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House flippers turn to crowdfunding

 

NEW YORK – Feb. 23, 2016 – Investors purchasing homes to spruce them up for a quick resale are looking beyond banks and tapping funding for their projects through crowdfunding platforms.

David Berneman's family business, Golden Bee Properties, for example, borrowed $1 million from 44 small investors – some who just offered $5,000 – through a crowdfunding site. Berneman used the funds to purchase a West Los Angeles home that he intends to renovate before trying to sell it again.

"It's like a Kickstarter for the real estate industry," Berneman told the Associated Press. "It allows people to get into real estate investing in a way they wouldn't have been able to before."

Once driven by the tech industry, crowdfunding is now becoming more common in real estate. Between September 2013 and 2015, investors poured $870 million into crowdfunding platforms, according to Crowdnetic, a data provider in New York. About a quarter of that amount – $208 million alone – was devoted to real estate projects.

"There's a crowdfunder popping up once a month now, and the low-hanging fruit is the fix and flips," said Jonathan Lee, a principal at George Smith Partners, an L.A. real-estate-financing firm.

Crowdfunding sites – like Patch of Land and PeerStreet – allow house flippers to find a much larger investor pool for their projects. The crowdfunding platforms are often open to accredited investors who net more than $200,000 annually and have a net worth of at least $1 million.

"Flippers traditionally are financed by 'hard money,' or short-term loans with double-digit interest rates that are secured by a hard or tangible asset, in this case real estate," the Associated Press reports. "Like hard-money lenders, crowdfunding platforms guard against risk by securing the loans to the property and lending for less than its full value.

If a borrower goes bust, the lender takes title to the property, which, in theory, can be sold for more than the loan principal. For example, the crowdfunding site PeerStreet usually will only lend about 75 percent of a home's value.

"Real estate is a tangible asset," says Eric Smith, director of data analytics for Crowdnetic about the appeal to crowdfunding in real estate. "It's not like you're going out there trying to buy into the next Facebook."

Source: "House Flippers Turn to Crowdfunding Platforms for Financing," Associated Press (Feb. 20, 2016)

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Related Topics: Real estate investing