Arash Sotoodehnia: Why I joined RealtyShares
RealtyShares, a leading online marketplace for real estate investing, recently announced the addition of renowned credit risk expert Arash Sotoodehnia to its leadership team. Today, Arash shares what fueled his decision to become the platform’s Chief Credit Officer.
Growing up, I always wanted to be an electrical engineer. I tinkered with integrated circuits, built my own radio, and even put together a simple computer which I programmed to calculate various mathematical series. I’d decided at the age of seven that I wanted to go to MIT to study electrical engineering. However, once I got to MIT and began working towards Electrical Engineering degree, I discovered that it didn’t hold my interest as much as I thought it would.
There were parts of electrical engineering curriculum, however, that intrigued me, in particular systems engineering. At MIT, in addition to my engineering courses, I’d taken a few economics courses. I quickly realized that I found economics fascinating. After all, economics focuses on explaining how 7.4 billion inhabitants of the world, members of an extremely complex system, behave and interact, and how one can potentially optimize outcomes for members of this system. For someone with a mathematical mind like me, it was the natural choice.
I eventually found my way to Johns Hopkins University working towards a PhD in Economics. At Hopkins I focused on monetary theory, and the role of money in an economy where agents borrow and lend, but are subject to collateral constraints. At Hopkins I also had a chance to take game theory classes and to think a lot about incentives, and ensuring that in devising economic contracts it is critical to ensure that various parties to the contract have incentives that line up well with the objective of the contract.
My first job after graduate studies was with Fannie Mae, modeling the behavior of Fannie Mae’s portfolio of multifamily mortgages. The idea was to develop models that focused on borrower incentives. After Fannie I spent several years at Ally (formerly GMAC), in roles that gave me opportunities to broaden my horizon. During the financial crisis, I was appointed Chief Risk Officer of ResMor Trust, a small Canadian Trust Company subsidiary of Ally. Here I got my first taste of running a small company as the CEO and CFO, with little oversight from headquarters. It was a fun job, and it exemplified what can be achieved in a small entrepreneurial environment when the leadership team clicks and works well together.
I left Ally in 2011 to join Citi as the Head of Risk Policy and Controls for CitiMortgage. It was during my time at Citi that that the financial services industry began to notice the first indications of a new disruptive force largely driven by the fintech industry: crowdfunding. Over the last few years, crowdfunding’s ability to disrupt how capital flows into the financial sector has become more clear, and this newcomer has brought big shake-ups to banking and more recently, to my career.
How crowdfunding is changing the financial services landscape
My wife and I own a vineyard in Virginia and we partner with a winery that assists with its management, buys our grapes, and makes some great wine. I once asked the winemaker, Julian, what brought him to the U.S. from France. He explained that in Bordeaux and other winemaking regions, the industry is heavily regulated. Vineyards are told when to harvest, what to plant for each specific region, and the winemaking process is equally regulated. By contrast, he said the wine industry in Virginia is, for lack of a better descriptor, the “wild west” where (almost) anything goes. One is free to experiment, find novel combinations of soil conditions, grape varietal, and wine making technique, to make a wine that is fascinating and totally novel.
That’s the same kind of view that has led to the rapid development of the real estate crowdfundingindustry. RealtyShares and other funding platforms have been able to develop and deploy modern technology to disrupt the traditional pricing and bring efficiency to the market for private real estate deals. There is still room to experiment and try different ways of doing things, to create a process or an execution plan that is efficient, adds value to our investors and sponsors, and is totally novel.
As someone who’s spent my career in the traditional finance industry, I’d grown accustomed to the status quo. With banks, there’s legacy infrastructure, governance and regulatory requirements that constrain the ability of financial institutions and their officers to experiment and take risks with novel approaches to doing things. With startups, and crowdfunding in particular, it’s an entirely different ballgame.
By embracing technology, crowdfunding is able to follow the same lending and investment models that banks use while concurrently disintermediating them from the transaction, directly connecting and pooling the resources of small lenders to serve the needs of borrowers. The model allows consumers to have more control over how their money is invested and potentially claim a larger share of the investment returns.
That freedom is something that traditional banking isn’t able to tap into. As a consequence of the financial crisis of 2008, federal regulators have significantly increased oversight of the industry, making innovation much harder in the banking environment. It’s challenging for banks and other financial institutions to take risks with innovative new models, both due to regulatory pressures, but also due to the burden of legacy systems. Regulators are pushing banks towards de-risking, being financial utilities, and not towards being risk-taking innovators.
Why I ultimately chose to work with RealtyShares
When I was first approached by RealtyShares, I was hesitant but intrigued. As I spent more time getting to know the people working at the company, particularly the senior leadership team that Nav has assembled, and learning about the platform they developed, I was convinced that crowdfunding is a potential disruptive but value-adding model for real estate funding.
In terms of innovation, RealtyShares has proven itself as a groundbreaker. That forward-thinking mindset, paired with the prospect of a new challenge and an opportunity to once again work on a small innovative team, ultimately lead me to accept the position as Chief Credit Officer.
Aside from having the chance to play a crucial part in reshaping the way real estate investors and sponsors connect, I was also attracted to the culture that RealtyShares’ leadership has created. When moving to a company that’s smaller and more intimate, it’s vital that the players get along well and that a solid foundation of trust has been laid.
Our CEO, Nav Athwal, has put together a team of intelligent, enthusiastic, talented people and I’m thrilled to be selected to join the RealtyShares team. My focus will be on measuring the company’s risk posture and ensuring that we’re building a platform that can perform well through the cycle, with the ultimate objective to ensure that we’re delivering the highest value possible while minimizing the risk associated with the deals offered through our marketplace.
It’s inspiring to see companies like RealtyShares reshaping the way things are done in the financial services industry. Because real estate crowdfunding is still in its infancy, there’s very little foundational framework in place, which poses its own unique difficulties. Fortunately, the opportunity to act as a pioneer in mapping out uncharted territory is one I embrace wholeheartedly.
