Crowdfunding for real estate investing is extremely new and extremely hot. I have talked to several companies that do this, but the one that I’m most impressed with so far is Fund That Flip. I first heard about Fund That Flip from J. Scott. Most of you know that I don’t flip properties, however I found it fascinating that arguably the best house flipper in America was on the board of a start-up that funds flips. I reached out to the founder Matt Rodak because I knew that my readers would be very curious as to how this new type of financing works. Specifically, how the underwriting process works.
As crowdfinancing for real estate starts to garner more attention, many redevelopers are asking themselves how they can get involved and start raising capital for their deals from the crowd. This article discusses, from the perspective of a crowdfunding portal, what you can do to position yourself positively and increase your chances of qualifying for a crowdfinanced capital raise.
- 1 What Exactly is Crowdfinancing?
- 2 Raising Capital – Best Practices Still Apply for the Crowd
- 3 The Portal and Pre-Qualifying
- 4 How we get a “good gut feeling”
- 5 Get Social
- 6 Whoa! This Sounds Like a lot of Work!
- 7 We’ve Come Full Circle – Relationships Matter Again
- 8 Real Estate Crowdfunding Case Study
What Exactly is Crowdfinancing?
Crowdfinancing (Sometimes referred to as Crowdfunding) is when capital from several un-associated individuals is pooled together to invest in a common business venture. This practice has been around for some time in real estate and historically has been known as “syndicating”. The JOBS Act changed things slightly by allowing real estate operators to “generally solicit” or “advertise” the fact they are raising capital for their deals. This is good news for you because prior to the JOBS act, you could only market your deals to investors you had a pre-existing relationship with. Now you can more broadly “advertise” your investments. That said, there are right and wrong ways to do this – which is why it is best to partner with a reputable website that specializes in crowdfinancing. (These websites are often referred to as portals.)
Raising Capital – Best Practices Still Apply for the Crowd
There are many great resources out there that provide advice on how to find private lenders or equity partners to help you scale your business and finance your deals. Most of those principles hold true in Crowdfinancing with one main exception – the people who invest in your deals online through crowdfinancing will likely never meet you. They’ll never get a chance to look you in the eye or shake your hand and get that “good-gut-feeling” that you are a trustworthy person. So how can you gain the trust of investors without being able to sell yourself to them in person?
The Portal and Pre-Qualifying
The portals can play a crucial role by acting as a gatekeeper. Most portals do some basic screening to ensure deals on their sites are coming from reputable individuals and companies. At Fund That Flip, we call these things our Objective Measures. These objective measures are easy to obtain and can be done relatively quickly. They start to paint a picture of who you are and whether or not you will make a good partner. While I can’t speak for how other portals view these things, this is our general approach.
Background Check – There’s a saying that goes “people are remarkably consistent over long periods of time.” While we certainly believe everyone deserves a second chance – a checkered past needs to be understood and disclosed. If you have something that is likely to turn up on a background check, the best thing you can do is tell us about it before we find it. This may still disqualify you for the time being but will be a step in the right direction towards building mutual trust and will save everyone some time.
Credit Check – Reviewing your credit patterns helps us understand how responsible you have been at meeting your debt obligations. It also lets us know what current liabilities you have and your likelihood of being able to manage a new one. While the past is not always an adequate predictor of the future, credit is another objective data point that provides additional transparency to our process.
Experience – Anyone that has rehabbed a house will tell you that you are bound to experience several surprises throughout the process. We find that people who have been through a few projects are better equipped to deal with the unexpected. This doesn’t mean if you’re inexperienced you’ll be an unsuccessful redeveloper. It simply means that in order to help manage some of the risk for investors, we prefer to partner with rehabbers who have some experience.
Like many things, there are no absolutes to this process and each redeveloper falls on a different point of the spectrum for each of these qualifiers. We look at each of these things individually and then put them all together to make a decision on whether or not you are a good fit for the platform. If you have information that you think will cause us some concern, be proactive and tell us. We look at hundreds of applications a day and appreciate when redevelopers are upfront and honest with us.
The Objective Measures are relatively straight forward and most people who don’t qualify understand why. That said, if you don’t think you’ll qualify because of one of the reasons above, keep reading. The tips below take some time to develop and you can start working on them as you’re also working on the Objective Measures.
How we get a “good gut feeling”
Once you’ve qualified on the above basics, we go onto more subjective measures of qualifying you. Here’s how we go about it and what you can do to improve your chances of successfully crowdfinancing your next deal.
Reference Check – We ask for 5 professional references. The reason we do this is simple. We don’t know you so we want to understand what people who do know you think of you. If you have the right amount of experience and have achieved some success in this business you will be able to easily connect us with references who can speak to the quality of work you do.
Google You – Yes, that’s right, we Google you. The reason we do this is because as soon as your deal goes on Fund That Flip, what do you think our investors are going to do? Yup, they are going to Google you. This is the new way for people to do their own reference checks without actually speaking to anyone who knows you. This is how people get a good or bad “gut feeling” about you without looking you in the eye or shaking your hand. If you find this concept too intrusive, or you still don’t buy into the social media movement, Crowdfinancing might not be for you. The reality is, social media is what makes Crowdfinancing possible.
There is a lot of good info on how to leverage Social Media to grow your business from much more qualified people so I’m going to keep this high-level and provide thoughts on “why” this matters. I would encourage you to educate yourself further on this if you are serious about running a business in the 21st century.
• LinkedIn – At a minimum, you should have a LinkedIn profile and at least 100 connections (500+ is preferred). LinkedIn makes it easy to find contacts from your email account so create a simple profile and make some connections. Spend 10-15 minutes each week finding new connections and improving your profile. Endorse and write recommendations for people and ask for recommendations in return. Investing a small amount of time on this will offer big returns for your crowdfinancing efforts as each positive recommendation provides scale to your networking efforts. One glowing recommendation from an investor or business partner will be seen by all future investors and get you a check box on the “good-gut-feeling” side of the equation.
