Secured Lending

Many of our investors ask us “What happens if a GROUNDFLOOR loan that I invest in goes bad? Will I lose my money?”

Ensuring you don’t lose your principal is the number one concern of any investor in any asset. Everyone wants to be repaid every dollar of their hard-earned money that they put in. Not all investments are equal from this perspective. In fact, for a given property or company, investing in debt (“lending”) is always less risky than investing in equity (“owning”).

Why is that? The answer lies in the very nature of what debt is and the rights that come with it, compared to equity. This is finance 101. Unlike most forms of equity investments (such as stock in a company or shares of a Real Estate Investment Trust), debt is always due to be repaid in a certain manner, at a certain time, under the terms agreed between the borrower and the lender. In real estate, sometime before the loan is due the borrower usually repays it by selling the property associated with the loan, or by borrowing money on a new loan to “take out” the old one.

If all goes well, there’s plenty of money to go around at that point. Loans are repaid, with interest. There’s enough money to pay the equity owners back for what they put in too, plus to reward them for their risk by paying them everything that’s left over.

What about when things don’t go well? What then? When a borrower violates a loan agreement by not repaying her lenders as agreed, that’s known as a “default.” Real estate lenders (GROUNDFLOOR included), usually require property to be pledged as “collateral” as a condition of making the loan. The lender has the right to “foreclose,” or assume legal ownership of the collateral in the case of default. A “lien” is the legally-recognized way of recording this right. Many people have unfortunately experienced this with a bank using its lien to foreclose on their own home as collateral in response to non-payment of the mortgage or some other default.

Owners of equity are usually left with nothing in the case of default and foreclosure. They lose all of their principal. Lenders, however, stand the best chance of getting theirs back. Aside from the government, or any contractors or employees with money due to them, lenders are the “first in line” to be paid from the proceeds of taking ownership of the collateral and selling it. In many situations, there are multiple lenders. Each lender has a place in line relative to the others.

GROUNDFLOOR does not offer equity in the projects we finance. All GROUNDFLOOR investments are opportunities to participate in loans that are secured by property as collateral. We offer two types of loans, based on the type of collateral we hold:

  • Senior Loans (example: 1429 Allene Avenue) are the very first in line. If they are not repaid as agreed, we have the right to foreclose upon and then sell the property. In this case we would use the proceeds of the sale to repay all of our investors in that loan.
  • Mezzanine Loans do not provide GROUNDFLOOR with the legal right to foreclose (since that belongs to whomever provided the senior loan, typically a bank). Instead, when the collateral is sold we have the right to be repaid only if the holders of senior loans receive everything they are owed. We would be repaid out of what is left over, if anything.

For more information check out our FAQ on secured lending.

To get back to your money, and the point of investors’ main question: How much risk is there that you could lose your principal? That answer depends on the following factors:

  • the seniority of the loan
  • the amount borrowed
  • how much you believe the collateral is worth, and
  • how much it will cost to foreclose and sell the collateral if necessary

Let’s use the $60,000 loan on 1429 Allene Avenue as an example. If the borrower, John Mangham, defaults on his loan, then GROUNDFLOOR would foreclose on the house since it is a senior loan and we have a first lien on the property. There are costs associated with a foreclosure. For example, S&P estimates these costs to be 26% of the loan amount. So, for our example property the cost of foreclosure could be $15,600 (or more, or less).

Then there is the cost of selling and marketing the house. For our example, let’s use a commission rate of 6%. We could further assume, based on sales of comparable properties, that the house sells for $120,000 (again: or more, or less). The sales and marketing costs at 6% would then be an additional $7,200. So from our sale of the house at $120,000 less foreclosure costs of $15,600, and less sales and marketing costs of $7,200, there would be $97,200 left to repay GROUNDFLOOR investors and any other transaction costs of the sale. GROUNDFLOOR investors expected to receive $60,000 back on the original investment plus 12% annual interest or $3,600 over six months for a total return of $63,600. In this example there would still be $33,600 ($97,200 – $63,600) of cushion to pay costs. So long as you believe that the value of the house is worth more than the total costs of foreclosure and sales and marketing ($15,600 + $7,200 = $22,800 in our example), then you can be confident that all your principal and interest will be repaid.

