WASHINGTON, DC—Now here's a problem you don't hear about very often. Washington DC-based Fundrise, a crowdfunding platform for real estate, had a $1.6 million project sell out in 2 hours and 22 minutes. That's about $11,000 per minute.
It was very exciting, obviously, CEO Ben Miller told GlobeSt.com, but also a bit awkward as some of the thwarted investors were upset. "I couldn't believe how fast the sale went -- it was sold out while the emails about the project were still being sent," Miller said.
Without a doubt, it sounded like a great deal. The project was the purchase and condominium conversion of an existing 14-unit multifamily property on U Street, located 11th and W streets. It was built in 2002 and is currently a loft-style boutique apartment. The developer originally designed the units with intention to sell condominiums but then decided to deliver the project as apartments as it was the early 2000s and the economy was in recession. As a result the building already has a condominium map in place and there are high-end finishes.
The sponsor, Urban Investment Partners, sees other attributes as well. There aren't any other high-end lofted condominiums on U Street and because the property was developed more than 10 years ago, the existing units are larger than most for-sale condos on the market. The expected total cost for the project is $10.4 million and UIP projects net sales of $11.0 million for a total project margin of roughly 14.4%. Sales for the units would have to be more than 20% below projections before the Fundrise investment would be negatively impacted.
Miller spoke with the upset investors and expects he will be better prepared the next time this happens. And more than likely there will be a next time.
If nothing else this story shows that the same dynamic that has been playing out in the institutional investment space -- more money chasing deals -- is filtering down to the individual investor level, at least for real estate. Indeed it will only get worse now that the Security and Exchange Commission recently finalized rules opening crowdfunding platforms to unaccredited investors as well.
Miller hasn't decided whether Fundrise will take advantage of the new rules, but he does know this: crowdfunding in general and Fundrise most definitely are not well-suited to high-net worth individuals that require a lot of hand-holding.
That Wall Street model where investment banks set aside a piece of an investment for their favorite clients? It will never happen at Fundrise, Miller said. "If you are a high maintenance investor you won't be a fit for us. We don't have a high-maintenance investor model," he said.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
