Nearly three years after the passage of the JOBS act, there are now plenty of real estate marketplace finance platforms (or real estate ‘crowdfunding’ companies) out there, reflecting a variety of pricing models. While it’s been argued that fees charged by major platforms in the real estate crowdfunding space can cripple investor returns, it’s also important to remember that the danger of fees eating into investor returns is by no means unique to crowdfunding – REIT fees, for example, can exceed 10%. A key consideration for both investors and sponsors is how these investment platforms are making their money.
From a recent article on the topic:
For $100,000 invested at the average annual return of 4%, without fees the investment returns $120,000 to bring the portfolio value to $220,000 at the end of twenty years. The SEC compared annual fees of 0.25% with both 0.50% fees and with 1.0% annual fees. Over a twenty-year period the portfolio with a 0.50% fee loses $10,000. The portfolio with a 1.0% fee loses $28,000.
Beyond those few examples, a wide array of fee structures have emerged that appear similar but bear important differences. Some platforms take significant fees regardless of whether their investment offerings live up to their promised returns, while others also participate in any additional profits. Another established platform takes no fees from investors. That may seem great but has some clear implications – they make their money upfront from a sponsor, so after a deal is posted online their role in the deal is pretty much over. Worried about lack of investor reporting 2 years down the road? Not their problem. This is not meant to disparage their business, just to point out that their responsibility to investors is far more limited.
For readers on the sponsor side, it’s worth noting that every platform surveyed takes a commission on the funding amount (typically ranging from 2-4% of the total) or a large flat “posting fee” that they are owned even if the raise is unsuccessful.
EQUITYMULTIPLE works on an entirely different model than other marketplace finance platforms. For investors, we charge a de miniminis servicing fee to cover our costs but only make a profit if our investors make money. The reason we do this is simple: we want our interests to be aligned with investor interests, whether that’s picking the best deals or making sure that the real estate companies behind these deals are meeting their responsibilities. Once a deal is consummated and investors committed, we provide dynamic reporting so that investors can keep track of investment health and returns throughout the lifetime of these projects. We extend this same logic to the sponsor fees – we only look to cover our diligence and deal fees, not profit just from posting deals by charging a percentage commission.
Simply put, we know good real estate and we’re willing to put our money where our mouth is.
For more on fees, check out the aforementioned article from CrowdFundBeat
CrowdFundBeat: “Real Estate Crowdfunding Platforms Fees – Can Kill Your Return” by Mark Robertson. 6/6/15