Illustrative Example of a Loan Default on 1429 Allene Avenue:

Proceeds from sale of the house

$120,000

Less foreclosure costs

($15,600)

Less Sales & Marketing Costs

($7,200)

Remaining capital to repay GROUNDFLOOR Investors

$97,200

Less Principal owed to GROUNDFLOOR Investors

($60,000)

Less Interest owed to GROUNDFLOOR Investors

($3,600)

Remaining cushion

$33,600

But how can you know how much a house is worth? That’s a subject for a future post. Every loan we offer comes with information to help you decide for yourself. We also encourage researching websites such as Trulia and Zillow to help you reach your own conclusions. Whether investing in debt or equity, every investor must come to his or her own determination of value. Until next time, we hope this discussion has been a useful start to understand the risks of investing and how to begin assessing them.

Let us know what you think of this post and any questions it leaves open for you down in the comments below. We’ll answer and appreciate the opportunity to get into the conversation with you!

 

 


  • http://www.PentagonHomes.biz Spencer Roane

    Please send me the appraisal on 1429 Allene Av. SW Atlanta

    • https://www.groundfloor.us/ Ben Armstrong

      Spencer, the developer did not obtain an independent appraisal for the Allene Avenue property. We always recommend that they do, but the decision (and cost of obtaining one) is up to them. In lieu of that, potential investors can inspect the comparable property sales listed on the project page and consult Zillow and Trulia for their estimates of value. Keep in mind, those estimates do not take account of any improvements already made and planned to be made to the property.

  • Steve Powers

    I am a RE Broker and Investor who is considering funding some Groundfloor loans. I have used hard money lenders in the past for purchase and rehab of SFR investment properties and was always required to get a full independent appraisal with current and ARV. The rehab funds were held in escrow and disbursed in stages after an inspection as work was completed.

    On the Allene Ave property advertised on the Groundfloor website as a “Renovation loan,” it is obvious that John already has title or controlling interest of the property and the renovations are complete. Basically he wants a $60,000 cash out loan on a vacant investment property that I assume is or will be on the market with no appraisal? If he can’t sell the property himself for at least $60,000 to keep from defaulting, how would it be possible for Grondfloor to sell the same property for DOUBLE at an anticipated $120,000? Also, I was told by Hal on a phone call on 04/17/14 5pm ET that John will NOT be required to pay any monthly interest payments.

    Therefore, John is basically selling us the house for $60,000 without the obligation of any further payment on the hopes it might actually be worth more so he can make more profit when sold to the end buyer. Otherwise he can walk away and leave us with the hassle of trying to sell it ourselves, presumably at a loss.

    If by some miracle, a foreclosed property does sell with a $32,000 unused cushion, who gets that money? I would assume it would be the funders since we took the risk in this venture, but is that the case?

    Also, do we get a lenders title insurance policy to protect us from unpaid taxes, prior unreleased debts on the property or mechanics liens? Are all our names included on a security deed recorded at the court house? I was told by Hal that we are actually loaning the money to Groundfloor and they are the ones lending the money to John. Why the 2 separate loan transactions? How can both be secured in senior position on the same property?

    Also, how does Groundfloor make money on these loans? I assume you are charging points BUT are those points paid by us at time of funding as a paid out closing cost such as a loan broker fee or origination fee or are they financed into the loan and paid upon payoff. If you are paid up front, what incentive do you have to foreclose, market the REO and attempt to recoup our money? How many of these deals are completed and loans fully repaid so far?

    Is there a page that explains the mechanics of these deals so I can get a clearer understanding to some of my questions.

    • Ben Armstrong

      Thanks for your commentary and questions, Steve. Not every deal on GROUNDFLOOR will necessarily have an independent appraisal available. Investors should check the project page to see whether there has been one, as well as for other information relevant to arriving at a valuation.

      It is a fair question you ask about scenario of default. Like you, we also doubt a borrower in this situation would default, yet we frequently receive that question. GROUNDFLOOR holds the right to foreclose. It is unlikely we would need to utilize that right on this deal. We probably should have used a different example, perhaps one where the value ended up being less than the loan amount to illustrate the true worst case when a borrower might actually be motivated to walk away. Instead, we chose to answer the hypothetical using the actual information pertaining to Allene Ave, which is an editorial rather than conceptual mistake.

