Author Topic: Why Hasn't RealtyShares collapse scared Sam away from Real Estate Crowdfunding  (Read 12402 times)

PacificBeachDad

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I'm new to this website and forum, so if this has been covered before and I missed it in my skimover, please enlighten me with links.

So I'm potentially interested in FundRise and Realty Mogul, but the RealtyShares debacle gives me serious pause.

I believe a reasonable summary of what went down with FS is :

"The surface explanation is that FS was unable to get funding for the company itself, but the real estate deals were all contained in separate LLCs that FS has no legal claim to, so investors should end up OK.

BUT, as it turns out, quite a few of the deals are going south and appear to have been poor choices from the beginning.
( I'm reading the posts starting October 4th where investors summarize their deal portfolio and which deals have likely gone south. https://www.financialsamurai.com/forums/index.php?topic=221.msg4006#msg4006 )

The fact that RS appeared to be one of the bright, rising stars in the field should give serious pause to anyone considering the other currently sexy crowdfunding platforms because it's pretty hard to know what is actually going on inside.  Simply taking a pass could very well be the right move."

A seasoned investor friend of mine who owns a lot of real estate directly, does hard money loans, etc. has had several syndication deals result in partial or full losses and has come to take a rather dim view of all of them. In his words, it becomes hard to keep the interests of the principals aligned with those of the investors.

So....why might this be wrong?

Tim

Sam

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Thanks for your interesting in my investments.

I have 18 investments. 14 are on track to achieve their target IRRs of 12% - 18%, 3 are going to be positive returns but achieve below their target IRRs, and one investment is down probably around 80%. Overall, my portfolio is positive and the investments are being managed by IIRM.

When I make an investment, I do a lot of due diligence and try to understand the risk and rewards. I do my best not to blame the market for my investment choices, only myself. If the overall returns were bad, that would be one thing. But they've been solid so far.

I also allocate no more than 10% of my investments in alternatives.

How about you? Tell us about your investments, your time horizon, etc. Thanks!
Regards,

Sam

PacificBeachDad

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Thanks for the quick reply.

So one statement in your reply says a lot "I also allocate no more than 10% of my investments in alternatives."
So if it all went completely south, perhaps you'd lose a few years worth of returns, but not be forced to get the resume updated.

I am still curious though if you think Fundrise is better organized/run thanRealtyShares or learned any lessons from the latter's demise???

Me briefly:
-a version of you.  Retired at 36 from a tech company with a starting nest egg due to stock options.  19 years in so far.  I'm a late dad with two kids under 4. Financial failure not an option. :)

- made some direct investments in companies of friends and acquaintances, most of which were a complete bust that I took a bath on.  One however did well enough to mostly but not entirely cover the other losses.  Thought about writing a brief e-book called "All Your Friend's Biz Ideas Suck." :)

-currently have direct ownership of several duplexes, some condos, and a mobile home park. All bought in wake of the 2008 crisis, so got some good entry prices. For the most part, enjoy managing them myself, dealing with tenants, even playing handyman from time to time (especially if it's something new where I learn something).  Once a year of so get a bad situation that I have to groan through.  (eviction, bad roof during rainy season, etc)

-took a complete loss in 2008 on a structured product that was issued by Lehman.  Once they imploded, I became just another unsecured creditor.  Nonetheless, I mostly assume that a bank failure is a Black Swan event that won't often occur.  S researching structured products but not convinced. (I know you do some investing in that domain)

-At a real loss what to do with new funds in current market.  Equities high, RE high, income products yields are low.
 
-Exploring crowdfunding, but RealtyShares implosion and friends' stories of syndications that didn't work out give me pause.



groovydude

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I've been involved in syndications for decades and I don't have any issues with the model. There's risk in everything.

As for RS, I can't speak for Sam, but so far many of the RS deals have paid out what or nearly what they projected. I looked at most of the offerings that came up on RS over their last 2 years (probably well over 100), and I only went in on 8 in total, and none in the last 9 months or so. In hindsight, one of these was a mistake, but I don' blame RS. I was an idiot for not doing more homework on that one, but it was also my smallest crowdfunding investment. A couple others are still a bit shaky, but so far all seems on track. Also, I'm not bragging about this, but I could tell that RS was in trouble over the last year, the quality of the offerings started to noticeably decay IMHO. So I've learned to trust my judgement about these things. I've steered clear of some other crowdfunding sites for this reason. Also, I read the contracts more carefully now.

With any crowdfunding offering, I suggest you do more than just read the offering page. Research the sponsor. Research the deal. I try and talk to every sponsor before I invest (I didn't on the aforementioned fail). I stay away from sponsors that don't have a long track record as a general rule. Be wary of the fees. Any site can have good deals and bad ones, as can any sponsor (even the best). All the sites seem to have their strengths and weaknesses. Personally, I don't like the Fundrise model (they have a heavy hand in managing the investments and take a hefty fee), but I don't think their offerings seem risky. However, I do think that if Fundrise goes south it will be as big a mess as RS for the investors. I'm invested in projects with Crowdstreet, Real Crowd, and Equity Multiple, their contracts seem safer to me.

One of the bigger platforms recently made a pitch to investors for capital (for the platform). I was privy to this. I can't share the details, but it was a bit eye-opening. I think we're going to see some consolidation over the next few years, with 2 or 3 platforms left on top. But I don't think we'll see many others just fold up as RS did.

