With interest rates continuing to be low, investors are increasingly turning to real estate in their quest for superior returns. However, traditionally, retail investors have found it difficult to find real estate investment opportunities which have been the exclusive domain of investment managers and well-connected high net worth individuals. Retail investors have been forced to restrict their investments to buying and flipping properties or to invest in real estate investment trusts (REITs) which manage a portfolio of investment properties.
However, Sharestates, a real estate crowdfunding platform, is now offering both accredited and non-accredited investors the opportunity to invest as little as $100 in real estate projects. The objective is to make the company the “E-Trade of Real Estate” by making real estate investment as easy and accessible as any other form of online shopping.
How the platform developed
Allen Shayanfekr, Sharestates legal adviser and co-founder, often walked past New York City properties and thought about why he and his friends could not put their money together and own one or more of those properties. He soon learned that it was difficult to access the market. At the same time, a portfolio manager named Wayne Geffen who is now an adviser to Sharestates was working on a real estate exchange along the lines of the NYSE for equities.
After they joined forces, the model they choose for their platform was E-Trade which pioneered the trading of securities such as bonds and equities for small retail investors. Real estate has traditionally been illiquid as an investment, and the company explains that they want to address the two factors involved namely the product and the ability to access it. In other words, they wanted to transform an illiquid market into an open and transparent one for retail investors.
The Problems with Regulation A
One of the biggest problems is the filing of a real estate deal of this nature under Regulation A which is an exemption from SEC registration for the offering of securities up to $ 5 million in any 12-month period. An offering under Regulation A has to be accompanied by a prospectus and may be offered to the public. Every property offered by Sharestates needs to qualify under this regulation.
This has rarely been done before because it is a difficult process and the normal qualification time is 9 months though it can take as long as 18 months in some cases. And once the SEC qualification has been obtained, approval from state regulators is required as well.
How the Website Works
The site itself is pretty helpful, and once you have provided some basic personal information, you are asked some relevant questions such as the type and the kind of property in which you are interested in whether you are looking for fix and flip or project developments from scratch and the period for which you wish to hold. Once an account has been set up, investors can look at the type of investment (equity, debt, etc.), the minimum requirement and the data for each project.
Addressing Investor Concerns
Naturally, the primary concern of investors is the fallout from a project that fails, and Sharestates itself does not provide any project guarantees. Instead, they obtain personal guarantees and security agreements so that investors are senior creditors if a project fails. Another method of protecting investors is preferential treatment for the return of invested capital so that the sponsor is required to repay investors before he himself can be paid. Yet another measure of protection is to impose conservative loan covenants and low to moderate loan to value ratios.
Investors need to keep in mind that these investments are basically illiquid and can be tied up until the project is complete and the realizations come in. However, the investments can be sold to other investors and the website uses its network to help investors to find buyers.
Photo credits – en.wikipedia.org
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http://www.businessinsider.com.au/sharestates-the-e-trade-of-real-estate-2014-8http://www.pr.com/press-release/552271
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