2,968 crowdsourcing and crowdfunding sites
Disclosure: Wealth Migrate is a client of Crowdsourcing.org / Massolution.
In 1995, Microsoft’s then-CTO Nathan Myhrvold asserted that the internet would make the middle man redundant. Myhrvold was ahead of his time, but whether it is travel agents or taxi companies, it is happening today.
Crowdfunding, likewise, has the potential to disrupt countless industries. By connecting those who are seeking funds to a crowd of individuals that’s looking to invest, it is able to reduce the role of middle men and allow individuals to democratically choose which investments, companies, or projects to support.
This is already happening in the video game and 3D printing industries, among others, with more poised to experience change in the near future. One industry that looks to be ripe for innovation is real estate.
Crowdfunding real estate has grown in popularity over the past year, and the growth is unlikely to abate in the near future. The benefits of crowdfunding real estate can be extensive: for developers, it provides a new way of raising capital and builds important synergies that can be tapped in future projects. For investors, it opens up the opportunity to learn about and invest in projects that they wouldn’t be able to find otherwise. Portals, for their part, are able to use the growing crowd of investors and projects to attract new capital and new developers to the platform, in hopes of bringing success to all parties involved.
Given the expanded reach of crowdfunding, it’s important for portal operators to focus on bringing quality projects to the investors. Since much of the onboarding and due diligence processes take place online, crowdfunding portals will hear from owners of substandard (and potentially even fraudulent) projects. Those platforms that allow the bad actors to slip through put their investors at risk, and may even put the industry at large in a bad position, think some within real estate crowdfunding sector.
In order to minimize the risk of this happening, it’s important for the crowdfunding platforms to invest the time into screening all the projects that want to raise cash from the crowd.
For all real estate firms, of course, due diligence is highly important when it comes to picking projects to invest in and partners to work with.
Those firms that operate regionally, or even nationally, can complete due diligence in a relatively straightforward way: go to the location, speak with the developers, assess the investment opportunity and return, see if any red flags come up, and make the decision based on what they see and hear.
For a company that operates internationally, however, it’s not that easy; scheduling a trip to see a property takes time, and it’s expensive. It’s hardly economical to fly out to any potential project site, only to find it subpar.
That’s a challenge Wealth Migrate, the South African global real estate crowdfunding firm, has embraced head on. We’ve written about the advantages of investing in global real estate in the past — in short, it opens up the potential for many more deals, in markets all over the world. Instead of being constrained to a region or country, a firm with a global outlook can truly pick deals that aren’t in overly saturated markets and are projected to deliver high returns.
Wealth Migrate describes real estate on a global scale as a “bridge of safety” between the emerging and the developed worlds. Investors in developing nations may want a way to invest safely in the developed world, while people in the first world who aren’t happy with the returns they’re getting can invest in the emerging world.
But how can a company determine whether a potentially lucrative deal that it learns about is truly worthwhile?
Wealth Migrate has solved this problem by building up an extensive network of partners. Building up the rolodex takes time, and the team behind the company has logged the hours necessary to have picked what they deem to be the suitably qualified partners in multiple markets. Crowdfunding, however, opens up the gates to potentially extend this reach, thereby opening up many more partnership opportunities. So how does Wealth Migrate determine which partners to work with that add value to its extended network, and which ones to avoid?
For that, the company has developed a number of criteria and they use their comprehensive GIDDSTM (the Global Investment Due Diligence System). First, and crucially, there are results-driven checks. The partners need to have been in business for at least five years, and have developed at least ten successful projects. Wealth Migrate also looks at the company’s projects and their track record: what verticals does it operate in, and how have the projects fared? Did they beat initial projections, or did they underperform?
Then, there are fairly intuitive checks: does the company exist, and can it prove that it has no cases being made against it in court? Has the company, or members of its leadership team, received any accusations of bribery or corruption? Can it prove that it has a robust project pipeline for the next 12 months?
There are, of course, more objective criteria: what makes a potential partner reliable and unique? What makes the projects that they would bring to Wealth Migrate stand out from the rest?
“Probably our most important criteria is that we only invest with pigs and not chickens,” said Scott Picken, founder and CEO of Wealth Migrate. “There is the old story that at breakfast, the pig is committed and the chicken is only part of the breakfast. We like pigs, who also put their money in, next to ours! Then, our interests are truly aligned. Chickens just want a free ride and disappear when things go wrong.”
If the Wealth Migrate team feels confident in the partner and decides to form a relationship, it still needs to screen the development projects that the partner brings to the table. Wealth Migrate looks first at whether the project involves investing in an existing property (the approach it typically adopts in the developed world), or a new development (its mode of operation in emerging nations). Naturally, the criteria are different.
When it’s considering investing in a project, Wealth Migrate looks at property assets ranging $5 to $15 million in value. The internal rate of return over a five year period should, conservatively, be estimated at 18 percent per year. The buildings need to be new — less than 10 years old, and preferably in major urban areas where population growth has exceeded the national average over the last three years. Gateway cities are preferred — those that serve as an entry or a departure point, and there are only 10 globally, says Picken. The company also tries to focus on major macro trends like medical or age care facilities, affordable housing, or student accommodation.
The value propositions vary project to project, but they may include reducing vacancy by placing new tenants, or making renovations or architectural upgrades to enhance value.
When it’s looking at a property development investment, the project criteria change. The property assets have to be in the range of $500,000 to $15 million, and the intention is to make an exit as quickly as possible. The projects need to be in areas that show not just rapid population growth, but also high economic growth. The value proposition for these may be to sell off 50 percent of the development, and rent out the other 50 percent.
All real estate is different, so the way Wealth Migrate checks the project against the criteria varies case to case; and the criteria it uses are much more involved than what is briefly described here. But the guidelines Wealth Migrate has developed enable it to quickly screen the incoming projects and determine which ones are worth looking deeper into. If the projects are credible and potentially profitable, the team travels to the locations to examine them on the ground.
That’s precisely what Wealth Migrate did with a recent medical deal involving seven medical buildings near Atlanta, Georgia. The company crowdfunded $5.725 million from 27 investors, in denominations ranging from $100,000 to $1 million. This enabled it to purchase the $16.2 million property — you can read more about that project in a previous article on Crowdsourcing.org.
Wealth Migrate invests in the projects alongside the crowd, so it has massive incentive to complete thorough due diligence on the partners that want to work with the company, and the projects that the trusted partners bring.
Picken believes that that’s the only way real estate crowdfunding can succeed. If the platforms don’t have “skin in the game,” their incentive is to generate revenue by funding a massive number of deals in the short term, where they can charge a fee on the money raised, and worry less about what happens in the long term — which is what the investor is most concerned with. This misalliance of interests, Picken believes, can have potentially devastating effect on the industry as it matures and the poor projects get exposed. For this reason, his team has focused on quality of deals that it considers investing in, and thereby the quality of partners that it trusts to bring it the deals.
In order to support real estate crowdfunding, its awareness and safety, Wealth Migrate has sponsored the 2014CF Crowdfunding Real Estate Industry Report, created by our sister organization Massolution. The report, the first comprehensive data collection on and analysis of the fledgling crowdfunding industry, is due out shortly; you can pre-order your copy today, here.