BACKGROUND

RealCrowd looks positioned to be a survivor among the approximately 85 real estate crowdfunding platforms that research firm Massolution said were in existence in early 2015. But because it acts as a portal for deals without vetting of individual transactions, it’s only for investors who can evaluate and understand the risks on their own.

The founders of RealCrowd, who have a long history in real estate, say they founded the platform after having to turn away investors including friends because the amounts they want to invest in commercial real estate projects were too small.

“We want to be the direct connector between investors and deals,” founder Roman Rosario said.

The company, based on Palo Alto, California, was launched in July 2013 and was backed by famed start-up accelerator Y Combinator. In its first six months, it funded more than $110 million in deals and has seen its growth trend sharply upward. The number of investors grew 229% year over year in Q1 2015 and its revenues rose 201% in the same period, RealCrowd says.

The company has raised four rounds of seed funding, two of which were for an undisclosed amount, a third in March 2014 for $1.6 million, and a fourth in August 2014 for $2.75 million. Investors have included Reddit co-founder Alexis Ohanian, Y Combinator partner Garry Tan and real estate and wealth managers. It used equity crowdfunding site Angel List to raise some of the money in a show of support for the concept of equity crowdfunding.

RealCrowd launched a new round of fundraising in April 2015 for $2 million, opening this up to users on its own platform. It says its plans for the future include creating a RealCrowd index fund, making its platform support Regulation A+ and further scaling of its teams.

In June 2015, so-called Regulation A+ was put in place by the U.S. Securities and Exchange Commission that makes it easier for smaller investors to participate in real estate crowdfunding. This move is expected to increase the number of opportunities available to unaccredited investors, but the SEC is expected to exercise close scrutiny on deals. It plans to study the segment and may determine there is a higher degree of protection required for smaller investors.

RealCrowd’s motto is “We’re not playing the game; we’re changing it.”

The company’s objective is to deliver a platform that makes it easy for real estate sponsors to find, attract and manage a large pool of small investors. RealCrowd’s ultimate ambition is lofty. It says: “Our goal is to fundamentally change how private investment markets function. To do that, we are positioned as a pure-play technology platform that connects investors directly with real estate sponsors.”

It differentiates itself as a “full stack” technology solution providing all the working parts operators and investors need from bottom to top to connect, administer, invest and transact.

As ambitious as its goals are, it’s also important to note what RealCrowd is not. It does not provide any intermediation in its deals, meaning it does not prefund them or participate in them in any way. Unlike some competitors, it does not form LLCs that pool its investors’ participation in the projects. As RealCrowd notes, this avoids adding complexity and cost to the transaction. But it also means that RealCrowd itself does not have any skin in the game on a deal you might invest in, and it leaves the due diligence up to you.

SPECIALTY

RealCrowd has gotten industry accolades, funding from well-known venture capitalists and has many major real estate companies on its platform. Its growth has been meteoric since its founding in 2013 thanks to exposure through the Y Combinator startup incubator and growing investor awareness of crowdfunding. The latter has arisen since the JOBS Act in 2012 opened up crowdfunding, and real estate crowdfunding has exploded. It is expected to increase by 150 percent in 2015 to $2.57 billion, making it one of the fastest-growing segments of crowd capitalism, according to Massolution. Commercial and industrial property crowdfunding is forecast to see a 250 percent increase in 2015.

RealCrowd was founded in 2013 with the goal of making elite commercial real estate investments accessible to individual investors. The company’s online platform is considered to be among the most active institutional-quality real estate investment sources in the United States.

Even though it is a well-known name in the niche, RealCrowd like its peers is little more than two years old. That doesn’t give you much history to offer reassurance, and the general guidance with the sector is to proceed with caution. But if you are ready to plunge in, this article will give you a helpful overview of how RealCrowd works, who uses it and what its strengths and weaknesses are.

TYPICAL PROJECTS

At the time of our test, there were seven open deals on RealCrowd including multi-family, mixed use, multi-focus and retail projects. Minimum investment ranged from $25,000 to $50,000, and targeted returns were 9% to 29%. Most of the deals were for property investment funds and two were for direct investment in specific properties.

The funds can act as lenders to real estate developments or invest in a portfolio of properties. Geographies ranged from Texas to the Midwest and Pacific Northwest. The funds typically invest in multiple locations.

TARGET AUDIENCE

The current average net worth of investors on the RealCrowd.com platform is just under $9 million and by 2016 is expected to top $10 million. About 74 percent of investors are between the ages of 25 and 49, with a substantial number of women participating.

As we discussed earlier, all users of the site are classified as accredited investors, meaning they have net worth of at least $1 million or annual income of $200,000. Before any investor can view full offering materials or invest in a project, they have to self certify their accredited status. Other verification also takes place including third-party certification, income and net worth verification through bank and brokerage statements. That is provided to the project sponsor who ultimately decides if you qualify to participate in the project.

LEADERSHIP TEAM

RealCrowd’s four founders have a wealth of experience in real estate, finance and technology. They have earned an A grade in one review.

