When I found out RealtyShares was closing its doors to new investors on Nov 7, 2018, I was shocked and saddened. Given they are based in San Francisco, I had met multiple people from RealtyShares since mid-2016 and developed some good relationships.
On Wednesday, October 24, 2018, I had lunch with their CMO and a marketing employee downtown. They told me they had just revamped their website and rebranded the company's name with a new color scheme and logo. I even got a new shirt and a cheap pair of sunglasses. You how startups are and their swag.
Further, I was told they would be launching a second fund, with a minimum $25,000 investment instead of $250,000 like their first fund, to be more accessible to more investors. Their second fund would act like an index fund for all the deals they vetted onto their platform.
Obviously, the new fund is no longer launching as personnel responsible for sourcing new deals will be getting laid off if not already. All that will remain will be a small team of people who will be responsible for servicing existing investors and their approximately $400 million of assets under management until scheduled completion.
What Happened To RealtyShares?
RealtyShare wrote in their e-mail to investors,
To our platform investors and operating partners:
Five years ago, RealtyShares was founded with a mission to connect capital to opportunity. With over $870 million invested across more than 1,100 projects, we have built one of the top online real estate investment platforms. We’re helping investors meet their financial goals and deploying capital to real estate operating companies to execute value-add and development strategies for properties across the U.S.
As an early stage company, we have relied upon venture capital to fund our operations. Over the past six months, RealtyShares aggressively pursued a number of financing options to continue growing the business. Unfortunately, despite our best efforts, we were unable to secure additional capital. As a result, we will not offer new investments or accept new investors on the RealtyShares platform.
From this point forward, RealtyShares’ focus will be servicing our existing investors and approximately $400 million of assets under management. This transition will have no impact on the underlying real estate investments. Investments will continue to be managed and distributions will continue to be made. Investors will continue to receive asset management updates and year-end tax information.
We are committed to serving our existing investors and sponsors and have a team dedicated to supporting our ongoing operations.
The RealtyShares Team
Surprise Shutdown Nobody Expected
I truly believe most people at RealtyShares were surprised by the sudden wind down. They were about to raise $30 million in new capital with a Series D funding round, but the investor got cold feet at the last minute. They even had a celebratory dinner.
I expected consolidation in the space, I just didn't expect RealtyShares would be one of them given they had raised $27 million in Series C funding in September 2017 and had so much demand. But in retrospect, it looks like RealtyShares expanded too quickly (hired too many people, new large office space in 2017) without an equal amount of supply.
Ever since I joined their platform in 2016, most of their deals were quickly filled. This was part of the reason why I invested in the fund instead because the fund would always get first dibs on the best deals. I didn't have time to log in every day to check.
But if you consistently have excess demand, your customer acquisition cost (CAC) will start to go higher and higher because your new customers will just be sitting there without deploying any or as much capital. Hence, finding that supply and demand balance is key.
Further, they didn't have the technology to scale quickly. RealtyShares ran a personnel intensive business to review, finalize, and manage deals. Their growth was linear, and not hyperbolic as venture capitalists like to see. I suspect part of the over-expansion was due to VCs pushing more aggressively for growth. Something to think about when you accept VC money versus bootstrapping your business.
What's Next For RealtyShares Investors
According to RealtyShares when I followed up on what's next:
We are in the process of assigning a new manager for the equity investments who will be responsible for ongoing asset management and reporting. We will certainly keep you posted as we continue to firm up the transition plan. The fund administrator is called NES Financial.
Below was another response from a different person:
The fund has always been handled through a third party servicer so there shouldn't be much of a transition here. We are focused on making the transition as seamless as possible and the asset management fees we charge should cover this until maturity.
It's important to make clear that investors in RealtyShares, the business, are the ones who've gotten hurt by their closing. Their equity will likely fall to zero or close to zero.
If you are an investor on the platform, your investments should play out the way they originally intended, albeit with less oversight from RealtyShares. RealtyShares, at the end of the day, was a marketplace (with an investment committee that vetted deals) to match investors with sponsors of real estate crowdfunded projects around the country.
RealtyShares created an LLC for each investment as a subsidiary of RealtyShares to invest in equity and preferred equity deals. These special purpose vehicles have no claim from those investors in RealtyShares, the company, during a wind down. The fund administrator, NES, will be paid to manage and operate these specific investments and the fund until scheduled completion.
It is up to the sponsors investors invested with to do their jobs and provide investors with the best return possible. They can't just disappear because RealtyShares investors are often just one source of funding for their deals. Further, the sponsors have investments in their own deals as well to demonstrate skin in the game.