• Facebook – Love it or hate it, Facebook has become a part of today’s culture. Having an account doesn’t mean you need to share every life moment, but you should have some of the basics. Potential investors want to know who you are as a person and Facebook creates a great outlet to allow people a small window into your personal life. Upload a few nice family photos, list books you are reading and TV shows you like. Your goal here is to make a connection with potential investors. The more you share the more likely you are to have something in common with your potential investors. They may look at your profile and think “She likes the show ‘Shark Tank’, me too! I like this person”. This scores you another point on the “good-gut-feeling” equation. If you’re uncomfortable sharing personal information online, consider investors are even more uncomfortable sending money to a person that they can find no record of.
• Twitter – This one is less of a requirement in my opinion and definitely requires more of a commitment. That said, I think it is valuable, at a minimum, to use as a means for staying on top of trends. Create an account, follow some users you find interesting and use it to simply follow what’s going on with your interests. I personally am not a big user of Twitter but definitely see value in it. I’ve made some good connections and have stumbled across good learnings just by following people and topics that interest me.
Whoa! This Sounds Like a lot of Work!
You may be thinking that this sounds like a lot of work – and you are right. That’s the point. It is difficult to fake an online life – which is what investors who don’t know you want to see. They are trying to answer the question “Is this person for real and can I trust them with my money?” If you don’t exist online – you don’t exist to online investors.
Here is something else to consider. If you are serious about growing your network of investors, then you’ve surely been to local Real Estate Investor meetings, business networking events and have followed up with coffee dates. How much of your time does that take up? How many follow-up coffee meetings do you need to make before a new contact writes you a check? In-person networking is time intensive and limited. More importantly, it doesn’t scale. The beautiful thing about social media is it provides scale to your networking. You can put in time here and there to build up your online presence and each person that reviews your profile helps increase your return on that time invested.
We’ve Come Full Circle – Relationships Matter Again
Back in the “good ol’ days”, before there were credit scores or loan-to-value ratios or troves of comparable market data, bankers made loans based on the quality of the person and how they lived their lives. They checked with your neighbors, your priest and your kids’ baseball coach to see what kind of person you were.
We moved away from that model as banks got bigger and local relationships got taken out of the equation. Banks had to rely on more data to make decisions and you went from a nice person who pays their taxes and serves on the local school board to customer #16453N13.
Crowdfinancing is again allowing people to make investment decisions based on people. The difference is now your lender is checking your “status”, “retweets” “likes” and “followers” to determine if you’re worth the risk. If you want to be successful at raising capital in this new environment you have to allow people to get to know you. Social media is the new way lenders (the crowd) make decisions on who gets funding.
All said, a great person with a bunch of positive points in the “good-gut-feeling” side of the equation still has to deliver good deals. If you’d like to learn more about how we at Fund That Flip underwrite deals, message us on Twitter @fundthatflip and we’ll send you our underwriting requirements.
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Real Estate Crowdfunding Case Study
The following example is taken from a real deal that is an ideal candidate for Crowdfinancing.
This 2 bed 2 bath home will be completely upgraded with modern finishes. This includes:
• New kitchen cabinets, countertops and appliances.
• Removing old carpet and refinishing hardwood floors throughout.
• New Paint throughout.
• Bathroom upgrades including tile floors, new sinks, tubs and tile.
The redeveloper will also add a third bedroom to make it a better fit for potential buyers in this market.
The home was purchased for $54,500.
The rehab costs are estimated to be $50,000
The redeveloper has reason to believe that the home will sell for $143,000.
This husband and wife team has completed more than 100 residential redevelopments in the past 6+ years. The husband is a respected member of the real estate investment community and has sold more than 20,000 copies of his books on how to be succesful at flipping residential real estate. He maintains an active blog where he documents all of his deals – providing great transparency to his process. The wife oversees the design aspects of the house. She is a licensed real esate agent giving her expert insight into the local market and how much the property is likely to sell for.
The developers are seeking to raise $80,000 to refinance their cash position in the house and complete the rehab. Fund That Flip will release the raised funds in three distributions. The first will be for $40,000 when we close the loan and secure a first position lien on the property. The remaining $40,000 will be released as construction milestones are achieved and confirmed complete by Fund That Flip.
The Borrower Dependent Note you are investing in has a 10% annual rate of return. The redeveloper will make monthly interest only payments and principal will be returned when the home sells.
• Loan to Value on After Repair Value = 55.9%
• The rehab is expected to be mostly cosmetic and is being completed by an experienced team.
• The hold period of the loan may exceed the estimated maturity date due to a number of factors.
You should be prepared to hold the note past the 6 month expected time allotted.
Background on the Author and Fund That Flip:
Matt is Founder of Fund That Flip, Inc. Matt owned a landscaping business in high school that had many clients who were real estate investors. Taking care of the landscaping work and an occasional demo, Matt became familiar with real estate investing and wanted to someday flip homes. One of the biggest challenges was coming up with the capital needed to complete a project. As he grew older and became more serious about getting started, he began exploring different ways to fund his first project. He thought it’d be interesting if he could use the newly evolving market of Crowdfunding to do so. When he started looking for a portal to partner with, he soon realized such a platform didn’t exist. He then began his journey of creating a platform that would allow experienced rehabbers to more efficiently raise capital by leveraging past experience. What he realized throughout the process is that investors also have a desire to invest in quality deals. Their particular challenge was having access to good deal flow.
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To read more about Matt’s prior experience and the Fund That Flip team visit:
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