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 shared by a helpful reader about a “disaster” loan with multiple bad factors – bankrupt building owner, bankrupt tenant, a charitable donation, poorly-aligned incentives, COVID-19 pandemic, civil unrest, and forced selling. 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: Office building in Springfield, Ohio.
- Target Net Investor Rate/Term: 8.75% APR for 31 months.
- Amount: $3,600,404 loan.
- 60% LTV based on 3rd-party appraisal of $7.76 million.
- Loan secured by the property in first position.
- Cash-out refinance.
Timeline.
- February 2018. Loan is originated.
- December 2018. Payments stop.
- January 2019. Payments are over 30 days late, demand letters are sent, etc.
- April 2019. Foreclosure complaint filed.
- April 2020. A year has passed. Foreclosure process drags on, but now all foreclosures are halted due to COVID-19.
- August 2020. Foreclosure auction date set for October 2020.
- October 2020. PeerStreet abruptly decides to sell to a third-party for net proceeds to investors of $573,281.31 for a final return (including interest paid to date) of 18% of the original investment.
How did a $3.6 million loan backed by a building that was appraised for $7.8 million in 2018 end up only giving back investors $580,000 less than two years later? How did a loan with a supposedly 60% loan-to-value ratio end up paying back only 18 cents on the dollar? After reading all the screenshots and documentation provided along with some poking around online, here’s what happened in the background.
A wealthy couple donates what might be the most prestigious commercial address in downtown Springfield, Ohio. The address is literally “1 Main Street.” Look at the building entrance from Google Maps Streetview. The lucky nonprofit recipient immediately agrees to sell it to EF Hutton, which renames it EF Hutton Tower. The nonprofit is happy, but they are on a payment plan and also get paid partially in EF Hutton stock. (Cue ominous music…)
EF Hutton is now both the building owner and the anchor tenant. So the same company that owns the building is also the source of most of the rental income. They now want a cash-out refinance, and obtain an appraisal of $7.78 million in January 2018. Now, if there was an independent buyer for this property, the appraisal might have been done with more skepticism. But it was appraised as a charitable donation (i.e tax write-off) for a needy non-profit! Many people potentially benefited from a high appraisal. The building owner gets more money from the cash-out refi, the donor get a bigger tax break, the recipient gets a high-publicity donation, even Peerstreet got a note with a great LTV%. Everyone except the person holding the bag at the end.
Okay, so time moves on. EF Hutton is quickly in financial trouble and being investigated by the SEC, somehow pivoting from stock trading to mobile phones to cryptocurrencies on its way to bankruptcy. Check out this Springfield News Sun article about their $12 million in debt. The anchor tenant is broke. There is no rent being paid. The nonprofit is owed money. Property insurance and property taxes are not being paid. The building is no longer being maintained. From a Peerstreet letter to noteholders:
As the foreclosure proceedings were ongoing, PeerStreet made repeated efforts to gain access to the property and assess its condition. After the court granted PeerStreet partial access to the property, we discovered water damage, deferred maintenance on the elevators and other maintenance issues caused by the borrower’s failure to maintain the property, which inspectors estimated would cost over $1M to remedy.
In addition to this, the borrower stopped making property insurance payments, which PeerStreet then advanced to protect investors’ interests in the collateral. The borrower also defaulted on property taxes in excess of $700,000.00.
COVID-19 crushes the local economy. Nobody is there to protect the building during civil unrest. There is no anchor tenant. $1m in property damage. $700,000 in property taxes. Even so, I don’t understand why Peerstreet didn’t just wait for the foreclosure auction. I’d personally feel more confident if there was an open auction. Could they have held out until after the pandemic passes? That’s what I would have done if I was the sole owner. However, Peerstreet might simply value a fast resolution over absolute final return.
Final numbers. As noted above, the final return (including interest paid to date) was 18% of the original investment. (As in, you put in $100 originally and get $18 back.)
My commentary. Both bad luck and bad incentives lined up for such a bad result. The appraisal was obviously too high in retrospect. Whenever someone donates something big, even though it is a charitable act, the donor still wants it to be valued as highly as possible while the nonprofit also benefits. The tax deduction here was worth millions. EF Hutton also wanted the highest valuation possible as it was a cash-out refi. COVID and economic factors only made it worse. Once it was clear that they had no more skin in the game (equity), EF Hutton let the property fall into ruin.
A cynic might wonder if EF Hutton knew this would happen and wanted to walk away with as much money in its pockets as possible? Where did all the money from their $12 million in debt go? Highly suspicious.
