Last updated July 2, 2016
Dateline: Medellin, Colombia
I’m in Medellin hosting an investing mastermind with a small group of Nomad Society Members and clients. Colombia has been widely touted as one of the most attractive places to invest in the Americas due to the lingering stigma of Pablo Escobar.
For some reason, people in the “first world” act as if countries never change, governments never change, and people never change. They tend not to notice the increasing surveillance and nanny state in their own country, and they remain closed to the idea that once disastrous countries can become successful.
For years, I’ve liked the idea of crowdfunding foreign real estate deals. Since we appeal to a younger demographic than many other sites of this nature, I hear from a lot of twenty-somethings who are just starting to make big money, but don’t have a ton of money to invest.
The idea of being able to invest $50,000 or even $5,000 in a crowdfunded real estate deal outside of the United States would be a big hit. That’s especially true when you consider that the world’s largest crowdfunding market — the United States — is easily the most burdensome when it comes to regulation.
As I’m not aware of any such platform for funding overseas real estate deals, I decided to investigate the US equivalent and do some due diligence. One of the largest such sites in the United States is RealtyShares.
Since I’m someone who actually does deals rather than just talking about doing them, I jumped in with a small investment in order to understand and report on the pros and cons of the process.
What is RealtyShares?
Realty Shares is a sort of crowdfunding for real estate where accredited investors — those with salaries of $200,000 or more for three years in a row, or a net worth of $1,000,000 — can buy an interest in US real estate for as little as $5,000 per deal.
I seem to recall that, in one case, the minimum was as low as $1,000 per deal.
While most deals are on individual properties, there are some portfolio deals — such as a bucket of long-term rentals in one city. Deals are submitted by individual real estate investors or investor groups and approved by RealtyShares.
Basically, any developer, flipper, rehabber or anyone else in the real estate business can submit their deals to the RealtyShares marketplace. I honestly don’t know how stringent the approval process is, but seeing that most deals are run by sole proprietors and small developers, I imagine the barrier to entry is low.
Since I approached RealtyShares as someone with an interest in improving on and replicating their business model in another country, I purposely chose three diverse deals to get a feel for how each of them worked.
Of course, as an accredited investor, I was well aware that investing in crowd-funded real estate carries the typical “substantial risks” that are spoken of in boilerplate disclaimers. Owning US real estate can be a rather dicey proposition in my opinion, but so can investing in a trumped-up stock market.
Ultimately, we are all responsible for our own investments, especially “riskier” and illiquid ones. However, my review has more to do with the RealtyShares platform, the types of deals they accept, and what seems like a dismal track record.
An overview of my RealtyShares investments
I invested a grand total of $17,000 in RealtyShares deals. I figured that number was low enough to avoid much exposure to the US real estate market but just large enough to get me into the three deals I wanted for my research.
How did my RealtyShares investments go? Not so well, to be honest. In fact, it reminded me of how poor my opinion is of most real estate developers and “flippers”.
On top of that, it suggested to me that services like RealtyShares aren’t much more than a splashier version of Craigslist for real estate investors to post their deals. Considering that all of my deals are behind schedule, I’m disinclined to believe that much due diligence is done on the people posting deals.
In fact, I have to wonder if RealtyShares has opened its forum to just about any Tom, Dick, or Harry investor with an above-average FICO score and the cash to get the LTV below 80%.
There’s not necessarily anything wrong with that, but it takes away the allure of carefully crafted deals.
There aren’t a lot of deals on the RealtyShares platform; in fact, deals that get emailed to investors often fund in their entirety in less than an hour due to the relatively low volume.
It just goes to show how yield-hungry the world is in an age when central banks have slashed yields to the bone.
What happened with my deals?
The first deal was a debt offering on a single-family home. Payments were to be interest only and at least three months of payments were guaranteed, even if the loan was paid early. The term was to be six months, with monthly payments starting right away. And they did, making this the best of the three deals.
The biggest challenge on the first deal was that the investor changed his mind on the exit strategy in the middle of the investment. He decided to lease the property for “income and future appreciation” — not really a good thing for a short-term debt offering — and is in the process of re-financing the deal to pay off debt holders.
The second deal was a six-month fix-and-flip equity deal. Despite their alleged long track record, this investor seems like a clueless fix-and-flipper straight out of 2007, considering the investment was made in November 2014 and projected to exit in March 2015. Eight months later, not a word from them.
Just the other day, RealtyShares stepped in to say the investor totally bungled the project. A nasty email disclaimer prevents me from copying and pasting the email here, but basically RealtyShares apologized for the company’s mismanagement and announced that there is still $50,000 in work to be done on the property.
The reason, they claim? The investment company had one of their partners leave and that’s been taking up the majority of their time. I can empathize; I’ve had to get rid of a shareholder in a company I owned before, too. The difference is that I didn’t take investors’ money and then deliver them excuses.
RealtyShares is now putting some form of pressure on the investors to refinance and allow equity holders to break even. The property has no debt on it, so I and other investors will be OK, but the process looks like it will drag out to at least a year past schedule.
Oh, and the sponsor couldn’t be bothered to send tax forms to investors, so the company merely had to make its best guess and provide tax forms to investors late.
The third deal was also a single-family home equity deal. Unlike the second deal (which became such a disaster than the usually hands-off RealtyShares had to step in), this deal actually did pay some cash yields.
The other problems, however, are similar: zero communication from the property investor and a timeline now seven months behind schedule.
My review of RealtyShares
As a lifelong entrepreneur, I usually go into a new business with the idea that it will take three times as long and cost three times as much as expected. I imagine that real estate deals like these can operate the same way.
The painter uses the wrong color, the landscaper goes missing for a week, and so on. However, I would similarly expect a competent real estate investor to offer a reasonable timeline that allowed room for error.
That said, I wouldn’t recommend RealtyShares to the average person reading this who would use RealtyShares solely as an investment vehicle to earn profits by investing in real estate.
An update on my RealtyShares deals
I was contacted by RealtyShares executives in December 2015 to discuss this article. I informed them that I wouldn’t change anything, but that I would update it if and when the deals paid off.
My conversation with their team was pleasant but had a definite “tell us how we can improve” tone to it, to which my response is usually to remind them that I didn’t pay them to provide free consulting.
Anyway, they told me that I was “really unlucky”, seeing that I chose the only three bad deals on their platform to date. I have no way of proving or disproving that. What I do know is that the deals continued to drag out.
Four months later – and after endless faux promises from the sponsor to start work – I started to receive what seemed like good news. RealtyShares had finally taken back the worst-performing property with the intention to sell it. It took weeks of wrangling with the sponsor, but they finally did it.
Only when they did, the buyer they said was ready to go for over a month suddenly dropped out. The property then had to be put on the MLS. It was sold within about two months, and I did break even and earn a tiny return. It took 17 months to close what was supposed to be a 4-5 month deal, but it did close and I was reimbursed.
The other two deals also eventually closed, each nearly one year after they were supposed to. I have been reimbursed; returns are either non-existent or minimal, but I did not lose money. However, from what I see, I am still not comfortable making a large-scale investment with RealtyShares.
That’s partially my personal view that these crowd-funded investments are so hot that they are overrated, which in turn gives companies that facilitate them a feeling that they can slack off. On the other hand, I’ve never been someone to trust fix-and-flip real estate guys, and this investment reiterated that for me.
One of my recent foreign real estate deals took about two hours to close in my own name and now earns a yield of 24%. I’ve found time and time again that it’s better to take my chances with real estate investments overseas in a country I may know less about than deal with quick-money investors in a country I’m from.