There a number of real estate investment marketplaces out there, but there are significant differences in how many of those marketplaces are operated. Some of them simply refer investors over to a sponsoring real estate company, while others
offer “curation” pre-review services that are designed to filter out some less desirable investment opportunities.
How do these differ from each other?
DIY Isn’t Always the Best Approach
Some marketplaces simply describe, and refer investors directly to, the offerings of sponsoring real estate companies.
With these marketplaces, there are often few investor fees, but there are also no services being provided. Investors are pretty much on their own, and have little direction as to the underlying fundamentals of an investment or its basic attractiveness. Industry professionals reviewing these sites are often taken aback at the forecasting assumptions utilized and the promises being made.
With these marketplaces, investors are pretty much on their own, and have little direction as to the underlying fundamentals of an investment or its basic attractiveness.
Investors are thus entirely on their own in making their investment decisions, without the help of a professional critical eye having first been cast on the opportunity.
In addition, investors on these sites must work directly with the sponsoring real estate companies on the several investments that they may be participating in. These sponsors may all have differing degrees of experience in dealing with investors, and their manner of delivering investment updates and tax returns can be similarly all over the map.
That means investors will need to monitor any number of differing investments with various sponsors. It also means that if issues arise with a particular sponsor, the investors will need to deal with such issues themselves, directly. Welcome to asset management!
Make Online Marketplaces Work for You
Curated marketplaces, on the contrary, first review investment opportunities and screen out those that it itself deems undesirable, or at least not sufficiently attractive.
This is a pretty key service for most investors, who may appreciate being able to pick and choose among different investment opportunities but who do not have the time or resources to spend on full underwriting (risk analysis) of those opportunities.
Our company undertakes a number of tasks designed to make an investor’s evaluation somewhat more straightforward:
Evaluation of the Sponsor. Sponsor quality can be a “leading indicator” of a worthy investment opportunity. A sponsor’s prior experience is critical in deciding whether the project meets our standards for listing on the platform. RealtyShares typically checks a sponsor’s track record of previous real estate projects, its familiarity with the local region in which the current project is located, and the results of background and credit checks of the sponsor’s principal executives.
General Evaluation of the Asset. High return objectives can be found in value-add, middle market opportunities – but not all such investments are alike. A certain level of due diligence is key to assessing the risks associated with a particular property. RealtyShares typically considers the asset type (whether a multifamily apartment building, industrial center, retail shopping center, student housing, office building, hotel, or self-storage facility); analyzes the proposed business plan; evaluates the project’s return assumptions; reviews the tenant profiles; assesses the structure and leverage (indebtedness) associated with the project; and the nature of the sponsor’s own co-investment in the project (its “skin in the game”).
Specific Underwriting of the Project. RealtyShares then does a deeper level of risk analysis, using our in-house data and team of experienced real estate professionals. We reconstruct all financial modeling ourselves – often utilizing more conservative assumptions than the sponsor – to stress-test the possible outcomes and assess the project’s probability of success. We review the legal terms of the transaction and negotiate on behalf of investors to ensure potential risks have been considered, and that the deal terms allow us to step in to mitigate and hopefully recover capital for our investors.
- Compliance Measures with our Broker-Dealer. Many of the above-described steps are reviewed by North Capital Private Securities Corporation, a registered broker-dealer and a member of FINRA / SIPC. A registered supervisory principal reviews our work, performs their own background and bad actor checks, and makes sure that the information presented to investors is fair, balanced and discloses the applicable risks. Such reviews are intended to mitigate as much risk as possible; however, risks still remain in all of these investments, so make sure to conduct your own due diligence.
Curated Marketplaces Also Help Sponsors
RealtyShares has raised a significant amount of capital for sponsors – over $800 million as of June 2018 – and much of that has to do with our curation model and the way that we structure our investments.
Rather than simply referring over hundreds of investors to a sponsor, we pool all of our investors into a special-purpose entity (usually an LLC) that then subscribes into a sponsor’s property-holding company. With this structure, a sponsor only has one “investor” to deal with.
Rather than referring hundreds of investors to a sponsor, we pool all of our investors into one special-purpose entity. That way, a sponsor only has one “investor” to deal with.
RealtyShares handles all of the communications, distributions, and tax work for our underlying investors. When it comes time for any potential payouts, sponsors just send us a single distribution; we then use our own proprietary technology to provide the pro rata distributions to all of our investors.
Similarly, sponsors need provide us only with a single Schedule K-1 for year-end tax reporting; we then turn around and automatically generate individual tax reports for all of our investors. Sponsors’ lives just became much simpler!
Curated Marketplaces May Add Value All Around
RealtyShares and other curated marketplaces can, by virtue of the value that they bring to a financing transaction and the structures they utilize, bring a much larger capital pool to real estate sponsors than they may be accustomed to – because we’re providing investors with real estate investment opportunities that they previously may not have had access to.
Investors are also reassured that some preliminary “vetting” of opportunities has occurred by a team of real estate professionals. The process can be a win-win for everyone!