      Regardless, were a property to sell out of foreclosure for more than the amount owed, net of costs, yes we would return proceeds pro rata to the investors.

      Regarding the necessary insurances, we take out a lenders title insurance policy on every first lien property we do. The security deed only has our name on it: Groundfloor Properties GA LLC. We, in turn, are borrowing money from you. You are given the benefit of this senior secured interest (via the securities agreement for each investment you make). We need to use two separate transactions because it is not cost effective to put 50 plus investors on a security deed. If the borrower is going to seek permanent financing (a mortgage) after borrowing from us, we have to be able to release our lien. A lot can go wrong if you have 50 names in that process and the permanent lenders might walk away.

      We charge the borrower an origination fee. We do not charge any fees to investors. The borrower pays the costs of capital. Because of the way our deals are structured, we are not a neutral party like a loan broker. You are loaning money to us, so that is our incentive to foreclose. Four deals have been fully funded. Three are current as per the construction plan / draw schedules in place. The fourth deal just funded Sunday and no funds have been disbursed yet, but John Mangham has borrowed form us before and has, to date, met all his obligations to us.

      We really appreciate all of your questions and commentary, here and in your email correspondence separately, both. Some of the mechanics are laid out here: https://www.groundfloor.us/investing and the full details are available in our Securities Agreement and Offering Memorandum (links available from the footer of our site once you have logged into your account).

    • groundfloor_us

      Thanks for your commentary and questions, Steve. Not every deal on GROUNDFLOOR will necessarily have an independent appraisal available. Investors should check the project page to see whether there has been one, as well as for other information relevant to arriving at a valuation.

      It is a fair question you ask about scenario of default. Like you, we also doubt a borrower in this situation would default, yet we frequently receive that question. GROUNDFLOOR holds the right to foreclose. It is unlikely we would need to utilize that right on this deal. We probably should have used a different example, perhaps one where the value ended up being less than the loan amount to illustrate the true worst case when a borrower might actually be motivated to walk away. Instead, we chose to answer the hypothetical using the actual information pertaining to Allene Ave, which is an editorial rather than conceptual mistake.

      Regardless, were a property to sell out of foreclosure for more than the amount owed, net of costs, yes we would return proceeds pro rata to the investors.

      Regarding the necessary insurances, we take out a lenders title insurance policy on every first lien property we do. The security deed only has our name on it: Groundfloor Properties GA LLC. We, in turn, are borrowing money from you. You are given the benefit of this senior secured interest (via the securities agreement for each investment you make). We need to use two separate transactions because it is not cost effective to put 50 plus investors on a security deed. If the borrower is going to seek permanent financing (a mortgage) after borrowing from us, we have to be able to release our lien. A lot can go wrong if you have 50 names in that process and the permanent lenders might walk away.

      We charge the borrower an origination fee. We do not charge any fees to investors. The borrower pays the costs of capital. Because of the way our deals are structured, we are not a neutral party like a loan broker. You are loaning money to us, so that is our incentive to foreclose. Four deals have been fully funded. Three are current as per the construction plan / draw schedules in place. The fourth deal just funded Sunday and no funds have been disbursed yet, but John Mangham has borrowed form us before and has, to date, met all his obligations to us.

      We really appreciate all of your questions and commentary, here and in your email correspondence separately, both. Some of the mechanics are laid out here: https://www.groundfloor.us/investing and the full details are available in our Securities Agreement and Offering Memorandum (links available from the footer of our site once you have logged into your account).

  • http://www.PentagonHomes.biz Spencer Roane

    Are Groundfloor investors lending to Groundfloor, which is, in turn, lending to borrowers/developers? If so, doesn’t Groundfloor do basic due deligence on each transaction? I can understand not recommending a particular investment, but info on transactions like an appraisal, title search, credit info about the borrower, and funds contributed by the borrower (eg – cost of property) would be helpful. Are investors, represented by Groundfloor, in a first lien position on the property? Does Groundfloor handle foreclosure proceedings, if necessary.

