Groundfloor Announces $100 Million Partnership with Direct Access Capital

Groundfloor Announces $100 Million Partnership with Direct Access Capital

Today we announced an important new partnership with Direct Access Capital (DAC). This is an important development for Groundfloor and real estate investors across the country. Here’s why:

For value-added real estate investors: We now have a fresh $100 million to lend for the purchase and renovation of single-family houses in the 24 states in which we operate. Groundfloor continues to offer the most flexible, lowest-cost loan products in our industry. This new partnership creates more capacity to fulfill strong demand from borrowers. We’re still the only nationwide, online lender in our market offering a balloon product featuring no monthly payment. Building from that success, we now offer larger loan sizes up to $2 million and a greater range of real estate investment credit products than ever before, apply here.

For passive individual investors seeking yield: We are utilizing the same personnel, criteria and processes to supply loans to DAC, our first institutional partner, as those we utilize to supply loans to our retail investors. In August, over 1,100 Groundfloor investors funded over 30 loans for a total of $3.7 million. The advent of our first institutional buyer validates the confidence our investors continue to place in the professionalism and competence of our origination, underwriting and asset management teams. It will also allow us to offer a greater variety of investment products over time. For example, soon we’ll begin offering monthly payment loans for retail investor participation alongside our traditional balloon payment product.

For Groundfloor: This partnership will triple Groundfloor’s projected revenue in 2018. That financial strength will enable us to continue investing to expand our reach and further enhance our product offerings. We remain “on-mission” to reformat how and by whom capital is formed, opening up access to lucrative risk-adjusted returns for all. There’s more good news along those lines on the horizon this fall. We’re excited to share this news today and look forward to sharing more good news soon. As always, our early investors, borrowers and supporters have our continuing gratitude for helping us arrive at this latest milestone.

We look forward to responding to questions and feedback about the news in the comments below or directly by emailing us at founders@groundfloor.us.

Hurricane Response

Hurricane Response

UPDATED: Saturday 12:19 PM ET

As Hurricane Irma barrels toward Florida in the aftermath of Hurricane Harvey, our hearts and prayers go out to all who are or could be affected. We are concerned first and foremost about the safety and well-being of our customers, friends and family in the Gulf area and Florida.

Equally, we know many in our community of investors and borrowers have questions about how Groudfloor manages the risk posed by natural disasters in general, and how specific collateral has been or is likely to be impacted.

Groundfloor currently has loans on 4 properties in the Houston area and 17 in Florida.

Hurricane Harvey

Since Hurricane Harvey has subsided, Groundfloor has gathered information on the four collateral properties that could have been affected by that storm. Three have been found to have suffered no damage. One (1016 Egret Lane, photo below) suffered wind damage.

68b1af94c3edddc01394c1c2857a7777096a0f14.jpg

Fortunately, Groundfloor successfully forced placed insurance on the property in anticipation of the storm. A claim has already been filed under the policy.

Hurricane Irma

In anticipation of Hurricane Irma, this week Groundfloor reached out to all of our borrowers in the storm’s path to request that they provide proof of insurance. Proof of insurance is required at the time of closing all of our loans. Our loan agreements also provide us with rights to confirm that insurance remains in place, and to force the placement of insurance on behalf of our borrowers in any circumstance in which such proof is not provided.

As of Friday afternoon we took action to force place insurance on all properties for which we had not received proof by noon that day (Friday, September 8). Of 17 loans currently outstanding in Florida, we have found three properties to have no insurance, and two to be under-insured. All five loans currently outstanding in coastal Georgia and South Carolina have been verified as properly insured. We are investigating the circumstances around each property that lacks coverage. The insurance companies have refused to issue insurance on the five Florida properties, or any Florida property at this point.

At the closing of each loan we make, every policy is reviewed to ensure Groundfloor is properly named and has notice rights. We will investigate in due course to find whether the borrowers in question canceled, and to confirm that Groundfloor received a cancellation notice from the carrier. In all cases we will vigorously pursue available legal recourse if we find our rights as a lender were violated by the insurer or the insured.

As Hurricane Irma progresses, Groundfloor will continue to check on the status of the above properties and any other properties that may be affected. Gathering information, resolving insurance claims and recovering from the aftermath of a natural disaster can take time. We will of course exercise an appropriate level of leniency in working with our borrowers to effectuate a full recovery as quickly as possible, while doing our best to keep investors informed. Investors in these loans can check loan updates for loan-specific information as it becomes available.