Getting back 18 cents on the dollar really hurts, and makes me wonder how this might happen on a more commonplace residential property (and how to avoid it). You would still need an inflated appraisal (avoid cash-out refis?). You would also need the owner to stop caring about the property and let it get totally trashed (maintain equity?). You would need a severe economic downturn and a forced sale (more skin in the game from Peerstreet to encourage more patience?).
Finally, this is another lesson in the importance of diversification. If this was a $1,000 loan amongst 50 different loans, your loss would be 1.6% of your total $50,000 portfolio.
Bottom line. Even though I’ve now invested and reinvesting $60,000+ into 63 loans at PeerStreet over 4+ years, I haven’t had one (knock on wood) completely “blow up”. I’ve had several spend several months in default, only to be paid back in full with interest. Thanks to a helpful reader, I was able to share this story and hopefully provide some educational value. Most importantly, this should teach you to diversify even if the loan looks solid, as even if you replaced any one of my $1,000 loans with this “worst-case scenario”, thanks to diversification my overall portfolio return would still be positive.
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.
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I was invested in this deal as well, luckily only for $1000. I appreciate Peerstreet’s openness about the situation and hope it serves as a lesson for increased due dilligence on their part. As you note in your Bottom Line, this is the reason for diversification. Thanks for posting!
I had 2 deals on another site go completely belly up, and that was before COVID. Shady sponsors and poor local markets led to complete loss of the original principal with very little of the income even paid. If you’re going to invest in these deals, you must diversify. Smaller amounts on multiple properties for sure. My entire real estate portfolio is in the red from those 2 bad deals and the gains on the winners will never offset the losers because I don’t want to put more money into these now.
Jonathan, I haven’t commented in a long time, but have been loyally reading for about 15 years now. My respect and admiration go out to you for sticking with it for so long.
Here’s one big question looming for investors: is commercial real estate a viable asset class moving forward?
COVID has thrust most companies into a virtual work case study. I know my Fortune 100 company will be keeping at least 20% of its white collar workforce virtual indefinitely. They are already looking at ways to offload company owned office buildings and vacate leased spaces early.
If this is the norm going forward, the commercial real estate market is going to get crushed. I just don’t see how the long run will be profitable.
Hi Tom! Thanks for sticking around as well through the various ebbs and flows of this little project of mine, ha.
That’s a good question regarding commercial RE, and I really don’t have a clear answer. I have friends that are permanently WFH now as well.
I was also in this deal for $2000. I doubled up on it because I had a bonus yield bump and it looked so safe at the offering including being semi-local to me to boot.
Crowdfunded RE has been terrible for me. RealtyShares was the worst, I was 0 for 3 there with one loan still outstanding after almost 5 years. PeerStreet was doing the best (i.e. not great) for me until this one deal wiped out everything I ever made on the platform and then some. I think I had a couple of other PeerStreet deals that I ended up with a loss on, but only in the 10-15% range.
I started looking at crowdfunded RE around 2015 after some (nearly entirely positive) experience as a private lender. I think I had at least a half dozen deals as a private lender in my local area before looking at crowd funding. My private lending returns were much higher than any crowd funding deal but I figured I could lower my total risk by crowdfunding more deals at lower rates. That absolutely did not happen with Realty Shares, Peer Street or … (I forget the name of the other platform, but its closed to new investors now anyway). I lost capital on every platform!
My go-to benchmark now is the Vanguard REIT. Infinitely liquid and diversified across all types of real estate run by professional managers. If a deal doesn’t significantly beat the Vanguard REIT return for a risk I deem acceptable, I’m just not interested anymore.
The way the article was written seems to imply a +18% return, rather than a -78% return. A careful reader will understand the difference, but an uncareful reader will not.
Meant to say -82%. Doh!
Thanks, I added some clarification to hopefully make it more clear.
I have only used Groundfloor. I put $500 into six 12 months loans.
4 loans were paid back in 8 months or sooner.
1 loan paid back in 22 months
1 loan still out there.
All were invested in late 2017. It was a very disappointing experience.
I haven’t touched crowdfunded real estate since.
Correction, these were invested in JANUARY 2017, so the one that is still out there is coming up on 3 years late.
GROUNDFLOOR – 10/28/2020
Our attorney has advised that the borrower has requested additional time to close. Closing is now scheduled for November 27, 2020. Please keep in mind closing dates are subject to change.
