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The dangers of crowdfunded real estate investment projects

By Mike Wheatley | August 7, 2015

Real estate based equity crowdfunding, known more simply as “RECFunds”, is rapidly gaining popularity among investors as an alternative, an often easier-to-source, form of funding. The benefits of RECFunds are obvious, and include access to multiple types of projects, smaller barriers to investment, and portfolio diversification.


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But while RECFunds are often a good bet for investors, especially those who might be unable to obtain financing using traditional methods, it doesn't come completely risk free. One of the more worrying risks is that such projects might not be underwritten properly, writes Anthony Zeoli in Crowdfund Insider.

Crowdfunding risks

The main problem with RECFunds is that the profitability of such projects is highly susceptible to all mannner of potentially unknown factors, including things like school district boundaries,creeping project costs, unemployment rates and so on, Zeoli argues. These factors apply to all kinds of investments of course, but the problem with crowdfunding investment projects is that the investors often don't have the time, patience or experience to properly evaluate these risks.

One might think this is okay, because surely the developer and crowdfunding portal have done their homework at least, right? Unfortunately, that might not always be the case.

Zeoli points out that many crowdfunding portals, being nationwide services, simply don't possess the necessary local expertise to properly check every possible factor that could have an impact on a project's profitability. For example, have they checked to see if a railway line runs alongside the property? Any airports nearby?

“The majority of current RECfund portals review and offer projects from across the nation,” Zeoli writes. “But while their underwriting teams often have significant experience in vetting projects, it just isn’t possible for these portals to know, or even have time to examine, ALL of the applicable factors that go into evaluating a potential RECfund project.”

Mitigating the risk

Zeoli recommends that anyone considering investing in a crowdfunded real estate project treat the endeavor just like any other investment. In other words, investors need to do their homework, and that doesn't just mean reading the associated documents but also conducting research, looking at Google Maps, searching crime rates, school districts and any other factor that might possibly undermine the project. Was anyone murdered at the property recently? Factors like this can easily erode a property's value.

The best way to mitigate risk is to use a more locally-orientated crowdfunding portal, Zeoli says. He gives the example of the SaundersDaily crowdfunding portal, which is focused specifically on crowdfunded real estate projects in Minnesota and the surrounding areas. The site is run by local realtor Jason Dailey, who counts over twenty years of experience in Minnesota's real estate market.

“Real estate investment, particularly residential real estate investment, is a local play not a national one, and it requires an experienced touch,” Dailey told Zeoli. “every local market is different and high-level analyst reports will not cut-it when important variables like comparable prices, vacancy rates, and even demographics can vary significantly in the same square mile in some cities.”

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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