Managing the financial side of these calamities is our responsibility and we are focused on executing it with diligence and professionalism. Equally, we are nonetheless concerned for the welfare of all in the storm’s path and pray for the safety of all.

 

The Benefits of Diversification: An Empirical Analysis

The Benefits of Diversification: An Empirical Analysis

We recently performed an analysis to quantify the effect of diversification on Groundfloor returns. The analysis is based on data for over 2,400 individual portfolios reflecting the allocation decisions made by our investors over time. Here are the results.

Announcing IRAs

Announcing IRAs

The past few months have been busy for the team here at Groundfloor. We’ve been focused on improving the investor experience.  And we are pleased to announce the launch of the #1 most-requested product feature from Groundfloor investors - IRA investing.

--- IRAs ---

We are coming out of our alpha testing phase and are now rolling out the self-directed retirement accounts more broadly. The regulation of IRAs and 401k accounts can be complex, so it’s taken us some time to work out compliance kinks with our custodial account provider, IRA Services Trust. Based on our first round of learning with a handful of early adopters, our software team has now soft-launched a new, integrated IRA account setup wizard. To access it, click the new person icon that appears in the top right of your screen once you log in (or click the image below).

So far, we think it’s working pretty well for most people and for most account setup scenarios. Let us know what you think. You can click here for IRA FAQs, and we have specialized customer support to help and want to make sure all your questions are answered for what can be a complex process--but also a rewarding tax-advantaged one.

IRA Special Offer:  As with most IRAs, there will be fees for IRA account maintenance.  We will waive these fees for life for our initial IRA investors who transfer and invest more than $10,000 in their IRA accounts by July 31, 2017.

--- Other Developments ---

More Loans.  Lots More.
After a temporary slowdown, our legal team finally caught up with the lending team. We’re now offering more loans than ever. In May, for example, we were able to offer as many loans in one month (20) as we had year to date. That’s great news for investors. An internal analysis we recently produced shows how much increasing the number of loans in your portfolio can substantially reduce variations in expected returns and timely repayments. We’ll have that data ready to share soon. 

Improved Reporting
Based on investor feedback, we’re improving our bi-weekly loan updates and monthly statements. Loan updates now include a reminder of when you invested in each loan and when the loan is due for repayment, along with the most recent information on project progress. While you may notice we’ve also made a few tweaks to our monthly statements, a significant overhaul and redesign is underway. When it’s done, that will provide even more information about your Groundfloor portfolio and how it is performing.  
 

We hope you will take advantage of these improvements and those to come. Our team thrives on customer feedback--positive and constructive alike. Feel free to comment here or email us at founders@groundfloor.us and we’ll be sure to respond and pass it along.

All the best,
Brian & Nick
Groundfloor Co-Founders

Resolution of our Loan for 4626 Brooks St NE

Resolution of our Loan for 4626 Brooks St NE

Groundfloor aims to offer investors a full spectrum of risk adjusted returns; from 5.5% to almost 25%. As basic finance theory instructs, investment returns should increase as the risk of a given investment increases. This post illustrates the risk, and the results, of investing at the upper end of the yield spectrum by describing the performance of the loan on 4626 Brooks St., NE in Washington, DC. 

Priced to yield in excess of 23%, we are now reporting that we expect this loan to experience a significant principal loss. This is just our second loss out of over 100 loans repaid since we began lending over three years ago. While some losses are to be expected in any portfolio, we think losses are opportunities for self-examination on the part of our lending team, as well as our community of investors who build portfolios of loans with us. This loss, which is expected to total $65,900, will upon realization represent a 0.22% reduction in our overall portfolio performance since inception.

We know most startups in the "real estate crowdfunding" market have shied away from this kind of transparency. Not at Groundfloor. We are still the first and only issuer of a direct real estate debt security that is publicly regulated by the Securities & Exchange Commission (public filings are available here), and the only one that is open to the non-accredited 95% of U.S. investors. We submit to a higher standard of public disclosure. When something goes wrong, we go beyond what we're required to disclose to share the details behind the numbers presented in our monthly performance filings.

THE LOAN

Groundfloor’s $97,000 loan for 4626 Brooks St., NE was originated on January 11, 2016 to finance the on-going renovation and expansion of a single-family house. It is subordinate to a first mortgage loan from F & N Enterprises, LLC. The $145,000 first mortgage loan closed on January 27, 2015 to fund acquisition and renovation of the property. Repayment was expected through a sale of the property upon completion of construction.

