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Learn how to find more investors, raise more money, and finance your real estate projects online.
234 Brian Dally, Co-Founder and CEO, Groundfloor
A New Approach
The summary is that my co-founder Nick Bhargava and I were looking into a bunch of ideas that would allow us to test the theory we have about capital markets and in the end we found that real estate was the best arena in which to test those ideas – and as we tested the ideas it became a real business. We both come from a different perspective compared to a lot of other founders in the industry. A lot of people approach this business and ask the question how can we make real estate financing better? Some people have seen an opportunity to cut out middlemen in the financing supply chain, for example. I think all of those are good worthwhile motivating factors.
How it Started
I was introduced to Nick because I thought there was an opportunity to invent a financial product that would allow people to participate in private securities offerings spread out amongst thousands of investors. One word that people used at the time was crowdfunding; Nick was actually an expert in that area, it's why I was introduced to him. He helped to work on Title III of the 2012 JOBS Act. He was in the Rose Garden when President Obama signed the Act into law and was very thoughtful about how to apply securities law to crowdfunding use cases. I was introduced to him because I was interested in creating a financial product that would that would allow lots of people to participate in something that typically only large private financial intermediaries could participate in. We recognized that we needed, if we were to be successful with a mass consumer product we needed a few ingredients. Number one if you look at our product today and that the subsector of real estate needed that we actually delivered on was a high yield product. People are pretty irritated that they only earn 1 percent in their bank account in terms of interest so we wanted to provide something that provides a really high yield.
Leaders of The Crowd
Conversations with Crowdfunding Visionaries and How Real Estate Stole the Show
Discover how laws that gave us crowdfunding were solely meant to finance small companies and yet inadvertently opened the doors to allow you to invest in real estate like never before.
Read the book and listen to the actual conversations.
First Product
We funded our first loans on small fix and flip projects that were in developing neighborhoods in Atlanta and we realized that investors snapped them up very quickly. We set a minimum investment of just ten dollars so that it would actually be acceptable to many people and over time we've added many more investors, until now when we have thousands of investors. Our loan sizes are larger but the yields are still very high and the terms are still short term still 12 months or less. Yields are still about 11-12 percent, and it's a very popular product for the mass market investor.
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The Grading System
If you're investing $10 you're not going to do hours of due diligence on your investment. What you need is a shortcut as an investor that you can trust to understand the risk of a particular loan and incorporate it into a portfolio of loans. What's different about Groundfloor is we uniquely allow you to build your own portfolio. There are REIT products out there that use Regulation A as well that are available to non-accredited investors online that will allow you to invest in a fund and then that fund will go out and choose investments and put them in there. Some of the REIT products that are out there have 10 or 20 loans in them for example, whereas we offer a 30 to 40 loans a month and you can pick and choose so the grading system is your shortcut. With an A Grade loan you learn over time for a whole bunch of reasons is a lower risk product than a D or an E or an F grade loan. We go all the way down to G. Lending Club and Prosper did that same thing when they set out on the same course in consumer debt. And it worked really well for them. So we adapted it to the real estate use case.
The mechanics are important but I think they even more important part of it is the motivating purpose behind it. We started the company feeling that people are smart enough armed with enough information to choose for themselves. If I told you that you could invest in the stock market but your only mechanism for doing so was a mutual fund index fund or an ETF you'd look at me like I was crazy. It's good that those options exist but we all want to be able to make our own decisions about what stocks we buy and the market lets us. But that's not true in private securities markets. Here at Groundfloor we uniquely created a security that gives you the efficiency of an overall offering like a fund but retains the decision making characteristic that you have with individual investing. Specifically at a mechanical level our investors are making a loan to Groundfloor and we in turn are investing that money as they direct in a series of limited recourse obligations, LROs, that they choose. One of the questions we get from sponsors a lot is, if this is crowdfunding how do I know that my project is going to fund? Well, you don't have to worry about that because we prefund every loan. Like any originator we have access to credit lines and we step in and prefund every loan.