GROUNDFLOOR – 9/22/2020
The borrower must pay delinquent property taxes prior to closing. The redemption of taxes is taking longer than anticipated because the County is not working with a full staff. Our attorney has provided the borrower a 2-week extension in order to pay these property taxes, which must be done before the closing can proceed.
GROUNDFLOOR – 9/10/2020
The borrower’s attorney has presented GROUNDFLOOR with an offer and we have agreed to a short sale of this property, provided there is no financing contingency. The closing is scheduled to place on or before September 15, 2020.
GROUNDFLOOR – 6/26/2020
GROUNDFLOOR’s attorney has advised they have not heard back from the borrower’s counsel regarding the settlement. Settlement Proceedings have been delayed due to COVID-19
GROUNDFLOOR – 5/3/2020
GROUNDFLOOR’s attorney has advised they have not heard back from the borrower’s counsel regarding the settlement. They plan to follow up this week.
GROUNDFLOOR – 3/29/2020
GROUNDFLOOR’s Asset Management Team is still in the process of negotiating a settlement with the borrower.
GROUNDFLOOR – 2/27/2020
GROUNDFLOOR’s Asset Management team is in the process of negotiating a settlement with the borrower.
GROUNDFLOOR – 1/18/2020
Our attorney has advised that the hearing has been rescheduled for February 26, 2020.
GROUNDFLOOR – 1/5/2020
There are no additional updates at this time in terms of the pending foreclosure proceedings; however, our Director of Asset Management is working on alternative settlement options. We will provide an additional update within the next couple of weeks.
GROUNDFLOOR – 12/20/2019
Our Director of Asset Management will be meeting with our attorney on January 3, 2020.
GROUNDFLOOR – 12/3/2019
Our attorney spoke with opposing counsel today in Court and the borrower is open to negotiating with GROUNDFLOOR. Our Director of Asset Management will be discussing the file with our attorney later this week.
GROUNDFLOOR – 11/13/2019
Unfortunately, the Judge granted the borrower additional time to respond. The next hearing has been continued to January 14, 2020.
GROUNDFLOOR – 10/23/2019
Our attorney has advised that the next hearing has been rescheduled for November 12th.
GROUNDFLOOR – 10/3/2019
There are no additional updates as the next hearing is scheduled for November 7th.
GROUNDFLOOR – 9/6/2019
Our attorney has advised that opposing counsel asked for and was granted time to respond to the Motion of Summary Judgment. Opposing counsel has until October 3rd to respond, and GROUNDFLOOR has until October 24th to respond. The hearing was continued to November 7th.
GROUNDFLOOR – 8/20/2019
Our attorney has advised that the next hearing has been scheduled for September 5th.
GROUNDFLOOR – 8/16/2019
Our attorney has advised that the Discovery responses have been sent to opposing counsel. The Judgment Department is in the process of re-noticing our existing Motion. We will provide additional updates as they are received.
GROUNDFLOOR – 7/29/2019
GROUNDFLOOR has executed the Discovery responses and returned to our attorney.
GROUNDFLOOR – 7/26/2019
Our attorney has advised that our Motion was entered and continued by the court. Due to the Defendant having propounded Discovery requests, our Motion was entered into the court record and continued to a date to be set after our Discovery has been responded to. Our attorney is in the process of preparing the Discovery responses and will send them to GROUNDFLOOR early next week for review and execution. The Discovery responses will then be provided to opposing counsel, and we will re-notice our Motion for the first available court date.
GROUNDFLOOR – 7/10/2019
Our attorney has advised that as of today, the defendant did not file an Answer; however, it can take up to a week after July 9th if the defendant sent the Answer via US mail. The Judgment Hearing has been scheduled for July 25, 2019.
GROUNDFLOOR – 7/9/2019
GROUNDFLOOR has reached out to our counsel for an update. We will provide an update as soon as we have more information on the next steps.
GROUNDFLOOR – 6/12/2019
Our attorney has advised that the case was continued since the defendant’s counsel appeared. The Court granted 28 days to file an Answer. Unfortunately, we need to wait until July 9, 2019, to confirm if the defendant’s counsel filed an Answer. If not, we can re-notice immediately after July 9th and once again present our Judgment packet to the Judge.
GROUNDFLOOR – 6/12/2019
We are awaiting an update from our attorney regarding the June 11th Judgment hearing. We will advise as soon as possible.
GROUNDFLOOR – 6/2/2019
There are no additional updates at this time as the Judgment hearing is scheduled for June 11, 2019.
GROUNDFLOOR – 5/8/2019
Our attorney has advised that the Judgment hearing is scheduled for June 11, 2019.
