Crowd funded Real Estate is Great but what are the Risks?

By Saturday, October 31, 2015 0 No tags Permalink

Crowdfunded real estate is catching on as more and more entrepreneurs look to micro-investors to fund their ventures. This is especially useful in lean economic times, when traditional lenders like banks and other financial institutions may be reluctant to afford funding to those projects deemed risky.

While crowdfunding can be exceedingly useful in some instances, there are a few risks involved that can be overlooked in favor of benefits like an improved ability to diversify one’s portfolio, as well as easy access to many different types of products. One significant risk involves underwriting a given project, which can be done improperly when utilizing crowdfunding methods.

What Is Underwriting?

For the purposes of this subject, the term underwriting differs from the commonly understood meaning related to accepting liability for a project. Instead, underwriting refers to the process of evaluating whether a crowdfunded real estate project has the capacity to be a success. Such evaluation must include in-depth examination of several important factors, from the economic makeup of an area to the type of property itself.

This evaluation typically occurs in two steps. First the developer or sponsor of a real estate project will conduct its evaluation, and all pertinent information will then be passed on to the crowdfunding group for further review. This group must both check the initial findings for accuracy, while also undertaking evaluation on their own.

Why Is Accurate Underwriting So Important?

Of course, in a perfect world evaluations of a proposed project would always be undertaken with the utmost accuracy. Unfortunately this is not always the case, and in many instances evaluations are taken at face value due to the often hectic pace involved when working through a real estate purchase. When it comes to crowdfunded projects, those at the helm may also lack the experience necessary to parse through projections and determine if valuations make sense.

Additionally, residential real estate poses many more issues because these properties lack the predictability of commercial ventures. While the overall profitability of most commercial real estate, whether that entails office space or chain coffee shops, can be determined more or less accurately at the outset, the same cannot be said for residential real estate. The value of residential property can shift based on things like neighborhood, school districting, and even the emotional state of a potential buyer. This only serves to underscore the importance of due diligence when it comes to evaluating a prospective piece of real estate.

Methods for Ensuring Success

While the above details the many pitfalls of underwriting when it comes to crowdfunding real estate, the solution to such issues can often be as simple as conducting a Google search to find out who the major players are. The Prodigy Network for example go through extensive research on a project to determine whether it makes for a sound investment overall.

To this end, be prepared to do quite a bit of reading. You’ll also want to seek out information on how the developer arrived at their conclusions. This can be useful for determining whether or not such conclusions are indeed sensible. In general, it’s recommended that investors refrain from taking numbers at face value. Instead, try cutting the proposed profits in half and ask yourself it is still worth investing. If not, you may have just saved yourself a lot of trouble along with a significant amount of money.

 

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