The loosening of Securities and Exchange Commission (SEC) restrictions has given developers a new means of financing: crowdfunding.
In the past few years, dozens of websites have appeared that allow developers to reach investors directly to crowdfund their projects. Some of the more popular real estate crowdfunding portals include: Patch of Land, Fundrise, Realty Mogul and RealtyShares.
This new option may seem appealing, but is it truly a viable option when it comes to residential or commercial real estate development?
Understanding The Benefits And Risks Of Real Estate Crowdfunding
There is a great deal of material available breaking down the benefits and risks of real estate crowdfunding for investors. However, very little has been written about what developers need to think about when considering financing through crowdfunding as opposed to obtaining financing through banks or other traditional sources.
Among the benefits is that crowdfunding may open doors for projects that have had difficulty obtaining traditional financing, either due to their size and scope, the experience level of the parties involved, or for other reasons.
Another possible benefit is ease of use. While every real estate crowdfunding portal is different, they all claim to make the process easy, with most promising to serve as the point of contact between developer and investors.
A benefit that may be of interest to some developers is that crowdfunding allows people who may not be able to otherwise invest in real estate to enjoy some of the rewards.
Of course, crowdfunding comes with risks. First of all, none of the crowdfunding portals guarantee that a project will reach investors. A developer cannot expect to go to a website like RealtyShares, hit the “Get Financing” button and be financed automatically. There is a possibility that the crowdfunding campaign will not be successful, sending the developer back to the starting line.
To that end, running a successful crowdfunding campaign can turn into a separate job. The developer needs to present a clear case that will compel not only experienced investors, but novices, to invest in the project. Then there is the possibility of questions and issues that must be addressed during the campaign. This can be time-consuming.
Lastly, financing alone is complicated, and it is only one element of real estate development. A crowdfunding website is not likely to provide the comprehensive level of support that many developers desire, support that could make or break a project.
Developers Do Not Have To Seek Financing Alone
One step developers can take in the early stages is to consult with an attorney who is well-versed in real estate development and financing. An experienced attorney can review the project and provide specific insight into whether crowdfunding or traditional financing would be more appropriate. An attorney with a solid foothold in the area of real estate may be able to identify financing opportunities that a developer missed. An attorney can provide personalized advice and attention through all phases of a project, ensuring that it is on the path to success at all times.