Learning from the crowd-funding sites

In general, I dislike real estate crowd-funding. My beef is that the lack of connection between the sponsor and the faceless equity providers makes it easy, psychologically, for the sponsor to justify to himself screwing over the investors.

That said, RECF sites do provide a very valuable service to new investors and sponsors: They have large repositories of pitch decks, PPMs and operating agreements.

Before RECF sites, it wasn’t that easy to lay your hands on a bunch of marketing materials for different deals. Now, you can go on one of the RECF sites, create an account, and shortly have access to hundreds of deals.

If I were starting out today, the first thing I would do is download a ton of different pitches and operating agreements and read all of them.

I would not pay that much attention to the pro forma financials. After all, these are marketing materials from random sponsors, so you have to assume the numbers are, at best, optimistic and, at worst, borderline fraudulent.

I would, however, pay a lot of attention to:

  • The nuts and bolts of how the deals are structured (the preferred return, the promote, the order of distributions, clawbacks, etc.). This stuff makes for very dry reading, but it is at least as important, from the investors’ perspective, as the characteristics of the target property and business model.
  • What numbers / factors the sponsor emphasizes in his marketing (IRR, equity multiple, location, pics of the property itself, etc.)

I would make copious notes, comparing and contrasting the different structures and ways of marketing. And I would create a list of questions, trying to get at why the sponsors made the choices they made.

You do this with, say, 20-30 of these pitches, and you are going to have a pretty good sense for how the whole game works.