BY GREG BROWN, REGISTERED REPRESENTATIVE AT VENTURE.CO BROKERAGE SERVICES, LLC.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of VENTURE.co.
Private, online real estate investments are risky. Just. Like. Every. Private. Real. Estate. Investment. Ever.
There are more conservative products if you don’t like risk.
But if you are intrigued by online real estate investing, and I think you should be, read on. (Online real estate investing is not going away.)
You will rarely hear me use the word “crowdfunding”. You’ve probably heard the word bandied about in association with real estate investing. And you may also hear that crowdfunding is “disrupting” and “democratizing” real estate investing right before our very eyes.
With all due respect, “crowdfunding” is not what is happening with investment real estate. The investment process is simply moving online and away from cigar smoke-filled rooms in the back of the country club clubhouse. Sidebar: that’s not really where this happens. I’ve been in commercial real estate over 20 years and never made a deal there. I just like the visual.
All that said, crowdfunding is one of the reasons we’ve all seen a market flooded with deals that should otherwise not see the light of day. Putting together an offering package is not hard; if a deal sponsor can put together a website and manage the legal work in under $10K, they can technically create an offering. Putting together a good deal is a different story. But it can be hard to tell what’s what when you’re looking at an overwhelming number of deals.
I would be especially thorough in considering deals using the Issuer Exemption that have not been fully vetted and underwritten by a FINRA-licensed broker-dealer.
Sponsors need to know the market comparables, the new development pipeline, and the economic drivers, not just be able to cut and paste them from a market survey into an offering memorandum.
Real estate is not a commodity: it requires active, and preferably experienced, management. When looking at a deal, I go straight to:
- Who exactly is responsible for the deal being curated in the first place?
- Who is going to mind it going forward?
A credible deal sponsor should have:
- Connectivity to the asset type. It is riskier to back a sponsor with a track record in office buildings who has suddenly pivoted to self-storage facilities. Or, a homebuilder who now wants to raise money to build a grocery-anchored shopping center.
This isn’t to say that a sponsor can’t exit an area of expertise to create a new one. There are plenty of successful real estate owners who own different types of assets. I’m just flagging it as risk-IER. Anything you do for the first time has risk. If you can handle that risk as an investor, proceed with caution. If not, stay in the right lane and find the next warehouse deal from a sponsor that has already done five warehouse deals.
- And/or connectivity to the submarket. There are real estate investing challenges that technology is still years away from solving. One of these is having local market knowledge. This is why high-level economic and demographic data is about as useful to a specific real estate investment as a Facebook political rant.
Top line data does not cover the political and economic power dynamics of a specific submarket. For example: is there a plan afoot to widen a road? Is there risk of a development moratorium because of a shortage of infrastructure capacity? Could there be a flood of competing products developed to devalue your investment property? You need the sponsor to have boots in-country to tap into the undercurrent of activity. They need to know the market comparables, the new development pipeline, and the economic drivers, not just be able to cut and paste them from a market survey into an offering memorandum.
I will qualify the above by saying that the size of a deal sponsor could blow your normal considerations out of the water. Clearly, large companies have the scale and ability to draw upon assets that smaller deal sponsors do not, so keep that in mind. Sponsors can also partner with local experts, but make sure those local experts remain part of the deal going forward.
Just stay away from the deal sponsors channeling their inner Lewis & Clark.
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