The two earliest members of the team, CEO Adam Hooper and CMO Roman Rosario, worked together at California’s Palmer Capital. They had 20 years and $3 billion worth of underwriting and transaction experience. They are joined by CTO JD Conley who led a VC-backed technology team that developed social games with 10 million users, and Andrew Norborg, who is vice president of engineering.

Hooper was named among the “top 50 Under 40” in the commercial real estate industry in 2014 and the only commercial real estate crowdfunding executive on the list.

DEAL STRUCTURE

That depends. Again this goes back to the nature of RealCrowd as a marketplace where real estate companies post various real estate investment opportunities. The deals are structured as Rule 506 c offerings. Investors go into entities that the operator/issuer creates. The terms including fees and minimums are set by the operator. You could be buying a share in a fund that lends money to real estate projects, debt in a specific property or other type of investment.

The focus so far has been on equity deals but RealCrowd has been incorporating more debt offerings.

LISTINGS

The deal page for each project is well organized and offers a good overview. It features pictures, a snapshot of the investment, projected returns and history of the operator. There’s a summary, key points of the deal, financials, FAQs, sponsor documentation and sometimes background on market conditions. Once funded, projects generally provide a quarterly update at a minimum.

Because each deal is put up by its sponsor, there is some variability in the type and quantity of information for each listing. Also, many of the current listings are for real estate funds which of course have a different profile than investments in specific properties.

We are curious to know how RealCrowd’s current emphasis on offering real estate funds as opposed to specific properties appeals to investors. Our suspicion is that many people who are excited about crowdfunded investment in commercial real estate might prefer to invest in individual properties since that is a more pure play. But time will tell.

FEES

FeesRealCrowd charges investors no fees. Woo hoo. That helps it boost total returns to investors. But just because RealCrowd doesn’t take a cut, it doesn’t mean you don’t need to watch expenses. Deals could have fees and other costs built into their structure by the sponsor, and you need to check the individual offering details closely.

RealCrowd makes its money by charging real estate operators advertising, technology and licensing fees. There is a monthly fee for managing investors.

DUE DILIGENCE

RealCrowd’s due diligence is focused primarily on the operating partners. The company screens the sponsors including reviewing their track record, prior operating history and any problems with foreclosures or litigation. The platform requires operators to have 10 years of principal level experience and a minimum of $50 million in assets under management.

RealCrowd does not underwrite any deals on the platform, prefund deals or participate in any way. Some critics say that does not align them closely enough with investors. But proponents of this method say it is most transparent and impartial. In addition, if RealCrowd were to shut down, there would be no disruption to investors’ money.

RealCrowd makes it clear that it’s a caveat emptor situation and notes, “While we have minimum history and experience threshold for Operators who post on our platform, if you are unable to perform your own due diligence, please consult with an attorney or financial advisor prior to making an investment.”

WEBSITE: RESOURCES, EASE OF USE AND POPULARITY

RealCrowd.com offers a frictionless user experience. We created an account in mere seconds and after clicking that we were accredited investors, we were immediately able to browse offerings. To actually invest in a deal, you click on the “invest now” tab and you are asked how much you want to commit and then your contact information is collected. The site sends a verification email and also a welcome note inviting us to contact the CEO with any questions. Nice touch! Once you invest, your account will have a dashboard that enables you to monitor all your investments.

Current OfferingsThe site provides a lot of documentation from the deal sponsors including history of the operators and the property or specific investment. There are also learning tools such as articles on real estate investment strategies and an eight-part email educational series on becoming a better investor.

On the whole, the site seemed thinner in terms of FAQs and resources than other CRE crowdfunding sites we have browsed. That may reflect its focus on savvier investors equipped to do their own due diligence. There was a function for real-time chat with customer service reps, but in our many hours on the site, it always showed operators as offline with the option to email a question. There is also live telephone support.

As of July 2015, RealCrowd has an estimated 35,000 estimated monthly unique visitors via desktop who spend an average of about 1 minute and 22 seconds on the site with 2.07 page views. About 58% of the traffic is from the United States. As of mid-May 2015, RealCrowd ranked ninth in traffic among real estate crowdfunding sites in the United States.

RealCrowd emphasizes the security of its site and boasts of its founders’ experience in building secure applications for government agencies. It offers extensive detail about its systems. In fact, the information here seems more detailed and technical than the support documentation for its deal vetting process.

HOW SAFE IS MY MONEY?

Real estate crowdfunding is not for investing novices. Experts point out the niche is in its infancy and there has not yet been a chance to watch a complete life cycle of many deals. Real estate by its nature can be a risky investment.

About 16 states have passed laws that cap the total crowdfunding raise on any given venture to $1 million and limit an individual’s investment to $5,000 or $10,000.

With RealCrowd, the security of your investment hinges on the structure and sponsor of the individual deal. There tend to be no investor guarantees or surety on crowdfunded real estate investments, and your main recourse in the event of problems would be litigation. That is a hassle and could be cost prohibitive. In the event of a major problem, it’s unclear if you could make a case for RealCrowd itself having any liability since the platform puts the onus for due diligence on projects upon the investor and clearly states what its screening of sponsors entails.