By Tyler Durden
“It’s the greatest thing in the world,” exclaims Alex Sifakis – the 33 year old Florida ‘flipper’ – saying he has never raised this much money this fast (despite teh 14% cost of capital). As Bloomberg reports, house flippers and property developers are increasingly crowdfunding — tapping the virtual wallets of anonymous internet backers on various platforms – because “the amount of money you can raise isn’t limited by anything but their investor base.” As one of the ‘investors’ in this crowdfunded flipfest notes “if something goes bad, you have the asset to fall back on,” but, as Bloomberg rebukes, speed and property loans may not mix — remember 2008?
Bloomberg points out that the house flipper from Jacksonville, Florida, crowdfunded nine deals totaling more than $9 million through RealtyShares over the last two and a half years. A July deal for $1 million took him just 12 hours.
“Generally, raising money takes so much time,’’ said Sifakis, 33. “This offers so much flexibility and time savings. It’s so much better than going to family offices, banks or Wall Street firms.’’
House flippers and property developers are increasingly crowdfunding — tapping the virtual wallets of anonymous internet backers on platforms such as RealtyShares, LendingHome, PeerStreet and Patch of Land. For riskier ventures, such as building new homes and buying, renovating and selling existing ones, they’re finding quick financing can be easier to get online than from banks.
That’s contributed to an increase in home flipping. In the second quarter, 39,775 investors bought and sold at least one house, the most since 2007, according to ATTOM Data Solutions.
The ease of fundraising through these nontraditional lenders could be a warning sign, according to Erik Gordon, a law professor at the University of Michigan in Ann Arbor.
“Whenever you see a big difference between the terms on which you can raise money in one market versus another market, something is wrong in at least one of those markets,” Gordon said.
“It usually is the market with the least-experienced players, and they usually end up wishing they hadn’t played.”
Sifakis said he’s borrowing money at an annual rate of 14 percent over two and a half years. He keeps all the profit he makes from selling homes, he said.
So far, Bloomberg notes that there have been few defaults in real estate crowdfunding deals. When they happen, the platforms say they’ll pay investors the proceeds from property sales.
The business has other potential pitfalls.
When it comes to real estate, faster isn’t always better. Wall Street’s home-mortgage machine of the mid-2000s valued speed over accuracy, with disastrous results, though most crowdfunding sites cater to investors and not homebuyers. Also, clicking for capital can be exploited by fraudsters who may not be who they say they are, according to Sara Hanks, co-founder and CEO of CrowdCheck, which provides due-diligence services for online investors.
“We’ve seen some things where the entity that’s supposed to own the property doesn’t actually own it,’’ she said.
Jeff Bullian, a Boston-based consultant, has invested in about 30 deals on RealtyShares and in a handful of others on websites such as Patch of Land. So far, only one deal has gone bad, he said. In that instance, the platform, which Bullian declined to identify, went to bat for investors so everyone could get their money back along with a small return.
Bullian said he contributes an average of $10,000 in each deal for returns of about 10 percent to 20 percent, similar to what he was getting from a marketplace lender.
“I really like the risk profile of real estate deals compared with some other investments because they’re secured,” Bullian said. “If something goes bad, you have the asset to fall back on.”
Sifakis, the Florida flipper, said he typically gets a $3 million line of credit from an investment firm for about every $1 million he raises on RealtyShares, giving him added buying power.
“It’s the greatest thing in the world,’’ Sifakis said. “The amount of money you can raise isn’t limited by anything but their investor base. And the investor base is growing and growing.”
The Fed has fostered this idiocy by manipulating everything and memories are short in housing markets. This will not end well…speed and property loans may not mix — remember 2008?