I’ve invested over $50,000 of my “alternative” money into PeerStreet real estate notes because of the ability to diversify into 50+ different high-interest loans backed by physical real estate. Here is a case study from one of my first loans where I was worried it was going to turn out badly, but it turned around. This was much different than my experiences with Prosper and LendingClub, where 90-days late almost always eventually results in a total loss. You can find additional case study links and the most recent update to my overall portfolio performance in my Peerstreet review.

Initial investment details.

• Property: 2 bedroom, 1 bath, 975 sf condo in Salem, MA.
• Net Investor Rate/Term: 8.50% APR.
• Amount invested: $1,073.
• Term: 24 months with extension option.
• Total loan amount: $123,750 from Peerstreet and $13,250 from loan originator (10% “skin in the game”).
• Appraised at $199,000 = 62% LTV.
• Loan secured by the property in first position.
• Stated goal is buy-to-rent.

Here is the Zillow listing. The buyer appeared to get a condo for a good price ($130k). The unit last sold for $155k in 2016.

Timeline.

• May 2017. Loan originated. Maturity is set for June 2018.
• May 2017 to June 2018. Interest-only payments made as agreed upon. (My portion was taken out July 2017.)
• June 2018. Borrower requests extension.
• August 2018. 6-month extension approved and extension fee paid.
• November 2018. Borrower requests another extension. Additional 4-month extension granted.
• April 2019. Payments stop coming in. Loan is late. Full balance of loan is due.
• June 2019. Now 60+ days late. Still no payments. Demand letter sent. Foreclosure process initiated.
• July 2019. At around 90 days late, the loan was suddenly brought current and paid off. All back interest (including default interest) and fees paid.

If you look at the MLS data, they tried to list it in March 2019 for $288,000 and then reduced to $249,000 in May 2019. The listed was removed, so I’m not sure who paid off the loan, perhaps the borrower or the loan originator somehow refinanced it elsewhere. The price wasn’t unreasonable, as the neighboring unit sold for $268,000 in May 2018 (2 bed/1 bath/1,000 sf). Notice that for this note, the loan originator put up 10% of the loan, so it had “skin in the game”. I don’t know if that made a difference.

Final numbers. I invested $1,073 in July 2019 and got paid $192.27 of interest and $1,073 of principal for a total of $1,265.27 as of July 2019. (This was an automated reinvestment which included whatever cash was in my account, thus the odd numbers.) This works out to a 17.92% total return over two years, which is 8.59% annualized return. The number was a little higher than the stated interest rate due the various penalty fees the borrower paid. These numbers are net of all PeerStreet fees.

I haven’t had a Peerstreet loan go through the entire process of foreclosure yet, but will write another update if/when that happens.

Bottom line. The vast majority of my Peerstreet loans have been paid back in full in a timely manner. Some of them end up with issues like late payments, sporadic payments, and/or repeated loan extensions, like this one. This one ended up as an example of an investment that looked like it was heading for foreclosure at nearly 90 days late with little communication, but bounced back and ended up being paid in full.

If you are interested, you can sign up and browse investments at PeerStreet for free before depositing any funds or making any investments. You must qualify as an accredited investor (either via income or net worth) to invest. If you already invest with them, they now sync with Mint.com.

Final update. I’ve invested in multiple real estate crowdfunding websites, including $2,000 into a single debt investment at RealtyShares. Unfortunately, this loan backed by a multifamily unit went into foreclosure and I outline what happened. There are risks in every investment, and my loss is your learning opportunity!

Initial investment details.

• Property: 6-unit, 6,490 sf multifamily in Milwaukee, Wisconsin.
• Interest rate: 9% APR.
• Amount invested: $2,000.
• Term: 12 months with 6-month extension option.
• Total loan amount $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
• Loan secured by the property in first position. Personal guarantee from borrower.
• Stated goal to rehab, stabilize, and then either sell or refinance.

Brief recap.

• January 2016. Funds committed. Loan closed.
• July 2016 to May 2017. Sporadic payment history for over a year. They would be on-time for a while, then there’d be a late payment, then things would brought back current, etc.
• May 2017. Borrower stated that the property was under contract for $225,000 with final walk-through completed and expected close within 30 days.
• June 2017. Borrower stopped paying. I guess the sale fell through (or they lied). Foreclosure process initiated by RealtyShares.
• September 2017. Judgment granted in Wisconsin court. By law, there will be a 3-month redemption period where the borrower can still keep the house if they pay foreclosure judgment plus interest, taxes, and costs.
• January 2018. The foreclosure sale was held and property ownership was reverted to RealtyShares. A judge still needs to confirm the sale.
• February 2018. The judge confirmed the foreclosure sale, and RealtyShares is officially the owner of the property. Property can now be assessed and fixed up before sale.
• April 2018. Property listed for $134,500 as per new BPO (Broker Opinion of Value).
• June 2018. Property is under contract for sale. Exact price unknown.
• July 2018. Property sold. Final disbursement of $1,133.73 received.

