Company tests new waters for small-scale investors
Imagine a small-scale real estate investor. Somebody like John Mangham, who buys rundown homes in the Atlanta area, fixes them up and sells them for a small profit.
“We bought this house for $20k, and it needed everything,” said Mangham, pointing to a one-story home that looks newly-painted. It’s in the Adair Park neighborhood that was hard-hit by the recession.
Now there’s a new kind of company cracking open the world of real estate investing for millions of Americans who don’t want to bother with the hassle. Atlanta-based Groundfloor has permission to seek investors across state lines using crowdfunding.
Although Mangham has been fixing up and selling homes and small commercial properties around Atlanta since the mid-1980s, this home illustrates why he got the loan from Groundfloor instead of a bank. Traditional lenders don’t always like lending for something as unpredictable as renovation.
“It needed a roof, it needed two new bathrooms, foundation work. It seems like every all we opened up we ran into more and more problems,” he said.
The more work a house needs, the more expenses cut into any potential profit from selling it, unless you’re willing to do the work yourself.
“The world of single family renovations has forever been the domain of, I call it, ‘The Two Guys And A Pick Up Truck’ or ‘Two Gals And A Pick Up Truck.’ Folks who want to improve their lot in life by buying a house, fixing it up and making some money,” Mangham said.
Now, investors don’t need that pickup truck. Groundfloor lets non-accredited investors put as little as $10 towards fixing up a house. A non-accredited investor is someone who doesn’t have a high net worth. He or she can be a person with some savings in the bank.
Michael Patzer, 28, is a software developer for Atlanta-based MailChimp who stumbled upon Groundfloor when it launched in Georgia a year and a half ago.
“So I was on Twitter following one of my favorite authors,” said Patzer. “He was in a conversation with Groundfloor about real estate crowd investing. I thought it was really interesting and I signed up for an account.”
In a matter of hours, Patzer had invested a couple hundred dollars in several home renovation projects not far from where he lives. He even rode his bike by one of the houses.“The landscaping was being done. They were putting in new windows. It was really cool to see my investment go to work,” he said.
Under a new Securities and Exchange Commission–sanctioned regulation, Groundfloor can look for investors like Patzer in eight states and the District of Columbia. Faith Anderson, Chief of Registration and Regulatory Affairs in the state of Washington’s Securities Division, helped draft the new SEC rules to allow for inter-state crowdfunding from non-accredited investors. “Groundfloor was the first to take advantage of this multi-state coordinated review program,” Anderson said.
Anderson added that it’s new territory for both regulators and companies. “It is exciting to me as a state regulator and someone who has been you know involved in the development of this coordinated review program because we want to see issuers take advantage of this program,” she said.
Anderson points out that investing in Groundfloor poses risk just like any other investment.
The typical Groundfloor loan term is between six and 18 months and the interest rate ranges from 6 to 26 percent. Closing the gap between the real estate investor and borrower through crowdfunding is what makes Groundfloor innovative. But, according to co-founder Nick Bhargava, it’s also kind of old fashioned.
“Finance was community-oriented activity,” Bhargava said. “When you needed money to do something you would turn to the people in your community. I think now, because of the web, the community is the entire world.”
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