Real Estate Crowdfunding Firm Seeks Lending Revolution

By Heather Perlberg, The head of consumer-product marketing at Google Inc. (GOOG:US) and a former general counsel for a travel website are seeking to transform the mortgage-finance industry. Michael Burry, the hedge-fund manager who foresaw the housing market’s nosedive, is betting they can.

Symbols of percents around small house.

Brett Crosby left his post at Google last week to join Brew Johnson, once a lawyer for a company acquired by TripAdvisor Inc. (TRIP:US), to start PeerStreet Inc., a Los Angeles-based online platform for financing real estate through a form of crowdfunding. They’re partnering with small, non-bank lenders whose short-term commercial-property loans they can fund using a throng of individual investors.

“These guys are really out to solve a market inefficiency,” Burry, an early investor in PeerStreet and a subject of Michael Lewis’s 2010 book “The Big Short,” said in a telephone interview. “A number of large markets are not adequately being served by the financial sector, so it really is time for new thinking.”

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Crosby and Johnson, who met at the University of Southern California’s Sigma Alpha Epsilon fraternity chapter, aspire to create the go-to website for real estate crowdfunding, a market already teeming with companies that raise large amounts of money through small contributions for U.S. property investments. PeerStreet also is part of a wave of businesses seeking to profit by providing alternative financing at a time when banks are reluctant to lend.

Loan Partners

The company is focused on raising money for debt, rather than other types of crowdfunding that buy physical properties. PeerStreet is partnering with existing originators, such as Los Angeles-based Thorofare Capital Inc., which makes short-term loans of $2 million to $25 million each.

In most cases, the originators will hold a portion of the debt on their balance sheets, giving them an incentive to issue high-quality loans and preventing crowd investors from assuming all the risk, Crosby said.

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“The goal is to get loans in front of people that are very easy to understand,” Crosby said. “We don’t want many variables. We want people to understand the terms, loan-to-value ratio and interest rate.”

Crowdfunding has been gaining steam since April 2012, when the Jumpstart Our Business Startups Act, or JOBS Act, went into effect. When final rules related to the law are enacted, restrictions will be eased on investments in closely held companies, including those set up to own commercial property, by people making less than $200,000 a year and with a net worth of less than $1 million. Firms can now market only to people who exceed those levels, known as accredited investors.

First Deals

Real estate crowdfunding companies, which completed their first deals last year, have raised more than $110 million, according to Nav Athwal, co-founder and chief executive officer of San Francisco-based crowdfunding company RealtyShares Inc.

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http://www.businessweek.com/news/2014-09-08/real-estate-crowdfunding-firm-seeks-lending-revolution

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