How RECF Changes Due Diligence for Real Estate Investors
May 20, 2017 by Allen Taylor
Due diligence is a fact of life. Everyone must learn how to analyze and judge an opportunity, whether it be a real estate investor looking at funding a particular project, a borrower deciding which lender to raise capital from, or a marketplace lending platform presenting investment opportunities to accredited private investors. Without due diligence, you stand a better than even chance of losing your hard earned money through the wrong investment.
While all of that is true, the nature of due diligence is that it changes based on the opportunity. Commercial real estate is different from residential real estate. Borrowing $5 million for a business expansion is not quite like taking out a $50,000 line of credit for small business growth. While there are some similarities, the differences are striking.
That brings me to my next point. Real estate crowdfunding is relatively new, and it does offer borrowers and lenders awesome new opportunities, but it also changes the way due diligence is performed for private investors.
Why RECF Requires Due Diligence
Real estate crowdfunding falls under the wider umbrella of marketplace lending. In essence, the platform is an intermediary. It brings together the borrower, or project sponsor, and the private investor so that each can get what they want out of the transaction. The borrower wants to fund a project; the investor wants a return on their money. The RECF platform makes the connection so that both parties can achieve their goals.
In order to ensure that both the lender and the borrower get what they want, the platform has to choose its investments very carefully. If the RECF platform presents a shady deal to investors, it could lose its credibility as a trusted intermediary. On the other hand, if the platform can’t raise the capital the project sponsor needs to see its deal through to the end, borrowers will stop presenting their deals and the platform will fail.
These realities make it necessary for the crowdfunding platform to do its due diligence on both the borrower and the lender.
For the borrower, Sharestates must learn of his past failures and successes, his track record in managing projects, his trustworthiness as a borrower, credit history, and other typical factors that any lender would want to know about a borrower. That includes whether the borrower can offer a personal guarantee in case something goes wrong with the project and the bottom falls out. For the lender, the platform is obligated to ensure that only accredited investors have access to the deals. Therefore, Sharestates must ensure each investor has the proper documentation to prove they meet the federal criteria for investing.
What Constitutes Investor Due Diligence
None of this precludes the necessity of the private real estate investor performing her own due diligence. With traditional real estate investing, the private investor would run comps on properties and crunch the numbers of a particular deal to ensure that those numbers check out and offer a potential ROI based on the investor’s cash and equity output. With real estate crowdfunding, the investor must perform due diligence on the platform itself.
What that means is looking at the platform’s track record in terms of projects successfully funded, the number of loan defaults over time, the average return on investment per project, the fees associated with each investment, whether the company invests in good neighborhoods, whether it uses solid underwriting practices, and what kind of backing does it have in its own equity pool?
Sharestates encourages you to perform your due diligence on this RECF platform. We think you’ll be impressed with how it stacks up.