    What fees does Groundfloor charge – either from funds contributed by investors or funds charged the borrower? Are such fees paid when the loan closes (when funds are disbursed to the borrower) or after the investors are paid?

    • Ben Armstrong

      Spencer, yes, our investors are technically lending to Groundfloor. We in turn lend to the developers. Over time, we will continue to systematize and standardize the information available for each deal, and highlight the information, if any, that is lacking. Each investor must decide for himself or herself whether the information presented is adequate to make an investment decision based on their own investment criteria. Groundfloor facilitates the presentation of information but does not make judgments about the value or veracity of it. Of course, it is in our interest to prevent the presentation of fraudulent or inaccurate information. No reliance should be made on our having prevented that in any given case, however.

      To answer your other questions: Yes, we are in a first lien position on the Allene Avenue property, among others. That position benefits you, the investor, since Groundfloor holds the legal right to foreclose in the event of default. Our fees are paid by the borrower. An origination fee is paid upon loan closing, and in most cases a servicing fee is paid during repayment (or, in the case of a balloon loan, upon repayment).

      Thank you for your continuing support and interest!

    • https://www.groundfloor.us/ Ben Armstrong

      Spencer, yes, our investors are technically lending to Groundfloor. We in turn lend to the developers. Over time, we will continue to systematize and standardize the information available for each deal, and highlight the information, if any, that is lacking. Each investor must decide for himself or herself whether the information presented is adequate to make an investment decision based on their own investment criteria. Groundfloor facilitates the presentation of information but does not make judgments about the value or veracity of it. Of course, it is in our interest to prevent the presentation of fraudulent or inaccurate information. No reliance should be made on our having prevented that in any given case, however.

      To answer your other questions: Yes, we are in a first lien position on the Allene Avenue property, among others. That position benefits you, the investor, since Groundfloor holds the legal right to foreclose in the event of default. Our fees are paid by the borrower. An origination fee is paid upon loan closing, and in most cases a servicing fee is paid during repayment (or, in the case of a balloon loan, upon repayment).

      Thank you for your continuing support and interest!

      • http://www.PentagonHomes.biz Spencer Roane

        Thanks for the response Ben. I’m glad you are moving toward collecting standardized info on each transaction. I would suggest an appraisal, title exam, borrower/developer’s credit score, and listing of what the borrower paid for the property and spent on improvements himself as a minimum. It would also be helpful to know what other transactions this borrower did with Groundfloor and whether he operated as committed (finished construction, paid off investors, etc.). You could also include references and testimonials by others who have dealt with the borrower. You could post this info on your website w/ a disclaimer that Groundfloor makes no warranties about its accuracy.

        Without this info each investor either incurs upwards of $1,000 to collect some of this info himself, refuses to loan to that borrower, or demands a higher-than-normal interest rate to lend. None of that accomplishes the objective of Groundfloor. Borrowers want/need crowdfunding. Investors want to make loans. Interest rates must be low enough as to not put borrowers in a bind (or have them be unsatisfied with Groundfloor b/c they lose their properties and their equity). Deals must be financially sound so investors don’t lose money. I would rather lend money at about 7%/yr. and know that I am likely to get principal & interest back, rather than a higher interest on a transaction that is likely to fail.

  • http://www.PentagonHomes.biz Spencer Roane

    Crowdfunding meeting tonight in Buckhead (Atlanta)
    http://www.meetup.com/Georgia-Crowdfunding/
    I plan to attend. If you do too, please look me up.

    • https://www.groundfloor.us/ Ben Armstrong

      Spencer, thanks so much for mentioning this. John Mangham, one of our project sponsors, is actually speaking at the event. I’ll add that it is open to anyone interested in “crowdfunding”. I look forward to meeting you.

Investing… In 30310?!

This week, in case you missed the news, we successfully funded our third property, a new condominium construction project in Powder Springs, GA. It featured an attractive rate, and many investors liked the fact that it was new construction. For some, “new” just seems more comfortable than renovation or “fixing and flipping.”

