Let’s start with some of the reasons that lead to the hyper growth of some of US-based real estate lending platforms. Since the 2008 financial crisis, the whole dynamics of real estate lending has changed. The perennial sources of funding like commercial banks, insurance companies, and other traditional lenders have turned much more conservative when it comes to underwriting loans for real estate. The stricter regulatory restrictions imposed on commercial banks as well as Commercial Mortgage-backed securities (CMBS) and the introduction of high volatility commercial real estate (HVCRE) within the Basel III requirements have forced the traditional banks to a take step back from construction financing.
Having said that, the real estate construction sector is showing no signs of slowing down and in 2015 it reached a size of $1.113 trillion as per the U.S. Census Bureau. There was an evident demand-supply mismatch in the market that led to the rise of online real estate lending platforms.
Real Estate Bank Lending on the Decline
After the 2008 meltdown, regulatory authorities have really tightened the screws especially around real estate lending and it has had a significant impact on the banking industry. Banks have had to increase the interest rate as well as fees as per new regulations in an attempt to fend of non-serious borrowers and to avoid a repeat of the multi-billion dollar fines after the housing meltdown. An HVCRE rule has set the cat among the pigeons, as it requires banks to keep more capital reserves when a loan is categorized as HVCRE. Usually, corporate loans carry a risk weight of 100% but risk weight goes to 150% if it is a HVCRE loan. This automatically leads to the pricing of construction loan going up.
With the road to a traditional loan getting harder than ever before, real estate players were left with no other choice but to look out for other alternative options. Alternative or online real estate lending platforms are the perfect solution for the obstacles being faced by the real estate sector. One glaring advantage enjoyed by the alternative lenders over the traditional banks is that HVCRE rules do not imply on online lenders. Even though the cost of financing is higher but their flexibility, easy underwriting process and quick processing time more than make up for the high-interest rates.
The image below highlights the growth seen across board in the alternative lending industry in general and online real estate lending in particular.
Though the entire online real estate lending industry has been witnessing a steady growth in the last few years, but there are few real estate lending platforms that are cutting above the rest through their gravity-defying growth curve and reach.
- LendingHome (https://www.lendinghome.com) –This real estate lending platform is a marriage of technology, data and operations where borrower and investors come together on a single mortgage platform. It has raised over $166 million in various rounds of funding and has originated loans in excess of $1.75 billion.
- Sharestates (www.sharestates.com) – It is a real estate marketplace lending and investing platform that allows investors direct access to real estate investment, with typical returns between 8%-12%. It has so far funded $656 million.
- Fundrise (https://fundrise.com) – Fundrise is a new kind of investment ecosystem that leverages the latest federal regulations to offer investment opportunities directly online. This incredibly efficient new model enables access to a diversified portfolio of private real estate assets with as little as $500. It has raised over $55 million and has invested $1.4 billion in real estate so far.
- RealtyShares (www.realtyshares.com) – RealtyShares is a real estate crowdfunding platform that provides accredited investors access to pre-vetted real estate investment properties and an opportunity to invest as little as $5,000 into each property. It has raised over $100 million in various rounds of funding and over $500 million has been invested through its platform.
- Patch of Land (patchofland.com) – it is a crowdfunding solution that uses latest technology and data to cut through the inefficiencies that has been plaguing the private real estate lending for years. This real estate lending platform has raised almost $25 million in different rounds of funding and has done just under $500 million in loan origination.
- RealtyMogul.com (www.realtymogul.com) – RealtyMogul.com is an online marketplace for real estate investing, connecting borrowers and sponsors to capital from accredited and institutional investors. It has raised over $46 million in funding and over $300 million has been invested through its platform.
- GroundFloor (https://www.groundfloor.us) – GroundFloor real estate lending platform connects real estate developers with individual investors. It is the first and only real estate lending marketplace open to non-accredited investors. In 2015, GroundFloor became the first issuer to be qualified by SEC for selling private real estate debt investments to non-accredited investors.
