Real Estate Crowdfunding: How to Survive a Shark Tank Attack

Since Title II of the JOBS Act passed in late 2013 the popularity of crowdfunding has risen dramatically. We are now seeing portals emerge in new markets in almost every industry imaginable. Recently, real estate crowdfunding found itself in the limelight as an entrepreneur representing Tycoon RE was able to pitch his business on ABC’s Shark Tank. For individuals like myself who work for a real estate crowdfunding company (Patch of Land), I was initially excited to see this new online marketplace gaining national exposure. Unfortunately, what transpired was a terrible elevator pitch, followed by a slew of unanswered questions, resulting in a resounding “I’m out” from the Shark Tank Panel.

To give some credit, perhaps it was ABC’s post-production of a much longer pitch session that made Tycoon RE look bad for the sake of Hollywood dramatics. Nevertheless, while I could write an equally long post about Tycoon RE’s poor representation of real estate crowdfunding, I’d much rather focus on each of the Shark’s personal reasons for opting out of the deal. That way, I can address the main issues the general public might have from the point of view of a real estate crowdfunding company that operates nothing like Tycoon RE.

Predatory Tactics

Why did Mark Cuban pull out of the deal faster than you finished reading this sentence? Cuban basically “hated” the idea because he felt crowdfunding sites can be predatory towards novice investors who don’t know what they’re getting themselves into. His main concern is the company would be targeting Grandma’s life savings.

As much as I hate to admit, it’s hard to argue that there aren’t any predatory crowdfunding sites that exist. With so many new portals popping up it’s hard to know which portal to trust. On top of that, crowdfunding is still in its infancy and many of the laws are still being written. However, Tycoon RE was fundamentally wrong in its claim that “anyone” could invest—the majority of real estate crowdfunding platforms are limited to accredited investors only because they operate under Regulation D (with a few exceptions).

Patch of Land avoids the accusation of being predatory by taking compliance with securities regulations seriously when it comes to who we let invest on our platform. For protection, we file every one of our investment offerings under Regulation D Rule 506(c) with the Securities and Exchange Commission and have a robust accreditation verification process. By doing so, we make sure we only take funds from accredited investors and are in compliance with securities laws. Our investors have a large amount of capital, so Mark Cuban can rest assured that we will not be taking advantage of Granny’s last nickel. To prevent any issues you should check to see if your crowdfunding company is promoting their investment opportunities under Rule 506(c), or whether they’re filing with the SEC at all. If they aren’t, they may be breaking the law, so buyer beware.

Related article: Rule 506(b) vs. Rule 506(c)

Time to Mature

Shark Tank’s Robert Herjavec believed there was a lack of liquidity in real estate crowdfunding investments. As a result, he thought it was too risky and not conservative enough for his liking. Herjavec and fellow Shark Kevin O’Leary discussed the idea of putting their money into a real estate investment trust (REIT). They said they could get the same results, but with the added ability to pull out their initial investment at any time.

The Sharks were concerned about putting their money into equity-based real estate crowdfunding deals, which are considered long-term investments. These types of investments can be complicated to understand since they rely heavily on future projections which are difficult to predict. Unlike debt-based real estate crowdfunding, which was not discussed on the show. Debt-based platforms like Patch of Land offer short-term investments, whereas equity deals often take 3-5 years to see returns, if at all, Patch of Land offers 12 month notes. Although the investment amount is tied up for the duration of that note, investors generally receive monthly interest payments along the way to ease the slight delay in principal repayment. The underlying notes also have no prepayment penalties with borrowers, which incentivizes them to return the principal as soon as possible. With such a big difference between debt and equity investments, I thought it was unfortunate a distinction wasn’t made clear on Shark Tank.

Related Article: Why Patch of Land Chose Debt-Based Real Estate Crowdfunding

 Who Am I Investing with?

Queen of QVC Lori Greiner opted out because she was too uncomfortable investing online with people she didn't know. Then again, there are a lot of people who are still not trustworthy of the Internet and e-commerce in general. At the end of the day, the best way to sway the opinion of someone like Lori is to simply educate them on how peer to peer lending works. Where I work, we strive to inform the public about what we do through our robust FAQ, blog spot, and a resource center. By browsing our site, you will find tons of information on a multitude of real estate and crowdfunding related topics. As more industries gravitate towards adopting the latest technology, it will only be a matter of time before conducting business through an online marketplace becomes a normal part of life. Besides, do you really know who you’re investing with when you purchase shares in a REIT? Probably not.

