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).
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I haven’t had a default on RealtyShares yet but I had had 2 on Patch of Land. Both PoL defaults are a year past the original end date and remain unresolved. In one case PoL did foreclose but has been unsuccessful in sale of the asset so far. In the other the borrower filed bankruptcy the day before the foreclosure sale as a delaying tactic.
As far as the collection of rents, I *think* the borrower is allowed to pocket them unless there was a clause in your loan for assignment of rents (this was almost certainly the case). However, I think you have to prove the rents were collected and get a court order to collect. That might all be part of the foreclosure process.
Investors haven’t seen anything yet. These investments, when the economy does truly go south, are going to be vaporized. 75% LTV in the middle of Wisconsin? No thanks. Second notes? No thanks. These are but 2 of the tens of ways you can get screwed in these types of deals. Keep them short term, and only in absolute prime markets.
What happens when people continue to pay the first, and not the second on these loans? You foreclose, but how do you take out the first if you don’t have the funds? Disaster waiting to happen.
These are real estate investments for the uninformed. Commercial has little to no statutory protections, and how do you know if the property is being bought properly with the right amount of due diligence? A broker opinion of value is a bad way to go because they don’t look at much.
This is a first position loan, as are most of these types of deals. I don’t think I’ve seen a second position loan yet.
I’m currently investing three 2k debt investment with realtyshares. I hope this doesn’t happened to me.
To your question “I wonder if the borrower is still collecting rent from all these tenants even after they stopped making loan payments and even now during the foreclosure process. Just pocketing the rent… Is that allowed?”
I thought it was possible to do this. I thought people were doing this during the 2008 financial downfall. Since people were so underwater on their mortgages, they would stop paying their loans and collect rent until they lost their property.
Of course its possible and prudent too, he’s the legal owner of the property and leases until yanked away in foreclosure. Questionable is what happens in this 6 month redemption period, is the foreclosing agent/service allowed (and is) directing any current rents away from the defaulter? For a fee of course…
Is it likely the units weren’t fully let or they are behind too in rent payments causing the default?
Please keep us informed, thanks for sharing, going to give this a try to.
I suppose anything (legal) that results in a greater net for an individual is “prudent” for that person, though I can’t help finding the practice a bit lame. I recall discovering after the fact that a landlord of mine had stopped paying his mortgage while continuing to collect my full rent for the many months it took for the foreclosure to finally occur — you can presumably see why this would annoy me (though technically yes, the utility I derived from my monthly rent payments was undiminished).
It feels to my as though this is taking advantage of policies intended to protect people from being peremptorily evicted via foreclosure, while not in any way favoring the people who are actually living in a property.
Just curious, does this have any affect on your credit, or just the actual borrower’s?
No, it has no effect on my credit as I’m essentially a lender (technically an investor in real-estate backed debt).
The loan documents should include an Assignment of Rents, entitling the lender to collect rents in this type of situation. As a practical matter, the lender likely has not exercised its rights.
Interesting, I will try and have a look. But I agree, it does not look like anyone on the lending/servicing end has pursued this at all.
Typically, before the lender can collect rents directly under the assignment of rents, the lender must give notice to the lessors of a default and the lender is invoking his rights under the assignment to receive rents directly from each tenant. Was this notice given in a timely manner?
Sorry to hear this bad news, Jonathan, is this your only investment with RealtyShares? I have a $2K investment also, just started in Sept, so no interest paid yet. Have been researching to get into a 2nd one, but the interest rates on $2K has been dropped to 7%, so still looking.
What are your other investment with PeerStreet, Patch of Land, Fundrise eREIT? have the investment been positive?
Yes, this is my only investment with RealtyShares. It’s my only default so far, everything else has either been paid off as promised, is ongoing, or otherwise exited. I don’t believe any other loan is even late at this point in time.
Thanks for the update and sorry for the bed news. I have been thinking to invest in RealtyShares or PeerStreet, but just didn’t put that into action yet. Please keep us posted on the process.
Appreciate you sharing – we all get to learn, I guess this is the downside to this type of investment. Will this foreclosure show-up on the borrower? Next time they try to get a loan like this, you would know? thanks.
It should appear on their credit report so that everyone else can see, as the borrower provided a personal guarantee.
I don’t understand why did these borrower pay 9% APR on a 24 months secured loan. I am pay only 3.5% APR on my home mortgage. and a lot of SMB are paying 6% to 9% on the unsecured LOC.
Are RealtyShares dealing with people with terrible credit score?