Final numbers. I invested $2,000 and got paid $210.84 of interest and $1,133.73 of principal for a total of $1,344.57. This means I only got back 67% of my money after more than 2 years. On the other hand, I have made over 50 different real estate-backed loans now, and it was only a matter of time before I got a full default. This was my first investment that finished foreclosure, but it won’t be my last.

The question is how often that happens and the size of those losses. When it came to Prosper or LendingClub, the interest rates might be higher but when a loan was 60 days late you were pretty much done. As an unsecured loan, you had nothing to fall back on if the borrower broke their promise (besides hurting their credit score). Sending it to collections typically only got you pennies on the dollar. In this case, I got back 57 cents on the dollar when you exclude interest.

Beforehand, RealtyShares told me that the foreclosure process in Wisconsin typically took about 12 months. That turned out to be a good estimate, as it was 12 months between foreclosure initiation and the property being under contract for sale.

Lessons. First, don’t put too much weight on a BPO (broker opinions of value). A broker thought this property was worth $238,000 in January 2016. Another broker thought the same property was worth only $134,500 in April 2018. The final sale price was probably closer to $100,000. That is a big gap.

Second, you should consider the local economic situation. This area is hurting, and if you do some digging you’ll see foreclosures all over the place. I didn’t know this at the time, but the low-income rental market in Milwaukee, Wisconsin was profiled in the NYT Bestselling book Evicted: Poverty and Profit in the American City (my review). Many of the properties mentioned in this book were literally down the street from this unit.

Third, you need to diversify. If this was my only investment, I might have an overly negative opinion of the asset class. If my successful Patch of Land loan was my only investment, I might have a overly positive opinion. Instead, this is one of 50+ investments for me (mostly at PeerStreet) and while I maintain a positive return higher than cash across my investments, there is the occasional foreclosure like this. Basically, when you read about my experience or someone else’s, you must take into account sample size.

Finally, I believe that some marketplace/crowdfunding sites may be better at sourcing and underwriting loans than others. As of November 2018, Realtyshares has stopped accepting new investments (they will continue to service existing investments). Even before that, they abruptly stopped doing residential loans to “focus” on commercial properties. I knew their specialty was more commercial real estate, but I didn’t want to commit $25k to a single commercial investment, so I went with this smaller residential loan. Since then, I have shifted my residential debt investing to PeerStreet as they allow me to split my investments into $1,000 minimums and they also have a slightly different model.

Communications quality. I would grade the online updates from RealtyShares as acceptable/good. They are relatively detailed and consistent, providing me a look inside the foreclosure process. Here are some sample updates:

October 9, 2017 We have identified a real estate broker to sell the property. The broker spoke with the previous property manager who was at the property a couple of weeks ago and who may be available for property preservation. The broker is going to take a contractor to the property to try and get an accurate cost estimate to complete the renovation.

September 21, 2017 Judgment was granted at the hearing. We expect the filed judgment from the court in approximately one week and will process it upon receipt. We should be able to schedule the sale in late October and it will be held after the redemption period expires—sometime in December. As soon as we receive the filed judgment order from the court we will have the exact 3 month redemption date. Sale cannot be held until the redemption period has expired.

September 8, 2017 The partner has declined to go forward with the purchase of the property. On the foreclosure front, the judgement hearing is scheduled for September 18th. If the judgement is successful, there is a 6-month right of redemption period during which the property can not be sold. During this period we will identify a property preservation firm and a commercial broker to sell the property.

August 25, 2017 A minority partner has stepped forward and has asked for a week to visit the property with the idea of making a paydown in exchange for an extension. We have agreed to speak next week after his inspection.

August 22, 2017 Service has been completed on the foreclosure. The defendants were personally served with the summons and complaint on August 2, 2017. The statutory answering time will expire on August 22, 2017. The judgment hearing will be scheduled at that time.

June 29, 2017 Due to the borrower’s inability to stay current, we have decided to start the foreclosure process for payment default. The foreclosure will run parallel with the sales process, meaning if the sponsor can sell the property and pay us off before the foreclosure is complete we will stop the process, if not we will take over the property. Typically, foreclosures in Wisconsin take up to 12 months.

Bottom line. Investing in real-estate backed loans means that if the borrower doesn’t pay up, you can foreclose and take over the property. But what is that really like? The purpose of this post is to provide real-world dates and numbers for a completed foreclosure on a marketplace real-estate investment site. I haven’t seen any other similar resources.

My current active investments are at PeerStreet ($1,000 minimums, accredited-only, debt-only) and Fundrise eREIT ($500 minimum, open to everyone, equity and debt).