In the current environment of low interest rates, investors are scrambling for yield, and many have turned to real estate. Typically investors buy and flip homes, or they invest in real estate investment trusts (REITs), which own different types of properties. But Sharestates is offering both accredited investors and the public a real estate crowdfunding platform that lets them dip as little as $100 into a project. The idea is to bring real estate to the masses.
The evolution of the E-Trade of real estate
Walking to class while at NYU, Allen Shayanfekr looked at properties he passed and wondered who owned them. Shayanfekr, the legal adviser and cofounder of Sharestates, also wondered why he and his friends could not pool their money together and own one of those. It occurred to him that the market wasn’t accessible.
Separately, Wayne Geffen, who is a portfolio manager at First Serve Asset Management, a long/short energy focused fund, and who acts as an adviser to Sharestates, had been working on R-exchange, “an exchange for real estate, the way the New York Stock Exchange is for stocks.”
In summer 2013, Geffen and Shayanfekr happened to be at a real estate networking event hosted by a mutual friend. Geffen and Shayanfekr hit it off, and Geffen realized Sharestates was already in the “sixth or seventh inning” and decided to collaborate with them instead of pushing forward with R-exchange.
Geffen thinks of Sharestates as the E-Trade of real estate. E-Trade was the first platform to aggressively market itself as the platform that opened up trading of stocks, bonds, and other securities to mom and pop investors. Geffen and Shayanfekr wanted to create such a platform for real estate.
Real estate is traditionally an illiquid investment. “There’s two components to something being liquid, the actual product, and the ability to get to that product,” Gaffen said. “That’s essentially what we want to do. We just want to make an illiquid market open and transparent for retail investors.”
One of the biggest hurdles to this is filing a property under Regulation-A: an exemption from SEC registration for securities offering up to $5 million in a 12-month period. Reg-A offerings have to come with a prospectus and can be offered publicly. Each property that Sharestates lists needs Reg-A qualification.
Why hasn’t this been done before? “It’s difficult,” Shayanfekr said. The average Reg-A qualification time is about nine months, and some can take as long as 18 months. And once the SEC qualification is done, one must go through state regulators as well.
The site itself is pretty intuitive. After you’ve filled in some personal information, Sharestates prompts you with some basic questions on the type of property that interests you, the kind of project (fix and flip/ground up investment), your risk tolerance, holding period, and so on.
With an account set up, investors can peruse through projects that are still looking for funding. Investors can look at the type of offering (equity offering, buy & hold, private loan), the minimum investment, and the amount of the project that’s already funded. And once they have picked a project, they can dig through all the additional data and see if it’s right for them.
The implications of a failed project are probably among the most common concerns investors could have. And Sharestates doesn’t guarantee any projects. “We generally take personal guarantees and security agreements on projects in order to protect investors,” Shayanfekr said. “That way, if a project goes south, they’re generally in a senior ‘lien position.’”
“One way we try to hedge investors against losses is through negotiating preferential treatment on returns of invested capital,” Shayanfekr said. “For example, the 345 Lenox Road deal requires the sponsor to pay back investors before paying himself. Another way is to be conservative on loan deals and loan on low to moderate loan to value ratios.”
Investors also need to remember these are illiquid investments. The money in a project will be tied up until it is completed. They can however sell the securities to other investors. Sharestates will inform its network to help the investor look for a buyer.
“If you look back historically, the wealthiest people in this country have created and maintained their wealth through real estate acquisition,” Shayanfekr said.
Now Shayanfekr and Gaffen hope to offer that opportunity to everyone.