If the sponsors disappear, they'll lose money since they have skin in the game, and they won't be able to raise new capital on other platforms again (not just real estate crowdfunding platforms).
Either way, I recommend everybody write down in detail each deal they own and the contact information of each sponsor for your records. This is extremely important given the governing oversight of RealtyShares will be largely diminished.
Log in to RS, click on “Documents” then “Investment Documents” – you can download the full package for the active investments right there to keep handy. Here's a link where I have gathered all the sponsor and deal profiles of the RealtyShares DME Fund and one individual investment I made in Conshy, PA. There are a total of 18 deals I've recorded.
We can only hope that RealtyShares chose only the best and most honorable sponsors onto their platform to do business with. But you never fully know until everything is all said and done. One of the benefits of having RealtyShares as a screener was that as part of their fee, they would also be the ones who'd follow up on any underperforming deals for us.
With $400 million in assets under management, RealtyShares should earn somewhere around $4M – $5M a year in fees. By going from ~100 employees down to 15, their asset management revenue earned should be enough to keep everything operating smoothly.
RealtyShares Alternatives
I'm a believer in the real estate crowdfunding space because it allows us to arbitrage real estate profits around the country. As someone who is sitting in expensive San Francisco, I want to use my expensive SF money to buy inexpensive heartland real estate property with lower valuations and higher cap rates.
Not having to source and manage these properties while earning a higher income is a core thesis of my Buy Utility, Rent Luxury strategy (BURL). I want to own assets that provide collateral and produce the highest amount of passive income. When you can earn a 10% cap rate in the Midwest while living in San Francisco, that's a nice arbitrage since cap rates in San Francisco are only 2.5% – 3.5%
Based on public funding knowledge and what I've observed in the real estate crowdfunding space, here are my top two RealtyShares alternatives:
1) Fundrise. I've worked with Fundrise since 2016, and they've consistently impressed me with their innovation. They were founded in 2012 and are the pioneers of the eREIT product. They have not only raised funding for their own company through traditional venture capital methods, but they have also done an Internet Public Offering where they raised capital from investors on their platform. Most recently, they were the first ones to launch an Opportunity Fund in the real estate crowdfunding space to take advantage of new tax laws.
What's also nice about Fundrise is that it's open to non-accredited investors (e.g. everyone), unlike RealtyShares. Further, their business model of creating tailored funds like the Heartland eREIT, West Coast eREIT, etc is attractive to someone who wants to diversify into real estate, but who doesn't want to pick and choose individual investments on the platform, despite these investments also being carefully vetted first.
Fundrise Review: The Best Way To Invest In Real Estate
3) CrowdStreet. In terms of platform risk, CrowdStreet could be the best real estate crowdfunding marketplace for accredited investors because it employs a direct-to-sponsor model. In other words, you get great communication efficiency and transparency by being able to correspond directly with the sponsors of the real estate offerings. You are investing on the sponsor's platform and not on CrowdStreet's, thereby removing any CrowdStreet platform risk.
CrowdStreet vigorously pre-screens all deals. They also have clear sponsor rating designations so investors clearly know the background of each sponsor as well as detailed information about each deal.
I’ve met up with seven of CrowdStreet team members in Palo Alto recently and really like their vision, how they treat customers, and they way of doing business. They specialize in “18-hour cities,” which are secondary emerging cities such as Austin and Memphis. This corresponds well with my long-term thesis of investing in the heartland of America due to better valuations, technology, and the rise of remote work.
CrowdStreet Review: Direct-To-Sponsor Real Estate Marketplace
The Future Of Real Estate Crowdfunding
Long term, there will likely only be two or three winners in the real estate crowdfunding space. It's the company that gets its technology and supply/demand matching right that will emerge victoriously.
I'm guessing that as news of RealtyShare's closing spreads, investors will take pause and reevaluate their alternative investment strategies and do more due diligence on respective real estate crowdfunding platforms. Further, I expect real estate crowdfunding platforms to do work to improve their balance sheets, increase their supply of deals, improve their technology, and improve their messaging.
I'm confident RealtyShares will do the right thing to see existing investments through to scheduled completion. They've got ongoing asset management revenue, a wind down team, and a fund administrator in place. I suspect they have cash on their balance sheet as well.
I'm estimating this whole transition process will take one or two months to get sorted. If there is not a successful transition, individual reputations and sponsor reputations will be severely compromised.
Related:
Real Estate Crowdfunding Learning Center
Ranking The Best Passive Income Investments
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
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