GROUNDFLOOR – 4/30/2019
The Case Management hearing was stricken by the Court and we can proceed with judgment. Our attorney’s judgments department will be scheduling hearing dates this week for our motion for entry of Judgment.
GROUNDFLOOR – 4/17/2019
Our attorney has advised that the Case Mangement date is still scheduled for April 29, 2019.
GROUNDFLOOR – 3/19/2019
Our legal counsel has advised that the case has been reassigned to a new judge. The Case Management date is scheduled for April 29, 2019.
GROUNDFLOOR – 2/22/2019
Our legal counsel has advised that defense counsel filed an appearance this morning and appeared in court this afternoon. Defense counsel made an oral Motion for Substitution of Judge as a matter of right on behalf of the borrower. The motion was granted. The order entered will be sent to the Presiding Judge for reassignment to a new judge. This could take a month or more. Our attorney is following up weekly for reassignment to a new court calendar and judge.
GROUNDFLOOR – 2/13/2019
There are no additional updates at this time as the Judgment hearing is scheduled for February 22nd.
GROUNDFLOOR – 1/15/2019
Our legal counsel has advised that a Judgment hearing has been scheduled for February 22, 2019.
GROUNDFLOOR – 12/18/2018
Our attorney is preparing the Affidavit of Information to proceed with judgment.
GROUNDFLOOR – 11/29/2018
Groundfloor has provided our legal counsel with the judgment figues. As previously mentioned, we cannot move forward until after December 17th. We will provide an additional update at that time.
GROUNDFLOOR – 10/31/2018
Groundfloor is working with our legal counsel to prepare judgment figures. As previously mentioned, we cannot proceed until after December 17, 2018.
GROUNDFLOOR – 10/1/2018
Our legal counsel has advised that service has been completed for the LLC through the Secretary of State. At this time, our legal counsel is proceeding with the publication for service on the borrower, which is a requirement in Illinois since we have been unable to serve the borrower. The Notice has been submitted to the newspaper and will run on 10/3, 10/10 and 10/17. Once the publication has run and the answer period has expired our attorney will be able to proceed with judgment. The answer period is set to expire 30 days from the completion of publication. However, in Cook County judgment cannot be filed for an additional 30 days from that date. In this case, we may proceed with judgment after December 17, 2018.
GROUNDFLOOR – 9/13/2018
Our legal counsel has advised that on September 10, 2018, this matter was stricken from the Case Management call in Cook County as no one appeared in court. The period for the borrower to appear and answer has been scheduled for September 24, 2018. Our counsel is still proceeding to serve the borrower through the Illinois Secretary of State. We will have an additional update within the next two weeks.
GROUNDFLOOR – 9/11/2018
Groundfloor has a call with our legal counsel this afternoon to discuss the status of the foreclosure proceedings. We will provide an additional update as soon as possible.
GROUNDFLOOR – 8/13/2018
Our legal counsel has advised that we are still in the service stage. Counsel is proceeding to alternate means of service (i.e., publication or service upon the Secretary of State).
GROUNDFLOOR – 7/14/2018
Our legal counsel has advised that the Complaint was filed on July 12, 2018.
GROUNDFLOOR – 7/9/2018
Our legal counsel has advised that the Foreclosure Complaint will be filed within the next 48 hours.
GROUNDFLOOR – 6/20/2018
Our legal counsel has advised that they are awaiting for title. The Complaint will be filed once title is received.
GROUNDFLOOR – 6/14/2018
Our legal counsel has advised that the file is currently under attorney review. We will provide an additional update as soon as possible.
GROUNDFLOOR – 5/31/2018
The loan was not repaid by the revised maturity date. Groundfloor will be engaging counsel today to proceed with foreclosure.
GROUNDFLOOR – 5/14/2018
The borrower has advised that the drywall will be completed by the last week of May, which will give him the value to refinance the loan.
GROUNDFLOOR – 4/23/2018
The borrower has advised that he is ordering inspections to close the walls and proceed with drywall.
GROUNDFLOOR – 4/17/2018
The borrower has advised that the plumbing and electrical works are in process, and expected to be complete this week. The rough-in inspection will be scheduled this week, and drywall will start after the inspection.
GROUNDFLOOR – 3/20/2018
The borrower has returned the Executed Forbearance Agreement, and the foreclosure proceedings are on hold. The new maturity date is May 30, 2018.
GROUNDFLOOR – 3/13/2018
The borrower never returned the executed Forbearance Agreement; therefore, we have engaged legal counsel to proceed with foreclosure.
