In the early 1990’s, only a few companies ruled the internet, and the words “search engine” were only used by engineers. Anyone old enough to remember will recall that each time you logged on to the internet, you would start at locations such as Inktomi, Lycos, Excite, Ask Jeeves, Altavista or Yahoo. In fact, for a period of time around 2000, Yahoo even outsourced their results to a small company from California. It was a young, nascent industry and most people heard about these services from a friend, by word of mouth, or through what we now know as viral marketing.
Unless you have been living on Mars for the past 20 years, you already know how that story ended. Most of those companies didn’t survive the first few years of expansion, they merged into other brands, were acquired, dissolved or morphed into something else. Billions of dollars were invested, much of it evaporated, companies went public and went bust, but the technology constantly improved. Remember that one small company that had a deal with Yahoo? That was Google.
Real estate crowdfunding has experienced a very similar trajectory. The new industry that broke into our collective existence only a few years ago with the introduction of the JOBS Act in Congress has spurred the trend of numerous companies trying to capitalize on the opportunity while giving accredited investors a chance to participate in real estate offerings that were historically closed off to only the rich and famous. As with the birth of the search engine, everyone scrambled to get an offering in the market, and is the norm, some were better than others. Many of these companies attracted hundreds of millions of dollars in venture capital investments, recruited talent, spent money on operations, marketing and, of course, technology to support the business. At some point, it was estimated that over 100 different companies solicited investors to invest in real estate deals online.
That was three years ago. The landscape has already started to shift, just as it did with the search engine. The market is experiencing a normal and desired phase of maturity, consolidation, improvement and decay. Not everyone will make it to the next phase. In fact, most won’t make it, and that is a good thing. This ongoing process of capitalistic survival of the fittest would make Charles Darwin proud. As clients become more educated about the process, regulators become more involved in enforcement and media becomes more experienced in covering it, the real estate crowdfunding market is quickly approaching the next step in its evolution.
The biggest news in the industry by far was the shutdown of RealtyShares, one of the earliest and largest players in the industry worldwide. That operation was taken over by RREAF and iintoo, two established and successful companies which were trying to bring professional asset management to thousands of existing clients. The company raised close to one billion dollars of investors’ funds to invest in real estate of all kinds all across the country.
In the budding real estate crowdfunding industry, how do you know who will survive and who will fail? In short, you don’t. But there is a lot we can learn from history. Consider these three key concepts
The first thing to remember is: don’t listen to the “experts.” All of the experts predicted that one of the existing major search engines would rule the industry—they were all wrong. The leader came from behind with a better product and ate everyone’s lunch. We saw blogs ranking real estate crowdfunding sites place RealtyShares at the top only days before they went out of business, not even mentioning platforms with better track records. Remember that in reality, there are no experts, and your opinion is as good as anyone else’s. Probably better.
The second important lesson is: don’t listen to the noise. Some companies (and people) are just better at public relations than others. Some people attract more attention and have friends in higher places. That doesn’t make them better. Always ask for track records and to see actual numbers, then take that information and make an informed decision. The companies with the best publicity are exactly thatI. t doesn’t mean they are the best at understanding real estate, investments, asset management or customer service.
Maybe the best advice is: try before you buy. Start small and use it as a learning opportunity to sign up, read the materials and review the results before deciding if this real estate investment is for you. Ask questions and gauge the level of understanding you are sensing from the company before you commit to investing with them. If you are looking for a get-rich-quick scheme, you’re in the wrong place.
We’re only in chapter two of this very long journey. But as with the search engine, this industry is evolving, and there are now only about 10 real estate crowdfunding platforms worth considering. The barriers to entry are higher now, and investors, regulators and managers in the space have learned some of the necessary lessons. In the next five years, we will see some companies merge, close or evolve into something else as the natural evolution of the industry continues.