But what is it that leads one to invest in any specific asset, opportunity, company or property than another? Sure, we all want to know that our investments are “smart” — which for most means the opportunity to earn a fair return for a given level of risk. Sometimes people invest or donate out of care or concern for the cause benefitted by the investment. There’s also ego, fear, image, opportunism and investing as a favor.

At GROUNDFLOOR, we believe everyone already is or can be an investor. We don’t think that word should convey some special designation reserved for those who have elite skills in running numbers, doing diligence and keeping abreast of market developments. If you have a bank account, certificate of deposit, cash value life insurance policy, brokerage account or retirement assets, you qualify.

If everyone’s an investor, then everyone also needs an investment strategy. That is, we all need a way to decide where to sock away our hard-earned money, and how much in which assets and types of assets. The path of least resistance isn’t smart (such as leaving your money in the bank), but neither is winging it and taking risks that you don’t understand. So what is a busy person without spare time, energy and interest to do?

GROUNDFLOOR is here to help. We started with a vision of helping to solve that problem for you, and have since built an investment product that delivers. How? Real estate is tangible. You know what you’re getting. Because you’re lending money (not buying into ownership), you know when you can expect to see it back, and how much you’ll be receiving in return. That much is easy enough to understand. But how can you go about choosing the right properties? Is that hard? Does it require expertise?

Take our 1429 Allene Ave Renovation project for example. Is it right for you? Give us three minutes with our new video (below), and we think you’ll know. Do you trust the borrower? Do you like the property, and believe it could sell? As a lender, you just need to know that it would sell for more than the total amount borrowed. Perhaps you’re concerned about the location anyway. At least one investor communicated that to us this week. Afterall, the zip code 30310 (which contains a great variety of neighborhoods, in actuality) doesn’t have the best reputation–at least with the banks.



Each person has to decide for himself whether this or any investment, fits his or her strategy. For some, helping to regenerate such a neighborhood might be exactly the place they want to put their money to work–for the social good, but also because often that kind of context obscures the best opportunities that would otherwise be in plain sight. For some, the more conservative option of making a loan in that situation might be the perfect vehicle, rather than an equity investment. But most big banks certainly won’t lend on a property in this neighborhood. What of that? For good reason? We think the Web is (all of you are) as good an arbiter of that as anyone–and in many ways a better one.

Watch the video, and tell us what you think in the comments below! And if you reside in Georgia, please consider joining us as we fund the property in the coming days and weeks.


0 Comments

First Financings Complete

This week we announced our news that GROUNDFLOOR completed the

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nation’s first-ever crowdlended, peer-to-peer real estate transactions. We’re very proud to have connected our growing community of investors and borrowers to participate in this historic end-run around the usual intermediaries.

The news has been met with excitement amongst proponents of true crowdfunding (i.e. those who aren’t confused by the loud labeling of accredited investor funding by some as “crowd” funding). Anyone waiting on the JOBS Act Title III crowdfunding provisions cheers intrastate and other approaches to achieving the same objectives (count our co-founder Nick Bhargava, one of the principal contributors to Title III, among them).

Why the excitement? Over half of the investments in our 905 Tift Ave Renovation and the Riverpark Townhomes New Construction were $500 or less. So everyone not only can, but is, participating. The projects pay 10-20 times what a comparable CD would pay. In an industry riddled with illiquidity, they pay back in six months or less. GROUNDFLOOR delivers an unparalleled value for the individual investor–and people are taking notice.

Even so, the press in Atlanta, where much of the action in providing access to the other 98% is actually happening, have been slow to cover what’s happening there. They haven’t devoted much digital ink to the state’s innovative Invest Georgia Exemption and the early advances that have been made utilizing it. We suppose that true revolutions can be difficult to spot, even in one’s own back yard. Equally, perhaps they are risky to herald. No doubt, at the first whisper of fraud, the same editors will be quick on the trigger!

For the time being, the victory is therefore a quiet one. In a week that has seen two incredible venture capital financings of accredited investor financing platforms that operate in the real estate sector, that’s perhaps indicative of where the rest of us fit into the scheme of things, at least for now. Indeed, it’s tough to compete with the big numbers that serving the top 2% of the U.S. can quickly put up.

