating partner for its services to arrange for the investments to be made.” Is there anything else that we should be aware of in terms of fees?
We do charge an up front flat access fee to the operators to utilize our set of tools / a fee to them with each deal. At this time, we do not charge any asset management fees nor do we participate in the upside of the deals. We also take a firm approach that platforms should not be taking any economics from the investors.
- Investors need to be accredited to participate, correct? And that requires them, or jointly with a spouse, to have income of several hundred thousand or liquid assets of $1m. What steps do you have to take at the outset, and over time, to demonstrate one’s accredited status.
Everybody that participates in a 506(c) offering must be accredited. To start, we have our users fill out a self accreditation worksheet as part of their signup process. We then speak with them to determine they are in fact a real person! When time comes to invest in an opportunity, we will take the necessary steps to verify that they are in fact accredited. We take this very seriously and have even seen investors that we are unable to verify based on the documentation provided showing up on other platforms with testimonials about how easy it was to invest! Those are some of the things that cause concern for us a bit about the space.
- Some web commentators have voiced concern that you, or other sites, act like a ‘broker’, or promoter of investments and that this role is restricted of crowdfund sites by the JOBS act. Are these the correct words to use or is there a misunderstanding here?
There is a misunderstanding. There is an exemption to registration as a broker/dealer in the JOBS Act that we fall under. Our approach is again different than other platforms in that we are not an issuer selling our own securities, but we provide a SaaS platform of tools for operators to run their own offerings in an online environment. We are best described as a ‘platform’ right now. Technically we are approaching it as a true marketplace as well, which by definition includes multiple sellers (operators) and multiple buyers. Other companies are only offering investments in their own securities which doesn’t seem like a true marketplace to us.
- What are future strategic plans for RealCrowd?
Eventually we will look into adding debt opportunities and may eventually look international as well.
- What are improvements being made to your process and site?
We just hired an amazing Director of User Experience (he was a Lead Designer at Salesforce.com and we managed to court him to eventually join our team!) and will be rolling out major improvements shortly. Our goal is to continually innovate and provide both operators and investors with the best experience possible. We are also always looking for feedback in how we can better the experience as well.
- It seems to me that the future of crowdfunding will be about balancing careful due diligence and presentation of offerings against growth rates. The first crowdfunder to have deals go bad could tarnish the entire field. How do you feel about that risk, and what is RealCrowd doing to be as transparent and prudent as possible?
We agree completely. Real estate investing, as with all investing, carries with it an inherent risk. Deals will go bad, the market will sour, people can and will eventually lose money. This gets to the earlier point that I brought up – we are not in the business of recommending investments for individuals. We want to make sure that we have the best real estate operators in the industry on our platform, companies that have been through multiple market cycles and take a very proactive role in operating the real estate. Those are the companies people want to invest with, and they are the ones that have the local market intelligence and experience to be a steward of their investors’ capital. Our platform is about access to invest directly with real estate experts.
Disclaimer: This blogger, Scott Lichtman, has made a real estate investment through the RealCrowd site. I am not otherwise involved with the company.