Real estate has been one of the hottest areas of crowdfunding, although most of it is focused on wealthy “accredited” investors who put money into funds, known as REITs. (And let’s face it, accredited investors don’t lack investment options!) Just two platforms allow direct investing by unaccredited investors. One is Pittsburgh-based Small Change, which uses the Regulation Crowdfunding exemption. The other, Groundfloor, has used a variety of exemptions since its inception in 2009 to bring short term, high yield-real estate investment opportunities to the mainstream. (It has also recently tiptoed into institutional partnerships similar to other online lenders).
This week, Atlanta-based Groundfloor announced a greenlight from the S.E.C. to expand its offerings under Tier II of Regulation A (part of the JOBS Act) to investors in all 50 states—an estimated 150 million people. The company also said it is taking indications of interest for its own Reg A capital raise. We talked to Brian Dally, Groundfloor cofounder and CEO (pictured above, at right, with cofounder Nick Bhargava) about these development as well as the company’s commitment to retail investors—and how “they’re crushing it.”
Groundfloor was just qualified by the SEC under Tier II of Regulation A, opening up investments to individuals in all 50 states. Tell me about the path to get there.
Two years ago we were qualified by the SEC for Tier 1, which was a fine place to start. We were the first to use NAASA’s coordinated review process [a streamlined process for state review, which is required under Tier 1]. If you wind the clock back four years ago, we stated off smaller using the Invest Georgia [intrastate] exemption. So we’ve gone from being available in one state to nine states to now all 50. This is a pattern of patiently building the company over time. If we wanted to get big fast we would have gone for the quick money from accredited investors and institutions. We have so much demand, we felt that we’re ready to go national.
What kind of demand are you seeing?
A lot of people complain that the average investor is not getting their fair share of the pie. The more insidious problem is, people aren’t even being served the same thing! If you’re a non-accredited investor in the US, you’re stuck with a choice that most people don’t feel very good about.
We’ve delivered average net annual yields of 11.79% and you only had to give up access to your money for an average of 8 months. If you’re a Goldman Sachs private wealth client, you might get that. But the ordinary retail investor doesn’t typically get access to that. The demand has been incredible. Yesterday we launched a batch of loans – 7 loans totaling $1.1 million. We sold it in 8 hours, and 620 investors participated.
We have a wait list. Our #1 responsibility is to our current investors who have been with us. We want to build supply to match demand. We’ll allow new investors in from the wait list as we build up supply. We now prefund all of our loans [before offering them to investors]. Our next batch of loans is twice the size of the one before it.
So how do you grow supply?
That’s where the crowdfunded equity raise [for Groundfloor] comes in. There are a lot of ways we can invest that capital to grow more quickly. We thought, why not allow the people who appreciate the product and have been with us to benefit from the success? The offering has not yet been qualified—we’re taking indications of interest on an invite-only basis.
How many loans are you doing these days?
We’re on track right now to do around 20-30 loans a month. That’s been growing. Back in October we announced the launch of our origination network. But we have to hold quality constant. Our employees and the brokers we partner with have to go through a selection, interview, training process. We have never been the kind of company that prioritizes growth over quality.
Our targets are to double that. Capital can scale that up quickly.
Are they all fix and flip?
Yes. All single-family houses, once in a while a small multi-family deal, purchased by a real estate investor to renovate and sell. Our specialty right now is 6-12 months term loans, $100,000 to $400,000 at top end, and rates of 8-12%.
What is your default rate?
We haven’t had a lot of losses. Specifically two out of 209 repaid loans to date have experienced a loss of principal, for a loss of 0.47%. That’s because we have first lien position on our loans, structured to make sure that there’s enough value in it, cushion, so that we can sell it ourselves. As we’ve grown volume and matured as a lender, we’ve improved our asset management practices to where about 13% of loans are repaying late, with about 3% repaying 90 days late or more.”
But what you really want to know is, what’s the net yield at the end. When you’re making 11.79% after a 0.47% loss, that loss doesn’t seem like much. That’s the reason we have a $10 minimum, so you can diversity and any losses won’t impact the overall portfolio. Our recent diversification data shared on our blog shows that you can build a sufficiently diversified portfolio of Groundfloor loans with $100! Every person who diversified in at least 10 loans has earned a positive return. Most of our customers invest this way.
Do the giddy heights of the stock market worry you at all? It feels sort of 2007ish…
Nobody knows what will happen with the stock market. But products like Groundfloor are at the opposite end of the spectrum, a first lien debt product with a real asset behind it. When the stock market is booming, some people want to diversify and be defensive.
What does your investor based look like? How many are unaccredited?
It looks like America. About 5% of our investors have indicated they are accredited investors.
You are a passionate advocate for unaccredited investors. Where does that come from?
I didn’t like bullies in school I was on the wrong end of that sometimes as a kid. I have an allergy to incumbent power structures. Internet technology is powerful. There’s a sensibility or belief that we can make our own choices, because now we have the information to do it—not just in finance but in politics, philanthropy—it’s one of the biggest trends in our society today.
Our investors are outperforming many funds and institutional investors. They’re crushing it.