I would assume it has to do with large amounts of money being borrowed for extended investment purposes. I gather that once you own like four properties, at that point getting any sort of additional conventional mortgage becomes difficult (impossible?). Presumably lenders consider you higher risk at around this juncture, with consequently higher premiums? If there are other factors involved I’d be interested to hear (such as higher credit risk individuals, though I’m not sure why they would be favored).
From the looks of it, it wouldn’t have mattered if they paid 2% or 20%, but generally yes, if somebody is paying more than 6% interest in today’s market for a deal, that should get your antennae up.
Very interesting read since I am also an investor on Realtyshare. Any updates on your case?
I just got notice that the foreclosure sale was completed and RealtyShares will formally become the owner of the property. The next step is to fix up and sell the property.
I was just coming to your site to see the latest and greatest on your real estate investment experiments and specifically get an update on RealtyShares. Saw the comment above. Interested to see how this wraps.
So from all the different real estate investment avenues you have worked with, what is your recommendation from a non-accredited investor perspective?
– Peerstreet
– RealtyShares
– Either FundRise investment strategies
– MogulREIT
– VNQ (currently invested)
– Real Property as a Rental (Currently Invested)
Hello, any update on this deal? One of my RS investment properties is about to go into default. Fortunately, it’s located in one of the landlord friendly states (Texas). Hopefully, the foreclosure process will be a breeze.
I started investing in RS since last year and my first 2 investments on RS are in default. All of them are dept investment in hot area in California. I found out RS only advertise the positive side, e.g. how much fund are invested and optimistic data, but they never disclose the default rate. One good thing about RS is they provide good communication (the updates) and try their best to get the money back.
I too have a RS residential loan near default. Shocked how quickly it went bad, only 3 payments were made. I tried another commercial property then started getting (very unclear) emails saying I had a chance to backout to due a valuation adjustment. When they couldn’t describe the problem in plain English, I bailed. They love to use lots of jargon and bombard one with data that is hard to make meaningful sense of – and I used to work in a corporate real estate dept for a Fortune 300 company.
Jonathan, your link to Amazon is taking me to a different book, titled “Nickel & Dimed”. Thought you might want to know.
Whoops, thanks let me fix that.
This particular property detail as it played out just screams “shady”. Adequate due diligence initially showed that the property was worth $238K, and the buyer supposedly put down actual cash in the amount of $52K ($220K purchase price less $168K loan)?
Then less than 18 months later it’s only worth $134,500? When real estate markets everywhere are up, or at least flat in the slummy areas? That’s a drop of 56.5% in value.
I’m guessing that buyer and initial valuer of said real estate had some sort of side deal going, and also that buyer didn’t really put down $52K cash. Then they sucked all the rent out of the place for 18 months and paid little to no property taxes, and let the place run down further too. I’ll be surprised if buyer purchased the place in their actual individual name, versus possibly using a shell buyer (paid them a couple of grand to use their name) or some sort of LLC where they got away without giving a personal guarantee.
You’re taking this a whole lot better than I would, given current value ($134,500- versus initial supposed value you invested based on of $238K).
Also, how do you think that you’ll get 80% of your $ back? The property is only listed at 80% of the amount RealtyShares loaned them (134,500 / 168K = .80). They won’t get full asking price, and then there are all those legal costs, + closing costs, + real estate commission + all the likely unpaid property taxes that RealtyShares will have to ante up on that will come out of your potential partial return of funds.
It’s true, I might very well get less than that. I just did a quick back of envelope calculation of 80% – 10% other fees + 10% interest that I have already received.
I don’t know if there was fraud, or something more endemic. Some people followed the “rich” landlords with multiple rental properties profiled in the Evicted book since publication, and they found that those landlords have also since filed for personal bankruptcy and lost many of their properties to foreclosure. Basically, the lives of the renters may be difficult, but it doesn’t appear like the landlords were making barrels of easy profits either. The landlords had to constantly finding new tenants, turning over properties, making repairs, and trying to collect back rent.
My experience with PeerStreet was great at first (for over a year) but now I’m looking at 2 actual defaults and probably another 2, soon to be defaulted. This is on about 20 loans; not a very good percentage. One borrower of over $1M and then left to help his father in Puerto Rico. Another borrower ran out of money and illegally granted the property over to a subordinate lien holder. I know that PeerStreet has touted the fact that no investor has lost money yet. It will be interesting to see what happens in my case. Of course, I’m not getting any interest on these loans for the months they’ve been tied up. I just hope I don’t lose my principal.
Another item affecting overall returns at PeerStreet, it takes a bit for a loan to be funded (awaiting loan closing) and become active. Then if the loan is paid off, after only a few months, it causes more time when your money is not invested.
