‘We Serve a Fragmented Market That is Ripe for Disruption,’ says Patch of Land CEOJune 3, 2016 | By: Srividya Kalyanaraman
$484 million: That’s how much real estate crowdfunding platforms attracted in 2015, which was three times of that the previous year. There are an estimated 125 such portals and the new SEC rule which allows non accredited investors some leniency to invest in these projects. To demystify real estate crowdfunding, deBanked spoke to Patch of Land’s CEO Paul Deitch to unravel the concept, measure the momentum of investor interest and the regulatory environment. Here are excerpts from the interview.
What’s on the horizon for Patch of Land this year?
Now that Patch of Land’s model is proven, we will be adding complimentary products for the real estate entrepreneur and investor, accompanied by a broadening of funding strategies. For example, we recently launched the new midterm loan product that addresses the opportunity in the $4 trillion single-family rental space.
How is the investment momentum different from that in ‘08-’09?
One of the biggest changes between then and now has been the enactment of the JOBS Act, which actually came about as a result of investment conditions in ‘08-’09. Peer-to-peer lending came into existence during the 2008 Recession when consumers and small businesses could not rely on banks for their funding needs. In 2012, President Obama signed a historic bill called the JOBS Act (Jumpstart Our Business Startups Act), allowing companies to raise working capital in the form of debt and equity via a crowdfunding model. When the SEC implemented Title II of the JOBS Act in 2013 it allowed companies to publicly solicit, via Internet marketing, their equity and debt offerings; private placements could now be advertised. Marketplace lending is an evolution of peer-to-peer lending, defined by the participation of traditional financial institutions purchasing the loans being issued by P2P lenders.
Whom do you consider your competition in the industry and how do you differentiate yourself from them?
We approach the competition question from a different perspective. One would think that other online lenders or real estate crowdfunding companies are our competition but they are not. We are all working towards creating more efficiency, transparency and access to real estate and investments. The market that Patch of Land is serving is fragmented, locally delivered, and highly manual — it is ripe for disruption. Banks are exiting the space due to capital and liquidity constraints and hard money lenders are limited by a single source of capital and local footprint. Unlike these offline incumbents, Patch of Land has a national footprint, and uses proprietary software to quickly and reliably make first lien position loans, pre-fund those loans, and then crowdfund the financing from thousands of investors (both individuals and institutions) on a fractional or whole loan basis.
Who regulates P2RE? And what are the challenges there?
P2RE and the real estate crowdfunding sector is regulated by the SEC. Patch of Land operates under Title II, Regulation D, Rule 506(c) whereby we can only accept investments from accredited investors, as defined by the SEC. This is a strict regulation that requires thorough diligence and vetting of the accredited status of the investor. The biggest challenge we face is that we have many retail investors who want to invest with us and we cannot accommodate them.
How are the ripples in the capital markets affected or will affect business?
Capital markets volatility has not had an adverse effect on our business. Our capital sources are very diversified and are not dependent on large capital market players. Over 90 percent of our loan volume has been, and continues to be, funded by crowd capital. We have on-boarded multiple institutions of various sizes that buy loans on a fractional basis, in addition to the whole-loan forward flow agreements in place.
How is crowdfunding for real estate different from marketplace lending specifically?
Crowdfunding for real estate, specifically when referencing debt, is a subset of marketplace lending. Patch of Land is a ‘real estate marketplace lender’ because we focus specifically and exclusively on debt and do not offer any equity projects for funding. Equity deals are crowdfunding deals, not marketplace lending deals. Therefore, a real estate marketplace lender that transacts with individual investors can be considered a crowdfunding platform, and a crowdfunding platform that does not transact in debt is not a marketplace lender. Two other elements that differentiate crowdfunding from marketplace lending are: 1) prefunding, where the platform fully funds the loans upfront and therefore is not engaging in crowdfunding that usually involves raising capital first, before disbursing it to the sponsor/borrower; 2) marketplace lending includes institutional and individual investors who participate in loan purchases, whereas a crowdfunding model is focused exclusively on individual investors.
How is crowdfunding poised to change real estate investing?
Traditional real estate (debt or equity) can be highly time consuming. We offer an alternative to have real estate debt as part of a portfolio, bringing both new and experienced investors all the data they need to make a decision. Most would never have the time to aggregate this much data on their own, through traditional methods. Crowdfunding allows capital to flow more easily to across the nation, rather than locally, to places and projects that might have been shut out or simply left behind because they were too difficult to assess, evaluate and understand, or were the purview only of local investors and gatekeepers “in the know”. Crowdfunding puts investors in the driver’s seat, giving them the power to pick and choose investments that meet their personal risk/return needs. It allows for investment strategies that are both more “bespoke,” and yet more diversified -both in the way of product type and geographies, all through fractional investments across a technology enabled, online platform. Investors not only have broader choices of where to invest, but they can do it from their mobile phones in seconds.Last modified: June 3, 2016
Srividya's work has appeared in publications like Money magazine, Advertising Age, FirstPost and The Economic Times. She has also dabbled in business intelligence solutions, and holds a Masters degree in Business and Economic Reporting from NYU.