Download: The Top 10 Crowdfunding Questions

Who's the Lead Investor?

Real estate mogul Barbara Corcoran didn’t like the mysteriousness of the lead investor. Corcoran expressed how spooky it would feel for her to lend money to a real estate developer without knowing their background information, professionalism, and ability to complete a project. Corcoran described this issue as the Achilles heel of real estate crowdfunding.

Unfortunately, there will always be a certain amount of risk involved in any real estate investment. One way to alleviate the perfectly normal fear of ‘not knowing’, is to align yourself with a real estate crowdfunding company who is known for having a thorough underwriting and due diligence process. At Patch of Land we do everything in our power to dissipate the risk by exclusively working with professional real estate developers that have a solid track record and years of experience under their belt. We make sure to take the time and talk to our borrowers in order to develop personal relationships with them so we can understand their plan and overall vision for the project. Additionally, we’ve developed in-house technology designed to give us a better understanding of our underlying asset. We are also able to assess risk and create a more complete profile of our borrowers by using these sophisticated modules. One thing every real estate crowdfunding company should be is completely transparent. Not only are we completely transparent, but we let people know that our investment opportunities are not inept to risk. Furthermore, we do not give investment, tax, or financial advice, and always encourage our clients to perform their own due diligence. While we can’t eliminate risk, we’ve certainly done our best to minimize it.

Brand Recognition

Finance guru Kevin O’Leary saw the profitability in real estate crowdfunding and was the only shark to make an offer for Tycoon RE. However, with only having done two ‘concept deals’ to date, O’Leary wasn’t sold on Tycoon RE’s brand and lack of track record. With thousands of new real estate crowdfunding portals coming online, O’Leary said he would have to completely re-brand the company and, therefore, made an offer of $50,000 for 50% of the company. Needless to say, Tycoon RE declined the offer and left the Shark Tank empty handed.

O’Leary’s argument of company’s having no brand name is true of many new crowdfunding companies entering the market. Their lack of identity stems from not having a consistent message or line of products. From day one, Patch of Land has continue to build its reputation around being a 506(c) debt-based real estate crowdfunding platform. We’ve carved our niche in the space and have established a growing network with thousands of accredited investors and hundreds of professional real estate borrowers. Our success and track record have helped earn a spot on a number of lists including: Top 5 real estate crowdfunding platforms and Most 506(c) filings. People believe in our company’s business model so much that during our SeedInvest capital raise we quickly oversubscribed our goal of $2.5M. People also believe in our company’s slogan of building wealth and growing communities, which is centered on the belief that you can make a lucrative investment while still giving back to the community. Our efforts to help the City of Newark, New Jersey’s revitalization process is one of the ways we’re accomplishing our many goals and leaving our mark in the industry.

The last great point O’Leary made was people trust him with their capital because “I put my own money in every deal.” O’Leary was referring to the fact that most real estate crowdfunding portals are not willing to put their own money into their investment offerings. Instead, they will simply host a project on their platform and wait for investors to fully fund a loan before moving forward with the project. As a thought leader in the industry, Patch of Land created the method of prefunding online real estate investment opportunities. Once we’ve determined we want to go through with a loan, we fully fund our borrowers so they can start rehabbing without having to wait for our crowd of investors to provide them with the necessary capital. By prefunding real estate, we put our own money in every deal and take on 100% of the risk up front. This goes a long way in boosting our investor confidence and is something we’ve been known for from the very beginning.

While Tycoon RE’s business model took a hit during the show, it’s important to remember that not all real estate crowdfunding companies are alike. When deciding which real estate crowdfunding platform to invest in or borrow with, it’s always wise to educate yourself on the facts. Looking for complete transparency will help you perform your own due diligence and help you reduce the risk involved. Seek out a company with a successful track record and perhaps most importantly use your gut! If something doesn’t feel right then swim the other way. Otherwise you might find yourself in shark-infested waters.

Download: The Top 10 Crowdfunding Questions

Did you catch this episode of Shark Tank? If so, what did you think? Do you believe this was positive, or negative exposure? Leave your comments and voice your opinion.