Crowdfunding is becoming more and more popular in the United States and it is even showing up as an option for real estate developers. As appealing as crowdfunding can sound, it is not always the best option for your needs. Every real estate developer, whether they intend to use crowdfunding or not, should become familiar with the challenges of crowdfunding in case they ever decide to give the finance option a try.
What Is Crowdfunding?
Crowdfunding is a sort of direct opposite option to standard project funding. Under normal circumstances, an investor would get the entire amount of the project done by one lender using one agreement.
With crowdfunding, your real estate investment opportunity becomes a security that is offered to an entire investment community. People buy shares in your opportunity and then you use that money to fund your project.
Crowdfunding adds a layer of regulatory demands that utilizing one funding source does not. As the real estate developer offering the investment opportunity, you would have to file the standard regulation D filings as required by the SEC for each state where you have investors based. These forms are simple enough to fill out, but they can become a burden if you have investors located all over the country.
One thing that many real estate developers agree on is that crowdfunding provides major challenges when it comes to timing. In some cases, a developer only has a couple of months to get their funding together to get a project off the ground. With crowdfunding, there is no urgency for investors to respond to your project, so it can be difficult to get the funding you need in time.
While there have not been a string of scandals that have threatened to undermine the integrity of crowdfunding, there is also not a long history of large projects being funded by the process either. The lack of stories about the SEC shutting down crowdfunding websites should help lend to its credibility, but the fact is that many developers want a history of success that crowdfunding is still in the process of developing.
Crowdfunding does have the reputation of being a bit unpredictable, and that makes it difficult for developers to feel comfortable using crowdfunding as a consistent financing option. While crowdfunding can sound convenient, you may find that it does not fit your needs with every project. At best, it will probably wind up being an option you try when all other options fail.
Not Quite Reliable
Many developers who use crowdfunding for the first time jump into the process thinking that the crowdfunding website accredits every investor. In crowdfunding, it is the developer’s responsibility to accredit every investor and make sure that investors are who and what they say they are. This is another layer added in by crowdfunding that can slow the process down and become a headache for developers.
As an alternative financing source, crowdfunding is there for real estate developers to use. But the entire crowdfunding industry is still evolving and it might not be in a developer’s best interests to consider crowdfunding a reliable and first-line source of project funding.