We have more than a feeling that there’s much more to this story, yet to be written. Never before have banks and Wall Street been displaced by the crowd in financing real estate this way. With this milestone, we proudly join other innovators who have gone before us in the arena of consumer finance.

Thanks for being with us as we move toward completion of this initial chapter. If you live in Georgia, we welcome your participation in the funding of our next set of projects. If you don’t, rest assured that plans are well underway to bring GROUNDFLOOR to many more people beyond Georgia soon.

 


6 Comments

Update on 748 Charles Allen

Those who have been following GROUNDFLOOR for awhile know that 748 Charles Allen was our–and the nation’s–very first 100% crowdlended real estate transaction open to participation by all. Along the way we experimented with a couple of different ways of structuring the loan, explaining how it works and attracting people to invest in it.

As sometimes happens on the bleeding edge of innovation, some of these tests took longer to complete than planned. Fast forward three months and it’s time for development of the project to start. The loan is half-full (see how optimistic we are?). How to proceed? Developer Pat Gilroy decided that, rather than canceling the loan and leaving the funding up to the banks, it would be better to offer a new and different loan that can fund more quickly.

We learned a lot observing the way our two most recent loans on other properties oversubscribed in five days and then just over 48 hours. The changes we are making with this new loan on Charles Allen benefit from that experience. Notably, it offers a higher rate (10%) and a smaller amount to fully fund. To participate, head on over to the new 748 Charles Allen project page and pledge now (Georgia investors only).

This is our first loan to offer the security of a second-lien (also known as “mezzanine”) position. For more about the details of what that means for noteholders, see our new Charles Allen Project FAQ posted today. We also invite comments on this post below, and for you to write us at founders@groundfloor.us anytime with suggestions, critiques or

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0 Comments

New Construction, New World of Investing

In case you missed it, the offering we introduced last week, 905 Tift Ave, fully subscribed in just five days. For over one-third of the investors who made a pledge, this was their first. The other two-thirds had previously pledged to invest in on our original offering, 748 Charles Allen.

We’re seeing a similar pattern with Riverpark Townhomes, which opened to accept pledges yesterday. In the first 24 hours, just like last week, over $20,000 has been pledged for this project by 25 investors. Unlike many purported “crowd”

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funding campaigns offering access to invest in real estate, it is also of course open to all investors, not just the accredited 2%. It too offers an amazing interest rate and security in the underlying property.

The similarities end there, however. This one, distinct from the previous two we’ve offered, is:

  • A new construction project, instead of a renovation
  • For townhomes, instead of a single family for sale or a multi-family rental
  • Located in Woodstock, a compelling suburb north of Atlanta, instead of in-town
  • For another development team new to GROUNDFLOOR, Troy & Gaby Yohn

This initial set of three offerings in Georgia (plus the growing list of future offerings) provides an initial indication of the diversity and breadth of opportunity investors can come to expect, especially as we expand to new states in 2014. As the Web gains steam in financing real estate development and opening more opportunities for everyone to invest, we’ll continue to grow into new types of projects, in new locations, from a variety of developers.

Interested in hearing more about how all of this works? This week we’re trying something new. We’re holding a lunchtime webinar on Friday, February 21 featuring GROUNDFLOOR co-founder Nick Bhargava and 748 Charles Allen developer Pat Gilroy.

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Sign up to attend. It’s free, and a great opportunity to ask your questions in real-time and to get involved.

 


2 Comments

Introducing 905 Tift Ave

Yesterday, independent developer John Mangham launched our second property for funding, 905 Tift Ave. Like our first property, 748 Charles Allen, this is a renovation project offering its backers an attractive interest rate to crowdfinance a loan that is secured by the value of the underlying property. In the first 24 hours, 905 Tift Ave was already 53% funded with 23 investors pledging $21,000.

Innovators like John and Pat are stepping up to cut out the bank and borrow direct from a new and better source of capital: You, the individual investor. As a result, we’re able to offer an extraordinary investment value. There isn’t a comparable risk-adjusted return like this

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available anywhere. Most uniquely of all, we’ve intentionally designed GROUNDFLOOR to be open to anyone, with no minimum income or wealth requirements, and offering an opportunity to get started with as little as $100. While our current offering limited by the constraints of securities law to the state of Georgia,

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we will be expanding to additional states very soon. Sign up for an investor account to be notified when we’re available where you live.