Groundfloor’s $97,000 was comprised of the following elements:

  • Settlement Charges: $9,725.01
  • Borrower Cash Out: $1,774.99
  • Renovation Escrow: $85,000.00

The total project capitalization ($254,000) consisted of:

  • Borrower Equity: $12,000 (4.7%)
  • First Mortgage: $145,000 (57.1%)
  • Groundfloor Mortgage: $97,000 (38.2%)

The $360,000 estimated After Repair Value (ARV) yielded an estimated leverage of 95.3% Loan-to-Cost (LTC) and 67.2% Loan-to-Value (LTV). Given the extremely high LTC, the loan was considered very high risk and was accordingly rated “F” on Groundfloor’s “A – G” scale.  The speculative nature of the loan was reflected in the 23.8% interest rate.

OUR ASSET MANAGEMENT ACTIONS TO PREVENT LOSS

Over the course of the project, Groundfloor disbursed 9 draws totaling $53,400, leaving a balance of $32,100 in escrow. We subsequently received notice that the borrower had encountered problems with structural systems and related permitting. Groundfloor promptly terminated further draw disbursements, met with the borrower and inspected the property. Subsequently, the borrower defaulted on the first mortgage. 

Groundfloor consulted local Washington, DC counsel to advise on various workout options and strategies to engage the first lien holder in a cooperative resolution. Groundfloor and the first lien holder engaged in negotiations to structure a resolution that could yield the maximum recovery. Valuation information obtained by Groundfloor, as well as the first mortgage holder, indicate there is insufficient value in the property to pay off both loans in full. In fact, there is insufficient value to satisfy the first mortgage holder’s full legal balance. Given the senior lien holder has first claim on the collateral until a full payoff is realized, it is clear Groundfloor has virtually no negotiating leverage.

Ultimately, the lenders did not reach agreement, and the first lien holder notified Groundfloor this month of their intent to foreclose.  The foreclosure is scheduled for June 19, 2017. Groundfloor expects its second lien to be extinguished upon foreclosure by the first lien holder. The remaining escrow funds which we held pending completion of the construction will be returned to investors, net of our costs incurred to recover additional balances.

SUMMARY AND CONCLUSION

Projected Loan Performance

  • Loan Amount: $97,000
  • Undrawn funds in escrow (LIP): ($32,100)
  • Recovery expenses: ($1,000)
  • Net Recovery: $31,100
  • Principal Loss: $65,900 (67.94%) 

Groundfloor was aware of the risks in the transaction and priced the loan accordingly. The risks were disclosed to investors. Nevertheless, we continuously strive to utilize negative experiences to improve our product. For example, we decided last year, well in advance of any problems with this loan, to discontinue offerings of junior lien loans. We hope to reintroduce them as we continue building loan volume. A larger number of available loans facilitates greater diversification of investor loan portfolios. It also makes concentration in higher risk offerings such as 4626 Brooks St less likely.

Despite this loss, Groundfloor continues to deliver an outstanding value for investors. As the only path for non-accredited and accredited investors alike to participate directly in loans backed by real estate, we’re especially proud of the 12.78% annualized net return (including this loss) that we have generated for our investors on average through over 100 loans repaid to date. 

That's the net rate of return overall -- for all of our loans that have repaid so far, assuming an equal amount of investment in every one. How about second lien loans like 4626 Brooks? We've made 11 other loans in junior lien position. All of the others have already returned principal and interest in full. This loan is the only second lien loan that did not. That will be of little solace to investors who concentrated their investments with us in the one that didn't repay in full. But investors who diversified by investing an equal amount in all 12 of our second lien loans earned a net annualized return of 14.19% on that group of loans taken together. If there's a silver lining in this news, that is it. Second lien loans as a group delivered 1.41% more yield than the overall portfolio. That's a quantification of the reward for the additional risk.

We appreciate the trust and faith of those who have been with us since the early days of our national expansion over 18 months ago. And we look forward to growing and welcoming many more investors in the year ahead. As always, whether you invest with us yet or not, we welcome your feedback, critical commentary and suggestions about this loan or any other topic below in the comments, or by email directly to me at rich@groundfloor.us or Brian and Nick at founders@groundfloor.us.