Also I’m using a self directed IRA account at PeerStreet, through Strata. The fees are $100 annual, plus $50 purchase fee. This can eat into your returns for a small investment.
For my IRA LendingClub account also through Strata, I don’t have any fees. Perhaps LendingClub is paying them or has a special arrangement with Strata.
I invested $53,000 in six Realty Shares projects. I estimate that I have lost $27,000. Four deals are in various stages of trouble. One has been declared a complete loss; another one a 6% lost. Realty Shares is spending a lot of time and money (probably mine) to try to collect something from these dead horses. My take is that Realty Shares was not doing good due diligence on the properties and did not keep up with what was going on. One of the sponsors totally lied, changing his story from month to month.
Realty Shares is shutting down.
https://www.crowdfundinsider.com/2018/11/141049-crowdfunding-real-estate-platform-realtyshares-to-shut-down-as-money-runs-out/
Realty Shares stopped accepting new investors or investments.
jonathan, sorry you lost money on this loan (my sympathies to other commenters who suffered losses as well).
General comment: I have over 100+ loans with various CF RE sites and have uncovered numerous exceedingly high BPO valuations, therefore I now pass on any investment that does not have a certified appraisal. However, I’ve also uncovered suspect appraisals. It’s my belief the competitive landscape is pushing companies to lean toward appraisers willing to give higher valuations thus increasing investor risks.
I invested in one loan and have one default (RealtyShares also). Guess I’m done with this experiment.
My investment in RealtyShare just went default last month right after they failed to pay interest. The response I got fron RealtyShare was they were actively pursuing the sponsor (i.e. South Street Development) but hardly get any response….
When I first saw these crowd funding sites for real estate, I predicted that they will all be out of business. Didn’t realize some may go down in the up market.
Investing 2,000 per deal is a cool gig and you can diversify, but there are other options. I would divest now and look elsewhere. If anything, I’d stick with Peer Street, these are the only guys in the industry that know what they are doing. Even then, it’s not the way to invest in real estate.
If you chose to stick to crowdfunding 1. Stay local where you at least can check values and drive by the property. 2. Don’t go over 65% 3. Slowly learn the deals and do your own due diligence.
Keep in mind, these companies invest all over the country and their expertise is very limited. Finance guys spent 50+ million for technology and got into Real Estate. Come on!
Another sign of trouble at RealtyShares – they have stopped paying vendors. I’ve been contacting the company for one month to be paid for work I provided… and zero response.
Thank you, Jonathan. Great read and in-depth analysis. I am a fund manager for a Reg D. mortgage fund (Difference is, all my investors have to be accredited). When these crowdfunding platforms started to get on the scene, I saw the writing on the wall for many reasons:
1. They pissed me off, because they were taking my business away on the funding site. The barrier to entry to small brokers was gone. Some smaller brokers didn’t need my shop to send business. But this has nothing to do with their model :).
2. I could not and still can’t understand how companies like RealtyShares can turn profit with the burn rate of the money they spend on technology.
3. Their business model –> A. Let’s build a website and spend $10 million doing it. B. Let’s market this website and spend another 10, 20, 30 million. C. or somewhere after B. “Oh, by the way, we will be in the lending business, let’s learn. A lot of these companies were figuring things out as they go along.
4. Nationwide expertise – Impossible! Every local lender knows exactly what to do with a defaulted asset within their portfolio; Every local lender knows exactly what they are lending on to begin with – they drive the property and they know the value with or without and appraisal. It’s hard to control funding and foreclosure process for a nationwide lender. It is a numbers game for the banks, but these crowdfunding guys are too new, too small as compared to the banks and too inexperienced compared to local funds.
5. Cost associated with a default process. There is no way a regular fund loses 70% of someone’s investment, unless they are leveraged. Keep in mind we are in the rising market. Everything happens, owners can destroy the property, but 70% loss is simply mismanagement.
6. Market downturn and liability. We are in the up market and their default rate is higher than the industry standard. Imagine what will happen in the down market? With the lack of local control? In case of the foreclosure they will be hiring a nationwide asset management company that will be hiring a low cost local real estate agents to sell and agents to do BPO’s (Broker Price Opinion of Value), not to mention flooding the market with these properties. Remember 2008? Liability and cost control. One lawsuit can drain all the equity without cost control.
Be very careful guys. I see the appeal – you don’t have to be accredited and you can diversify the risk by putting $5,000 into each project, but it’s a flawed model and as a professional I saw this as soon as these companies came onto the scene. PeerStreet is the better one as far as the actual Real Estate Lending Expertise, but still won’t recommend them. Good luck!