New York-based online real estate investment platform Sharestates has announced a $30-million deal with Ranger Capital that will see the pooled investment vehicle invest in different real estate opportunities in the New York area.
The deal came together fairly quickly, Sharestates CEO Allen Shayanfekr said. Sharestates Director of Community Development Kevin Shane has spent much of his half-year in the position contacting family offices, institutional investors, and high-net-worth individuals, and Ranger Direct is the first of many such deals arising from his efforts.
After three months of conversations Ranger Direct agreed to take part in fractional loans, which is a key trait of Sharestates opportunities, Mr. Shayanfekr said.
“Fractional loans allow us to post partially funded opportunities with an anchor investor.”
Posting a project with a 50 to 70 percent funding rate provides credibility and momentum for new investors who see the team platform and projects have been vetted by a larger conglomerate, he added.
“I was reading something on Indiegogo where they call it the ‘green bar effect’,” Mr. Shayanfekr explained. “People want to be part of a movement that has traction.”
“At the end of the day the goal of crowdfunding is to bring as many people together as possible,” Mr. Shayanfekr added. “And at the end of the day the individual investors love to invest in these but it also gives us another layer of credibility to say we have family offices and institutions and hedge funds investing alongside them.”
Maintaining that philosophy does have its challenges, Mr. Shayanfekr admits, because many large institutions and family offices want to buy whole loans. Sharestates avoids whole-loan situations because it removes the crowd from the process and reduces Sharestates to little more than a broker, he added.
As for why the Sharestates team focuses on New York, the simple answer is because that is what they know, Mr. Shayanfekr said. Most of the Sharestates team is from the area and their backgrounds are in area real estate.
It also does not that hurt that New York is always a hot market, even when other areas of the country are stressed.
“There is more security in New York City than in the middle of the country where there are more fluctuations and volatility,” Mr. Shayanfekr said. “Even after the market crash New York was one of the quicker states to rebound.”
“It’s a safer place to be, and the projects are attractive. People want to own a piece of Brooklyn and New York City.”
Most of their activity comes in the core markets of Queens, Brooklyn, and the Bronx, with the majority being fix and flips of small and medium developments that were foreclosures, REOs or short sales.
Mr. Shayanfekr provided a recent example of a two-family purchase in Queens. Valued at $635,000, it was purchased as a short sale for $360,000. Sharestates funded 75 percent of the deal, and the borrower renovated and was out within six months.
While New York is keeping Sharestates busy, there may come a time when they expand to other markets. Before they do, Mr. Shayanfekr said they will conduct extensive due diligence. It takes people who know the communities to properly underwrite deals.
Speaking of underwriting, it is bad underwriting that will separate winners from losers when the industry goes through the attrition most experience after their initial growth period, Mr. Shayanfekr believes.
There are many components that go into a proper underwriting process, Mr. Shayanfekr said.
“If you’re conservative with your projects and your loan amounts and you make sure your borrowers and sponsors have sufficient skin in the game, they’re sufficient to protect you from that fallout.”
He added Sharestates considers 32 different variables when vetting opportunities, including such standards as LTV ratio and a borrowers credit score and rating. But they also take a close look at the applicant to see if they have a proven track record in developing similar sized projects in the neighborhood they are applying to develop in. Someone with no experience in a particular region or building type, or who has never had a project budget the size of the one they are applying to fund has little chance of being accepted on the Sharestates platform.
In the release announcing the deal, Ranger Partner Bill Kassul highlighted Sharestates’ transparent on-boarding process as one of the reasons they signed on to the deal.
Mr. Shatanfekr said Sharestates tries to make as much information available up front so potential investors do not have to request it. By giving them this information up front, it saves time and can be a valuable differentiating factor when it comes time for a decision. Ranger spent a fraction of the normal time conducting their due diligence because Sharestates was prepared, Mr. Shayanfekr said.
Count Sharestates among the minority of platforms who truly keep the crowd in real estate crowdfunding. A minimum $250 investment is low enough to encourage investors to try out a new opportunity at low risk, Mr. Shayanfekr said.
“Our philosophy is it doesn’t matter if you have a million dollars or a billion dollars or a thousand dollars. When we have people coming online to view projects from a new platform and a new industry there’s a hurdle of trust you need to overcome.”
“For us to come to someone and say ‘to get your feet wet you have to put in $50,000’ that is a hard burden to meet.”
The gamble has been paying off, for Sharestates is seeing investors returning to invest larger amounts once they become comfortable with the process.
While Sharestates has to develop their own education process, the industry as a whole has to do the same. For that reason, Mr. Shayanfekr does not see the dozens of other platforms as competition. At this early stage of a new industry, they must work together to educate the public while soundly minding their own store to avoid giving the industry a black eye through poor management or pulling scams.
That is why Mr. Shayanfekr invites more regulation, as it will weed out the bad apples, leaving only quality players in the space.
If you are considering real estate as either a borrower or an investor, Mr Shayanfekr has some advice: Investors should look carefully at a platform’s underwriting process, considering each of the factors discussed above.
“People who have never been involved with real estate think it’s very easy,” Mr. Shayanfekr said. “They buy a building, collect rent and retire. Things break, lawsuits happen, tenants don’t pay and you have eviction, and there are rent delays.”
“So it is important to make sure you are working with opportunities and borrowers who have a track record and who know what they are doing.”
Unrealistic expectations are one common problem Mr. Shayanfekr sees, and the other is the obstacle of investors usually needing hundreds of thousands or even millions of dollars before they can enter real estate.
“We are trying to fix those two problems and hopefully crowdfunding will help us do that.”