GROUNDFLOOR – 2/19/2018
Groundfloor is investigating a commercial resolution, which may provide an expedited resolution and repayment rather than proceeding with a judicial foreclosure. Additional updates will be provided in the next few weeks.
GROUNDFLOOR – 1/16/2018
Groundfloor will be issuing a Notice of Default to the borrower on January 17, 2018, which will provide the borrower with 30 days to repay the loan before proceeding with foreclosure.
GROUNDFLOOR – 1/8/2018
Groundfloor has reached out to the borrower for an update on the refinance closing. We have given the borrower seven days to provide a copy of the refinance commitment letter from the lender refinancing the loan. If the commitment letter if not received within seven days, Groundfloor will engage legal counsel to proceed with foreclosure.
GROUNDFLOOR – 12/14/2017
The borrower has advised that there is a delay with the refinance, but the loan will be repaid by the end of the month.
GROUNDFLOOR – 11/29/2017
The borrower has advised that the loan is in the process of being refinanced, and should be repaid on or before December 13, 2017. Please note that closing dates are subject to change.
GROUNDFLOOR – 10/30/2017
The borrower has advised that he is working to refinance the loan and expects to repay before the maturity date.
GROUNDFLOOR – 10/4/2017
The borrower has advised that the corrections have been approved by the city of Chicago. The renovations will resume, and the borrower hopes to have the property under contract by Thanksgiving. Please note that the borrower will also have refinance options ready to ensure the loan is repaid by the December 01, 2017 maturity date.
GROUNDFLOOR – 9/8/2017
The borrower has advised that they are awaiting corrections from the architect on plans that were submitted to the city of Chicago to proceed with renovations. The borrower is hoping to have the corrections approved next week.
GROUNDFLOOR – 8/10/2017
The borrower has advised that they are still waiting on city inspection approvals. The exterior work that was not budgeted is underway. Please note that the borrower also advised that the brick on all three floors is currently being replaced.
GROUNDFLOOR – 8/9/2017
The borrower has advised that they ran into some issues with the drywall and wiring. They are currently waiting on an inspection from the city of Chicago and intend to have the property on the market by the end of September/beginning of October.
GROUNDFLOOR – 6/30/2017
The borrower has advised that the project has been delayed due to plumbing issues. The borrower has completed the rear decking, plumbing and electrical rough and are awaiting all rough inspection. It is anticipated that in the coming few weeks they will have drywall completed and windows installed.
GROUNDFLOOR – 4/20/2017
The borrower has advised that HVAC works have been completed.
GROUNDFLOOR – 4/3/2017
The borrower has advised that insulation works have been completed.
GROUNDFLOOR – 2/21/2017
The borrower has advised that framing works have been completed.
GROUNDFLOOR – 1/24/2017
The borrower has advised that all architectural work has been completed.
Groundfloor apparently provides more frequent updates than Peerstreet!
I had one on Realtyshares blow up where I lost 55% of my invested capital. And subsequently Realtyshares went belly up so new platform management firm was not too interested in pursuing the options for recovery.
I am sure that RS platform along with GF has more defaults compared to others. I shared my deal and experiences in this post https://financialfreedomcountdown.com/how-to-evaluate-real-estate-deals-that-will-help-you-avoid-losing-money/
A better fund in which to invest appears to be home builders. According to a recent Axios article home inventories are incredibly low and prices are being driven up by lack of supply and that wealthy investors are buying up homes, holding and selling for profits.
The conclusion was more building is necessary as building starts have been stagnant for a long time.
https://www.axios.com/us-home-prices-march-upward-50a76ad7-4a89-400b-8908-a2c5aeddf61d.html
This article had some interesting bits: Net lease REITs piece together Covid strategy
https://therealdeal.com/national/2020/12/10/net-lease-reits-piece-together-covid-strategy/
I had a bad experience with patch of land also. No interest payments for many months. The borrower had stopped making payments. Luckily after a few months I got my principle and all interest payments. Wasn’t very impresses with POL. They don’t do proper due diligence on the borrowers. In fact, I googled one of the borrowers on another property and found they were in the middle of a criminal trial and I informed POL and they were very surprised to hear of it. The next day that listing magically disappeared with a notice that said it was fully funded.
Thanks for sharing this story. I was in on this deal and lost 9K! There are two rounds and I was careless at the time, putting in 5-6K per deal. I still have about 20K locked up at Peerstreet – all in default. In retrospect, this whole thing was too good to be true and a waste of time.