This post is specifically for real estate developers looking to raise funds for their projects:
I will start by saying: DO NOT TREAT THE CROWD WITH DISRESPECT OR YOU WILL FAIL.
The investors on our platform are sophisticated and intelligent. We have HNW, Family Offices, PE funds, RE funds and other institutional size capital all part of our “crowd“. Teams of analysts in each company do due diligence on any given project effectively crowdsourcing any questions and concerns our investors have.
Technology has changed the way a business can deal with pretty much everything. Generally, the standard thinking from real estate developers raising funds for their projects has been to get all the money from one investor or as few investors as possible. That thought path has both positive and negative consequences for you, which we will explore below.
This train of thought USED to be much more relevant than it is today and before the birth of the crowdfunding industry. You know that every deal is different and every investor is also different, but let’s dissect the pros and cons of using new methods to raise funds for your projects.
From my own development experience, I can say the merits of having one large investor include:
- Fewer meetings/time spent pitching deals
- Large money/fewer investors
- Decision making power is centralized
- Communications are “simple and easy”
- Working with knowledgeable and experienced people
However, the downside of having only one investor include:
- Requests for board seats and directorships in the project company
- Contract terms that may not be appealing or acceptable to you
- Many strings attached to the investment
- Requests by investor for personnel changes or input that is not aligned with developers’ plans
- Direction, branding, type and size of deal can change dramatically
- Investor may change his/her mind half way through the project and use tactics such as payment/draw down milestones to pressure developer into “new terms”
- Investor will often require a personal guarantee from the developer
What is now happening through real estate crowdfunding is that many of the challenges to having more investors have effectively dissipated. More investors can now participate in a deal without requiring the developer to commit additional time or resources as the platforms can step in, and through their technology and reporting/monitoring systems, create a clean and smooth process flow.
The main benefits of sourcing capital from crowdfunding include:
- Diversification of capital
- Communications are simple, tracked and monitored
- Fundraising meetings reduced, allowing developers more time to focus on the project itself
- Reporting is automated and all information about the project is stored online
- Marketing, branding and promotional value for the developer and project
- Potential buyer pool for the finished product and future projects
Other interesting benefits of crowdfunding that may be most appealing to developers:
- No requests for board seats or directorships
- No changes to direction, branding, type and size of deal
- No changes to flow of capital as all funds are raised before the project moves forward
- No new plan instigated by investors
- No requests by investors for personnel changes or input
Now this isn’t to say the investors are not protected and do not have proper rights. To the contrary, there must be clear and contracted terms at the beginning of the deal, but it does mean that there can be some significant “non-financial”benefits for a developer to work with the crowd. Developers should be encouraged to offer the crowd better or at least the same returns one large investor would get in light of the benefits of working with the crowd highlighted above.
We get asked all the time: “What is the lowest return your investors are willing to accept?” This is completely the wrong thinking. You need to be asking yourselves: ”What is the best return that I can offer to get capital fast and under all the other terms that suit you best”.
The same fundamentals of investing remain the same. If you want to fund fast through crowdfunding, you need deals that meet the following criteria:
- Developer’s must have skin in the game
- Great location
- Safe and clear legal structures
- Asset backed
- Strong returns
- Shorter terms
Treat your first campaign as a brand building exercise and put the effort and energy into it to make it work. Find the best possible deal you have on your books and use that. Offer returns that are better than those achieved on your last deal to entice investors to try working with you. Build trust, transparency and credibility for a long and lasting relationship, just like any other investor relationship.
I will end by saying: DO NOT TREAT THE CROWD WITH DISRESPECT OR YOU WILL FAIL.
This is a topic of hot debate around the globe, but fundamentally, technology and the internet has taken away some of the previous headaches of dealing with too many investors, whilst also offering opportunities to smaller investors who would previously not be able to afford to come into a development deal of this size.
InvestaCrowd is a global real estate crowdfunding platform headquartered in Singapore, deals on InvestaCrowd are exclusively available to our members only. Their are limited investment positions in each deal, and investments are offered on a first come first serve basis. To see the latest offerings and begin investing today, login and create an investor account at www.investacrowd.com
We welcome all comments and would love to hear back from you, thank you.