Crowdfunding relies on a group of various individuals and/or institutions to collectively finance loans. Each lender, who is referred to as an investor, supplies a small percentage of the borrower’s loan and earns interest on that money.
Traditional crowdfunding sites like Prosper aren’t geared toward buying and flipping houses. Prosper’s maximum loan amount of $35,000 is intended for projects like home renovation, debt consolidation, and small business funding. That’s where specialty crowdfunding sites for residential real estate flippers come in. Some will pre-fund your loan, meaning the company will quickly close your loan using its own money while it waits for investors to put up funding, while others do not close your loan until investors have fully funded it. That may mean a slower closing or no closing.
“Crowdfunding websites occupy a similar niche as hard money lenders,” Davis says. “They’re relatively expensive, but will lend to real estate investors regardless of how many mortgages they have, and focus heavily on the collateral and quality of the deal itself.”
Groundfloor offers loans from $25,000 to $2 million with financing of up to 90% of LTC (100% of renovation costs), closings in as few as seven days, no payments during the loan term, and no tax returns or bank statements required for loans under half a million. Interest rates range from 5.4% to 26%. Borrowers must pay a minimum of three months of interest even if they pay off the loan sooner. Typical closing costs are $500 to $1,500, and Groundfloor charges two to four points per loan. All points and fees can be rolled into the loan. Groundfloor typically does not work with inexperienced flippers.
Patch of Land offers loans from $100,000 to $5 million with the financing of up to 80% of loan-to-value or up to 70% of the after-renovated value, closings in as few as seven days, and interest rates starting at 7.99%. Borrowers make automatic monthly interest payments on their loans for terms of one to 36 months. Patch of Land only works with experienced developers.
Fund That Flip offers up to 90% of the purchase price, up to 100% of the scope of work, closing in as few as seven days, loan terms from six to 24 months, and rates starting at 7.99%.
Trenchard and Machado said they did not use any real estate crowdfunding websites, but both suspected that the crowdfunding process for evaluating and committing to a deal may be slower than what a borrower would experience with a private or hard money lender. Once a flipper has a solid relationship with a lender, the two may be able to close a deal in 24 hours when a great opportunity comes up and all the paperwork is in order.
Unlike a private lender, crowdfunding sites also may not offer the opportunity to negotiate. They may have set parameters for each deal because they are responsible for a large group of investors.