This loan differs in a few respects from our original issue. It is a shorter term (six months instead of one year). A single-family house, the business plan is to renovate and sell, rather than leasing it out. Like Pat before him, however, John has done this successfully many times in the very same neighborhood, with the very same type of property. Both of these developers are experienced hands who are utilizing GROUNDFLOOR’s innovations in securities regulation to offer everyone the chance to tag along, financially.

Funding real estate development this way, 100% bank-free, is a triple win:

  1. Developers get better access to capital
  2. Neighborhoods receive much-needed investment for further development
  3. Individual savers and investors earn above-market returns

Questions or comments about how it all works and where we’re going from here? Feel free to use the comments below, write us at founders@groundfloor.us or comment/ask on the project page itself.


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More Properties, More Opportunities

This week we’ve rolled out a few new features to lay important parts of the foundation for what you’ll be able to do with GROUNDFLOOR in 2014.

We launched the nation’s first 100% crowdlended real estate financing in late 2013. Over 180 investors in Georgia have pledged more than $129,000 so far to be a part of it. While we’re continuing to expand our Georgia offerings, soon we’ll be ready to announce our expansion to accept more investors, for more projects, in more states. As we prepare for that, we’re eager to hear from you. Use the comments below to ask questions or provide feedback publicly, or write us anytime at founders@groundfloor.us.

 


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Consumption —-> Investment

With the holidays passing behind us and the new year dawning, many people transition from consuming to investing. Gustatory indulgence gives way to new diets and resolutions to exercise. We refocus time spent relaxing with family and friends toward re-establishing productive routines. This time of year also finds us assessing, retrenching and plotting the way forward for our spending, saving and investing.

At GROUNDFLOOR, we believe everyone deserves equal access to financial opportunity. In 2013, that commitment led us to launch in Georgia. The state’s innovative regulatory construct set the stage for us and a few other crowdfinance pioneers to start serving more than the accredited top 2% of investors. For 2014, we’re preparing to expand into additional states, as we continue to broaden the types of properties and loans available for you to crowdlend. That’s our own focus on investment as we turn to the new year.

It’s a good time to be thinking: What’s yours? By many accounts, 2014 promises to bring a broad wave of innovation in crowdfinance. Experts expect nationwide implementation of Title III of the JOBS Act. Numerous states have declared their intention to follow in Georgia’s footsteps. There will undoubtedly be new opportunities to invest in asset classes that have heretofore been inaccessible to the non-accredited 98%. It could be a coming of age for crowdfinance. A phenomenon that started with backing independent projects of interest for early adopters on Indiegogo and Kickstarter could now expand into taking equity in startups, funding the growth of small businesses and earning secured interest in direct real estate investments for a new mass market of savers and investors. No one can know for sure how quickly this new market will take shape, or what shape it will take, but it is quite evidently upon us.

As you make your own transition into 2014, have you determined how the new crowdfinance options for investing fit with your financial strategy? Is there a particular type of opportunity you’re anticipating? If so, we’d like to hear about it in the comments below or by email at founders@groundfloor.us. We’re curious what types of crowd investments you see as the

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most promising. And of course, if you have questions, comments or critiques about the particulars of crowdlending with GROUNDFLOOR as represented in our first property offering in Midtown Atlanta, we’d be grateful for the opportunity to discuss those with you too. Happy New Year!

 


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Real Crowdinnovation

Today we’re announcing our second property to be crowdlended in Georgia via GROUNDFLOOR, along with an important improvement to the way we offer our loans to investors. These developments are significant for two different but very much related reasons.

Nick and I started GROUNDFLOOR with an uncompromising focus on creating new and better financial products available to all, with no exclusions based on income or

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wealth. We set out to serve unaccredited investors. Traditionally, by contrast, finance has started at the top. Afterall, so the thinking goes, that’s where the “smart money” is. Life is good at the top of the market. Accredited investors are indeed easier to serve through existing regulations, do have more money to invest and surely have their own distinct problems to be solved.