Also, crowdfunding has given me valuable access to the sponsors. I've made several investments directly with sponsors that I've found through my investing with these sites. I can't imagine that I would have made these connections entirely on my own.

JD

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One of the bigger platforms recently made a pitch to investors for capital (for the platform). I was privy to this. I can't share the details, but it was a bit eye-opening. I think we're going to see some consolidation over the next few years, with 2 or 3 platforms left on top. But I don't think we'll see many others just fold up as RS did.

I'm pretty sure I know of whom you speak here, as I had a similar opportunity.

Just curious - did you participate? I reviewed the numbers and decided against it.

Interestingly, I had begun a transaction to purchase RS stock in March/April of last year on the private equity market and bailed on it because of the deterioration of listings on the RS site, as you mentioned. I can only wonder what level of insight the seller had as to the upcoming (at the time) RS implosion.

Sam

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One of the bigger platforms recently made a pitch to investors for capital (for the platform). I was privy to this. I can't share the details, but it was a bit eye-opening. I think we're going to see some consolidation over the next few years, with 2 or 3 platforms left on top. But I don't think we'll see many others just fold up as RS did.

I'm pretty sure I know of whom you speak here, as I had a similar opportunity.

Just curious - did you participate? I reviewed the numbers and decided against it.

Interestingly, I had begun a transaction to purchase RS stock in March/April of last year on the private equity market and bailed on it because of the deterioration of listings on the RS site, as you mentioned. I can only wonder what level of insight the seller had as to the upcoming (at the time) RS implosion.

Here’s my take on angle investing

https://www.financialsamurai.com/just-say-no-to-angel-investing/

Regards,

Sam

JD

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One of the bigger platforms recently made a pitch to investors for capital (for the platform). I was privy to this. I can't share the details, but it was a bit eye-opening. I think we're going to see some consolidation over the next few years, with 2 or 3 platforms left on top. But I don't think we'll see many others just fold up as RS did.

I'm pretty sure I know of whom you speak here, as I had a similar opportunity.

Just curious - did you participate? I reviewed the numbers and decided against it.

Interestingly, I had begun a transaction to purchase RS stock in March/April of last year on the private equity market and bailed on it because of the deterioration of listings on the RS site, as you mentioned. I can only wonder what level of insight the seller had as to the upcoming (at the time) RS implosion.

Here’s my take on angle investing

https://www.financialsamurai.com/just-say-no-to-angel-investing/

Heh, thanks to the typo I read this and thought it was going to be insight around "angle shooting" investments. An excellent read nonetheless.

My takeaway from it is the old different strokes for different folks mantra.

Thanks to angel investing, I retired in my 30s. Though I will say that I have soured on the US private equity market in the past several years, choosing to focus on the UK market due to tremendous tax advantages, better regulation and more reasonable exit targets.

On the flip side, I discovered CRE around 2 years ago, thanks to a post of yours on Quora, which was very complimentary of RS. I'd simply been sitting on much of my private equity gains but thought - man, I should do what Sam's doing - generate some more stable income instead of just running down the tank and making the occasional high-risk PE purchase.

Well, we all know how this story ends (as of now) - I couldn't have joined RS at a worse time and as such, CRE has been a significant loser for me. Though I have hope that my CrowdStreet holdings will turn that around in time.

I guess we all have our specialties! And may I say that your articles are always insightful and enjoyable to digest  :)

groovydude

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One of the bigger platforms recently made a pitch to investors for capital (for the platform). I was privy to this. I can't share the details, but it was a bit eye-opening. I think we're going to see some consolidation over the next few years, with 2 or 3 platforms left on top. But I don't think we'll see many others just fold up as RS did.

I'm pretty sure I know of whom you speak here, as I had a similar opportunity.

Just curious - did you participate? I reviewed the numbers and decided against it.

Interestingly, I had begun a transaction to purchase RS stock in March/April of last year on the private equity market and bailed on it because of the deterioration of listings on the RS site, as you mentioned. I can only wonder what level of insight the seller had as to the upcoming (at the time) RS implosion.

I did not, it seemed to me that the exit was to hope for a buyout from another firm. Too much risk and not commensurate reward IMHO.

JD

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One of the bigger platforms recently made a pitch to investors for capital (for the platform). I was privy to this. I can't share the details, but it was a bit eye-opening. I think we're going to see some consolidation over the next few years, with 2 or 3 platforms left on top. But I don't think we'll see many others just fold up as RS did.

I'm pretty sure I know of whom you speak here, as I had a similar opportunity.

Just curious - did you participate? I reviewed the numbers and decided against it.

Interestingly, I had begun a transaction to purchase RS stock in March/April of last year on the private equity market and bailed on it because of the deterioration of listings on the RS site, as you mentioned. I can only wonder what level of insight the seller had as to the upcoming (at the time) RS implosion.

I did not, it seemed to me that the exit was to hope for a buyout from another firm. Too much risk and not commensurate reward IMHO.

Agreed and thanks for sharing your thoughts. In this case, I think Sam's take on angel investing is very applicable; likely not much value to trickle on down.

This is a bit of the general problem with angel investing nowadays where companies are opening up to angels and/or crowd-funding well into their existence. It's one thing to invest at a purely angel level, before any institutional investors have come onboard - the rewards can be massive. But to be throwing your money at effective Series C stages and later, your money is so diluted and the terms often favor prior investors, risk to reward rarely makes sense. In those cases I prefer to buy existing shareholders shares directly, as they will have stronger liquidation preferences and you can negotiate valuation.