- Allrise Financial Group Inc (https://allrise.us) – Unlike banks, it offers loans using private capital which are backed by real estate. Loan processing is quick and efficient. It offers loans even to individuals with low FICO score and for any kind of real estate project like fix and flip, commercial rehab or small business start-up and that too at very affordable rates starting from 8.95%. It has originated $ 162 million in loans so far and has a network of 169 borrowers in four different countries.
- CrowdStreet (www.crowdstreet.com) – CrowdStreet is a software and services company disrupting the commercial real estate industry by enabling innovative real estate operators and developers to efficiently engage in online capital formation, communicate with investors, distribute investment documents and centralize ongoing investor relations. It has raised over $5.5 million so far and has done $155 million in equity loan funding.
- Money360 (https://www.money360.com) – Money360 platform is an online marketplace for commercial real estate loans. Its lending platform enables the borrowers to access affordable commercial real estate loan options. The company’s total loan origination stood at $70 million in 2015. It has raised almost $165 million in debt financing from multiple investors.
- Wealth Migrate (www.wealthmigrate.com) – Wealth Migrate is an online real estate marketplace that allows users to crowdfund property suggested by the website itself. It enables investors to make both residential and commercial investments, dependent on the location of the investment. It has raised $5.6 million so far and over $64 million has been invested through its platform.
- Roofstock (www.roofstock.com) – Roofstock is an online marketplace that invests in leased single-family rental homes in a transparent, low-friction method. The company provides its clients with research, analytics, and insights to evaluate and purchase independently certified properties at set prices. It has raised over $68 million in funding.
- PeerStreet (https://www.peerstreet.com) – PeerStreet is a crowdfunding platform that gives investors easy access to high-yielding loans that are collateralized with real estate. It has raised over $ 21 million in various rounds of funding.
- Lendzoan (lendzoan.com) – it is a real estate crowdfunding platform that is helping in changing the face of real estate investing by bringing together borrowers and investors in a collaborative and trusted environment.
- AssetAvenue (www.assetavenue.com) – is an online lender that is using technology to improve the way people borrow money for real estate investment properties. It has raised over $19 million so far.
- AlphaFlow (www.alphaflow.com) – It is the first and the fastest growing automated real estate investment service. It has partnered with leading real estate lenders around the country and underwrites their loan based on 50 different factors. It managed to raise $6.4 million as seed funding from various investors notably Y Combinator, FundersClub and Red Swan Ventures.
- Acquire Real Estate (www.acquirerealestate.com) – Acquire is a real estate crowdfunding platform for Accredited Investors. It pre-funds and co-invests solely in institutional-quality deals. It has raised $6 million in various rounds of funding.
- EarlyShares (www.earlyshares.com) – EarlyShares is a crowdfunding platform that connects individual investors to a curated selection of vetted, return-driven real estate investment offerings. It has raised over $5.8 million in funding.
- Fundthatflip (www.fundthatflip.com) – It is a technology-platform that facilitates financing of residential redevelopment projects. It provides basic screening and due diligence of each redeveloper and their projects before they are made available on its platform to accredited investors. It has raised over $2 million so far.
- RealCrowd (www.realcrowd.com) – Experienced commercial real estate investment professionals created this unique crowd based equity platform; its value proposition is to allow investors to decide where their money is invested by offering direct investment opportunities. It has raised $1.6 million.
- DiversyFund (https://diversyfund.com) – DiversyFund is a leading real estate crowdfunding platform where investors can gain access to investment opportunities of pre-vetted real estate properties. It has raised over $1.2 million so far.
- EQUITYMULTIPLE (https://www.equitymultiple.com) is an online platform that helps investors diversify and grow their portfolio through streamlined access to pre-vetted commercial real estate investment opportunities. Platform has over $70B in combined real estate transactions.
Apart from the above-mentioned real estate lending platforms, there are plenty of other viable options also available in the market. These startups are on the cusp of a revolution as they change how business is done in a Trillion dollar industry.