In the previous post on real estate crowdfunding, we covered the regulatory structures of crowdfunding offerings and the impact that those offerings have on sponsors. In this post, we’ll look at two distinctly different types of crowdfunding platforms that every investor should be aware of and how each affects the investor’s ability to find great deals. The differentiators discussed below expose the business strategies, and more importantly the incentives, behind crowdfunding platforms that impact the investor.
There are two major types of crowdfunding platforms: crowdfunding marketplaces and captive crowdfunding sites.
- Crowdfunding marketplaces are websites built to be a truly independent and free marketplace for investors and sponsors. The crowdfunding marketplaces are created to provide the investor community with deals from numerous sponsors, most often pre-approved for quality control.
- Captive crowdfunding sites are sites created by a real estate sponsor to satisfy a specific business need. They do not necessarily find the investor the absolute best deal in the available market.
Most often, real estate sponsors create captive crowdfunding sites to raise capital exclusively for their own projects. These types of sponsors tend to be developers that believe they can achieve better terms for themselves with investors over the internet than within their network. In some cases, captive platforms are even created by institutional investors for the specific purpose of attracting unique sponsors and deal flow. On almost every one of these occasions, the institutional investor managing the captive platform is a private lender attempting to loan money to real estate sponsors. Often, these private lenders masquerade as crowd funders, though very little if any of the capital for the loans comes from the crowd.
It’s important for investors to understand captive platforms, because these websites could be viewed as having some level of conflict with their clients, particularly if the sites market themselves as a crowdfunding marketplace when acting as a captive platform. This subtle conflict among captive platforms is much like a wealth management bank that, for the purpose of restricting competition and making more fees, only offers their clients their bank’s investment products. For this reason, crowdfunding marketplaces are generally more desirable for investors.
However, it would be shortsighted to presume that captive sites are more desirable for the sponsors that control the site. For example, a sponsor that uses a captive crowdfunding platform to fund its projects will have a lower number and variety of deals than a marketplace platform with multiple sponsors. As a result, investors seeking high-quality deals are less likely to visit a captive platform than a marketplace platform where numerous sponsors are competing for their money.
Assuming sponsors want to maximize their project’s exposure with investors, they might be better off using a marketplace platform. In addition, the marketing and operational overhead of running an effective crowdfunding platform can be very expensive for a single sponsor to operate. Currently, there are no requirements to disclose on the website whether the site is an open marketplace platform or captive platform. So be sure to call a representative of the site before making any investments.
Please stay tuned for the next article in this series, where we will compare and contrast some of the top and most popular real estate crowdfunding sites in the market right now.
For more information on real estate crowdfunding, obtaining a commercial real estate bridge loan, or investments in commercial real estate bridge loans, please feel free to reach out to firstname.lastname@example.org.
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