We think the non-accredited 98% are what the “crowd” in “crowdfinance” is all about. That’s why we’re innovating in Georgia now, rather than coordinating millions of dollars in transactions between financially powerful parties nationwide and leaving the true crowdwork for later. Our announcements today are born of that pioneering effort. We launched. We listened. We learned. (And, we’ll continue to do so!).

For example, we gleaned that having one loan offered at a given rate is better than the flexibility afforded by having two (one with a set rate, and the other being priced by auction). Developer Pat Gilroy’s 748 Charles Allen multifamily renovation is now offered as a single one-year secured loan rather than two different loans. The offered rate (currently 8.75%) decreases as funding commitments increase, rewarding those who act to get in on it first.

We also validated and learned more about investors’ interest in allocating investments amongst a variety of assets and terms. Over the coming weeks and months, we’ll fulfill that demand with geographic diversity, new categories of real estate, a range of loan terms and different capital structures. Today’s introduction of developer Rick Tuley’s group of rental townhomes in Woodstock, GA is a first step in that direction. In addition to being our first property of this type, the loan will be our first to feature profit-sharing. It pays interest over a five-year term, plus a bonus at the end based on the increase in property value.

Profit-sharing on a loan is the kind of benefit that, previously, only sophisticated institutions or accredited investors could negotiate for themselves. Consistent with our original mission, we’re excited to offer it to everyone. To our knowledge, no one has ever done that before, certainly not in real estate. Will it work? We think so, and will undoubtedly make adjustments along the way as we did with our first version of an auction rate construction loan. Time, in conjunction with continued innovation at the forefront of true crowdfinance, will tell.

Have an opinion or reaction to share with us? Email us anytime at founders@groundfloor.us, or use the commenting feature to this blog. We look forward to the discussion.


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WHAT’S NEXT FOR CROWDFUNDING? SECURITY.

As recently covered in the Wall Street Journal, states such as Georgia are on the vanguard of putting equity crowdfunding theory into practice. They’re removing the “accredited investor” limitation, allowing people like you and me to invest in private companies, and they’re doing it ahead of the SEC’s implementation of the JOBS Act. For those of us who believe that “accredited investor” limitations are antiquated and unjust, such state-level efforts represent real progress toward a better future. That’s why, after helping to craft the crowdfunding provisions of the JOBS Act two years ago, I began working with Mark Easley and Steve Reaser to introduce an improved version of crowdfunding in my home state of North Carolina.

The availability of quality investments that are risk appropriate for crowdfunding investors will be key to ensuring the success of crowdfunding over the long term. Investing in the equity of a startup or small business can be risky. For most people, investing a small portion of their overall portfolio in the riskiest assets is prudent. How small, and whether that portion amounts to anything significant in absolute terms, is a matter of some debate. Fortunately, “equity” crowdfunding is only one part of the story. New crowdfunding rules and technology innovations are being employed to expand the savings and investment options available to the 98% of us who are not accredited investors. For example, GROUNDFLOOR has recently used Georgia’s rules to create an important world first: An opportunity to invest in loans which benefit from a first lien on real property, starting with as little as $100.

Crowdfunding the renovation of a multi-family rental property in Midtown Atlanta certainly won’t generate the financial returns of “the next Facebook or Google.” It’s not a lottery ticket. But it’s not a gamble either. This class of stable, secured asset offers significant value for the average investor’s portfolio. Loans like this are the first to be repaid. They are due to be repaid within a specific time period. If they are not repaid, the lenders ultimately have a right to

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assume ownership of the asset through foreclosure. These are the same terms banks themselves use when lending out your deposits. Crowdfunding rules like Georgia’s allow us to cut out the middleman and return five to ten times the interest of your savings account or CD, all with a secured investment.

There are some who worry crowdfunding will be a roulette game, resulting in losses for most people who invest in the riskiest of assets. But we don’t see crowdfunding as a game with one outcome. Instead, we see a broader, more inclusive and more sensible future, patiently and prudently built on access to the full range of wealth generation tools that the accredited investors and institutions have always had at their disposal. Take a look at what we’re doing at GROUNDFLOOR today with our first project in Georgia. What do you think of it? Tell us in the comments below, or write us anytime at founders@groundfloor.us. We’d love to hear from you.


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