Origination
We are one of the few platforms by the way that's out there that actually does originate every loan that we make and that we offer. We go out and we prefund that loan and then we hold it on our books until it's ready to be released for investment. When it's released for investment, people pick and choose which ones they want and we will accept investors until it's fully funded. That usually takes about a week sometimes hours or days; more typically a week and people invest on average somewhere between on average $100 to $500 per loan. On average there are about 20 loans in every investor's portfolio and it means that if you have only $1,000 to invest if you have $100 to invest you can build a portfolio of 10 or 100 loans and be pretty well diversified. Once the loan repays you're repaid exactly what Groundfloor earns. So if a loan is at a 10 percent annual rate of interest and it goes nine months, you get nine months of interest at 10 percent; which is exactly what we earn on the loan. In our agreement with investors and mechanical level is to return exactly what we earn from the underlying loans.
iversification
What’s great about our platform is that people can make their own decision what loans to invest in. Some people want to only invest in the most secure stuff where they are willing to accept a lower yield. Other people say you know what I have elsewhere in my portfolio outside of Groundfloor I have secure positions, so I want to roll the dice and go for high yield loans. People who go for the high yield loans typically understand over time that there's greater risk to those in terms of maturity default maybe those loans take longer because it's a more expensive renovation. There's more maturity risk or sometimes loans do experience losses. Fortunately in our case we've only had three out of over 300 that have returned capital that are realized some kind of loss. But that's why we have structured the product to encourage people to diversify. Most people do. Most people put some money into the higher yield loans, some in the middle and some in the conservative end of the range, and over time our investors get the choice. They don't have to wonder what they're buying and whether the fund manager is doing a good job because there is no fund manager, they are the fund manager.
Starts With the Sponsor
Our business model all starts with the sponsor who is looking for capital. Our theory of this company from the very beginning was that the source and structure of capital matters to the end use the capital. We believe that we can offer the sponsor a product that few others can offer at a lower rate than others can really match. And that's because we're ultimately going to sell this at retail gives us a lot more flexibility to be creative. We make a loan to sponsors by using the criteria that are disclosed in our offering circulars so we have to follow the guidelines for lending that we lay out in our offering circular. It is very clear to everybody concerned, what kinds of loans we will do, the kinds of loans we will not do, what kind of rates are available and what kinds of rates aren't available. Once we make the loan we go through standard process of diligence. Like any lender would. We look at the experience of the borrower we are looking at the business plan for the project we're looking at the amount of leverage that they're looking for. We're looking at the exit that they're trying to target and questioning whether that's achievable. We do a full business case workup on every loan that we originate. Once we originate we hold it on our balance sheet while we qualify the loan with the SEC. We submit batches of loans; if you go to our EDGAR filings, you'll see we file a batch of loans about every week. Those loans are laid out and amended into our offering.
$10 Minimum
The Reg A+ Offerings
We actually have two Reg A offerings. One is an offering of equity in the company which is quite a bit separate from the Reg A offering that allows people to participate in the loans. The Reg A offering of debt which is a limited recourse obligations separate from the Reg A offering of equity in the company and here's why it's quite different. One is an investment in these loans which are high yield short term backed by a 1st lien position. These are technically backed by a loan that we've made that is itself backed by as first lien position on that loan. And then the Reg A offering of equity in the company is an opportunity to participate in the future equity value of the company. That's not a real estate investment that's a fintech start up investment.
When you purchase a limited recourse obligation via our regulation A offering you are technically making a loan to Groundfloor itself. Now the terms of the loan that you're making to us are laid out in an Investor agreement. Our investor agreement with you says you get to pick the series of limited recourse obligation that you're investing in and you get to choose the amount that you invest in each series and by terms of our agreement with our investors we then promise that as we are repaid by the borrower behind a series of limited recourse obligations we're then obligated to return the capital you in the exact same proportion as we receive it on that series called a limited recourse obligation. This is the recourse for our investor who is loaning us the money. It is limited to that series meaning they can't, having not been paid in full for one series of limited recourse obligations, they don't have recourse to then go after other loan or other assets of the company. It's the same way that Lending Club and Prosper are structured with their payment dependent notes. But in their case there is no there's no real estate underlying those; it's just borrowers promise to pay.
Unlocking Opportunity
We created a system whereby we could build this mechanism and invent this product that allows people to still retain the power of choice but that gives us an extremely efficient means of operating so that we're able to spread the cost of complying with the regulations across hundreds and thousands of loans and up to $50 million using regulation A. In short we have unlocked the opportunity to invest for the non-accredited investor. That's the fundamental difference between Groundfloor and other platforms.
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