Feb 19, 2020
REAL ESTATE CROWDFUNDING - A PRACTICAL GUIDE FOR REAL ESTATE PROFESSIONALSIrwin Stein
Commercial real estate brokers are turning to crowdfunding to syndicate properties and construction projects because it gives them more than twice the income they would receive from just listing the property and hoping that a buyer comes along.
With crowdfunding, a broker can tell the property owner to expect a closing in 90 days, for full asking price, because the listing broker intends to put together a group of investors to buy the building rather than find a single purchaser. Sellers will certainly be happy and the listing broker is now in control of the process.
There are three stages in the syndication process: origination, operation and liquidation. The real estate broker who originates the offering typically may receive fees and profits from all three stages.
By syndicating a property rather than just selling it to a single buyer, listing brokers can eliminate the buyer’s broker allowing the listing broker to collect 100% of the real estate commission.
The listing broker can also receive an annual fee for managing the property on behalf of the investors and at least the listing fee (and often a share of the profit) when the property is resold. Many professional sponsors will re-syndicate a property after 5-7 years to give the first round of investors an opportunity to cash-out. They can then re-syndicate the same property to new investors and start the cycle all over again.
Crowdfunding real estate has become popular because the traditional method of sale has always been hit or miss. If a broker lists a property for sale, but does not have a buyer in his back pocket the scenario is always the same. A few months of time-consuming walk-throughs and dealing with the brokers claiming to have potential buyers who may be interested when they actually do not. Negotiating and re-negotiating low-ball offers that inevitably fall through never makes the seller happy.
The listing broker has no control over how long the process will take.
Eventually there will be those conversations where you must tell the seller it might be a good time to lower his price, even though you told him when he signed the listing agreement you were certain the asking price was fair. When the sale finally closes, the listing broker will have to split the total commission with the buyer’s broker.
The investment outlay for larger properties like office buildings, warehouses, apartments, hotels and shopping malls is often too much for single investors. Offering these properties to groups of investors significantly increases the pool of capital that is available to purchase these properties.
A typical real estate syndication combines the money of individual investors with the management of a sponsor. New legislation (the JOBS Act) and new technology have drastically reduced the cost to put together a group of investors to purchase virtually any property. Billions of dollars of real estate properties are already being funded on crowdfunding platforms.
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