Real Estate Crowdfunding Takes Crowdsourcing To The Next Level

By on October 12, 2013

Unless you have been living in a shoebox or an isolated island in recent years, you should have heard about crowdsourcing where average individuals with big ideas are raising millions of dollars for their businesses. And all that is conducted conveniently online.

The underlying concept of crowdfunding is that people will contribute money to help innovators bring their ideas and concepts to life without expecting anything in return. But of course, it becomes a tough job to get an internet stranger to pull out his credit cards when he does not get anything in return. So crowd funding evolved slowly into something whereby the project originator offers a freebie or gimmick to the donar. For example, game developers could offer to create a special character for a contributor who pledged a certain amount of funds. Or a product creator can offer to ship an item to the contributor. In other words, crowdsourcing slowly became just another “marketplace” for people to buy stuff while feeling good about themselves that they have helped an aspiring entrepreneur achieve his dreams.

With the ease of access to free and legal money, there are a few elephants in the room that have sat on the sidelines waiting for their turn on the wheel. And one of those is the market of real estate investments. I don’t think anyone needs to be reminded of how humungous the real estate market is. But up till now, there is a problem with real estate crowdsourcing.

The incarnation of crowdsourcing was for angel investors to lend a helping hand for wannabe entrepreneurs to realise their dreams. But who in their right minds will provide free money for someone else to invest in real estate?

money needed to fund real estate

That changed a little when freebies and gifts are offered for people to pledge money for project kickstarters. But as a real estate investor going for crowdfunding, what is anyone going to offer a contributor in exchange for their free money? You can’t give the roof away, can’t give the bathtub away, and you certainly are not going to invest in properties under the names of the pledgers. This is why crowdsourcing for real estate has been a muted elephant in the room all this while when the world is going crazy over this form of alternative investment capital.

Evolution will forever change how people perceive this. Just look at mortgages. Once just a simple agreement to lend and borrow between 2 willing parties. And then it evolved into a commodity that is being traded all over the world until a point where borrowers have no idea who are the ultimate mortgage owners anymore. Which led to what we experienced in 2008.

If you are going to offer your cash to a stranger to dabble with properties, what are you going to expect in return? The one thing that pops in your mind immediately. And that is a return on investment. Now because crowdsourcing is not really investing, the legal parameters surrounding these activities are more relaxed. And for real estate to achieve success in crowdfunding, it has to offer a return to “pledgers”. When that is offered, it becomes an investment scheme. And that immediately erects a huge amount of laws into such agreements as they resemble public solicitation. For example, REITs are setup to get capital to invest in properties. And we all know how much legislation goes into underwriting and managing them.

Well, things are going to change dramatically. Jumpstart Our Business Startups Act (JOBS) is going to change things. And this is just the start. You can read it up the details on Wikipedia. This is the door being unlocked to a chaotic real estate global marketplace that will be exploited by billion-dollar corporations right down to the individual scammer. If you don’t know, a huge percentage of project starters don’t meet their goals and also fail to complete their projects.

In this case, you might be thinking that the best move to avoid being conned is to only put your money into projects started by respectable organisations. But if your are going to do that, why not get into REITs in the first place? Or are you just an investor who invests in bright shiny objects? You have to be clear on why you might be considering property crowd funding in future. It has to be for advantages and benefits that REITs cannot offer.

Here are some of them

1) REITs are traded on stock exchanges. This means that they are prone to the all too familiar market panic and sentiments that come along with a public listing. Emotions drive the market rather than real values.

2) Sponsors of private equity are highly vested and focused on higher returns

3) Private equity usually have a specific goal to achieve an exit strategy

4) REITs are not as liquid as you might think. Yes they are easily available on the exchange. But where are the buyers to buy from you?

5) Private equity has more agility compared to the library of guidelines public funds have to adhere to

6) REITs usually go for big time mega buildings rather than a niche market

A little comic relief in this video of how it might turn out.

More problems with real estate crowdfunding

As this opens up to a global marketplace, problems are magnified and your influence marginalized. Wouldn’t it be nice to contribute and get a continuous passive income of monthly cheques in 3 years? All you have to do is hand in your money now. Maybe that is not going to happen. But I bet that we are going to see such sales pitches being a common place once this goes mainstream.

No longer will project promoters come from all over the world to cramp us into small dimly lit rooms to convince us on their overseas investments. They are going to do that via the internet using a video on youtube in place of their physical presence. They will save thousands on airfares, entertainment and accommodations while offering the same pitch of “8% guaranteed returns per annum”. The real estate investment revolution is taking place. And crowdfunding is like flipping the nitro switch in a super-car that already has a V12 engine custom fitted.

If you think locating a land banking con-artist was difficult, the difficulty to locate shady project starters will multiply a hundred times. And if you imagine seeking recourse over shammy deals is difficult for previous overseas investments you have made, you have seen nothing yet. Crowdfunding for investments will take everything to the next level.

One of the big reasons why people are willing to throw their investment money overseas is the ease at which to claim a stake in the investment. Very often, all you have to do is sign a few documents, write your cheque, and “poof”, there goes your money at hypersonic speed and in return you get a certificate showing that you have invested. Crowdsourcing will make it even more simple to throw invest your money away. Just a couple of clicks and an automated software sends you a digital certificate.

It’s a breakthrough concept that has been in the making for decades. Just that now, it is going to become legal and the crowd would jump on the bandwagon. And the internet provides the ultimate platform for it to create chaos in the world economies. It’s a match made in heaven. The pit for public funds is bottomless. And so is the opportunities for scam artists and “failed” investments.

Although there are many potential drawbacks of real estate crowdfunding, it is an essential step to take in an evolving global marketplace. The international authorities will have to work overtime to settle disputes when they happen. And they always happen. For the average investor, you may no longer be able to tell what is genuine and what is questionable.

But let’s end this on a brighter note. Crowdsouring or crowdfunding, or whatever you call it, allows every individual the opportunities to take part in property investments that they would have otherwise never even have a sniff at in the first place. In the early phase of this real estate investment revolution, there might be criteria to meet to take part in them. But rest assured, some smart people will eventually find loopholes for the average person to take part in them one way or another, until it fully opens up. This is how crazy we are.


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