Monday, 24 October 2016
Last updated 2 hours ago
Sep 30 2013 | 2:26pm ET
Crowdsourcing has come to the real-estate market.
Los Angeles-based Realty Mogul, the “Lending Club of the real estate market,” matches lenders with borrowers looking for funds to buy and/or upgrade and renovate properties.
CEO Jilliene Helman started the firm—which was chosen for the Microsoft/Tech Stars Accelerator in Seattle, won the HATCH pitch competition at South by Southwest and the Innotribe/SWIFT event in New York—to help her parents manage their money.
“Both of my parents are retired and they were looking for places to put their money to generate some current income,” Helman told FINalternatives. “They were fed up with the stock market, had experienced a lot of the volatility in the crash in '07-'08, and so they came to me for advice. I was working in wealth management at the time, and I said, 'What about real estate? You can generate current income from real estate.'”
Initially calling her venture "Real Estate with Friends," Helman began investing in loans secured by real estate for family and friends. “We were generating 8%-10% returns, paid monthly, and that was an alternative to making 1% at a bank,” she said.
Passage by Congress, in April 2012, of the JOBS Act, which makes it possible to raise money on an online portal from non-accredited investors, opened a door for Helman.
“I thought to myself, 'There's going to be an opportunity to open up this business to an even wider scope of investors and bring real-estate investing to a broader scope of investors who can have access to real-estate transactions.'”
To capitalize on this opportunity, Helman teamed with Justin Hughes, whose background is “predominantly technology.”
“I approached Justin and said, 'I've got this idea and want to take this model that I've been doing offline with friends and family and move it online in accordance with the JOBS Act and with this political opportunity.'”
The two began working on the platform in last March and Helman went full-time at the company a year ago. “We went into beta in January of this year and then we launched the project in March,” she said.
Realty Mogul works with real-estate companies that have “a specific geographic focus and a specific property-type focus,” said Helman. “So, for example, borrowers doing single-family renovations in Los Angeles.”
Borrowers, she said, come to them with transactions, explain how much they need to borrow, what renovations they plan to do and how much they think the property is worth. “Then we underwrite that and say, do we think that this value is really the value? What are we comfortable loaning against this specific property?”
Realty Mogul determines the value of the loan to be offered—they've been offering loans in the $50,000 to $400,000 range—and sets the rate of interest, which has been averaging 8.5%. Helman said rates vary, based on a number of factors including location.
“Part of that is actually due less to the risk and more to the competitive nature of our industry—there are other private lenders who do things that are similar. So, for example, we've been doing loans in Los Angeles, and there are a lot of lenders in Los Angeles. The rates tend to be a little bit lower. We just opened up our Tennessee market, where there are a lot fewer lenders, so our rates in went up 1% for our investors.”
Accredited investors, for their part, sign up with the site, create a user account, browse the loans and choose the ones in which they wish to invest. Browsing is free; should they choose to invest, they will be charged a fee that depends on “the type of investment (loan purchase or equity purchase) and the nature of the transaction.”
“They can see the specific loan that they're going to invest in, whether it's in Washington or California or Tennessee or other markets; they see the exact borrower; and they see all the information around the loan—the loan-to-value, our estimated after-repair value, all the metrics that are going to be important to them. And from there, they can do the entire transaction process online. They can sign documentation online, they can fund online and have access to what we call an investor dashboard which gives them 24/7 access to watch how their money is working for them.”
Helman said the opportunity for peer-to-peer real estate lending exists because banks have little interest in such short-term loans.
“Banks have a lot of bureaucracy. For them to deal with a six-month loan or a one-year loan, they still have to go through multiple channels, senior underwriter, senior-senior underwriter, vice-president of underwriting, etc.”
Moreover, she said, banks don't like to lend on non-owner occupied property.
“We're doing 10 loans right now that are all occupied, they're fully leased, but on a lot of our rehab loans, they're being rehabilitated, so there's no home owner in the property and the borrower is paying interest on the loan when there's actually no underlying homeowner who's paying them a monthly rental payment. Banks are reluctant to lend on that.
“Our approach and how we get comfortable with it is, of course, keeping loan-to-values low, but also understanding the value of that property after it's repaired. So we look at a lot of comps for properties that have been renovated and we're looking for what we think that property is going to be worth after that renovation.”
Helman said they're limited, from a regulatory perspective, to under 100 lenders per loan, and typically have between two and 10 lenders on any given transaction. Realty Mogul funds first-trust deeds, which means, in the case of default, no other lender has priority.
To date, Helman said, response to the platform has been encouraging: Since going live in March, they've facilitated loans worth more than $2 million for “thousands” of investors and they now operate in four states (Washington, California, Tennessee and Kansas), with Texas next on their list.
“We're growing leaps and bounds,” said Helman. “We have more demand from our investors than we have supply of loans right now, so we are really ramping up the loan supply. We're starting to work with some new borrowers, we're very stringent or careful, if you will, in the borrowers that we work with, so growing our borrower side is always going to be more challenging than finding the demand for high yields. But it's been just great. It's been a fantastic ride so far.”