Crowdfunding has arrived for just about all forms of investment activity – including real estate. There are more and more opportunities for retail investors [read: average Joe] to participate in real estate development projects. Until recently, though, there wasn’t much to speak of by way of investor protection, with almost all real estate crowdfunding investments being completely unsecured for the investor.
Investor Versus Intermediary Security
As an investor, you might think your money is being “loaned” direct to the real estate developer. Not so. This is all overly simplified to make the point, but in most cases, you would be lending to an intermediary, who in turn lends to the developer. The intermediary’s loan to the developer is secured, similar to a mortgage on a property, but your loan to the intermediary is not.
Enter Patch of Land
Patch of Land is a real estate crowdfunding portal that has recently changed its processes to enhance investor protection. Here’s how – in simple terms – the new approach works.
1. Patch of Land funds a real estate developer, receiving a promissory note, or mortgage, on the property under development.
2. All of Patch of Land’s interests in the promissory note are assigned to an intermediary, which is a special purpose entity (SPE) designed to reduce the risk of investments getting tied up in the event of a bankruptcy.
3. Enter investors. In exchange for their investments, the intermediary provides investors with a loan document, called a Borrower Payment Dependent Note or BPDN, which means the investor gets paid if/when the intermediary receives payments from the developer.
4. The Patch of Land intermediary assigns all of its interests in both the promissory note and the securing mortgage to a third party who is completely independent. This third party holds the notes and related securing documents on behalf of the group of investors in each project. This means that if Patch of Land should wind up or enter bankruptcy, the investors’ interests are protected and managed by the intermediary.
A Step Forward
A shared secured interest is better than an unsecured interest, and this move by Patch of Land leads the way in taking an important step forward for protecting investors. The fact Patch of Land has taken such a transparent approach, making all of its related forms and documents available publicly, may prompt other RECfunding portals to take similar steps.
Many types of investment opportunities, such as those found on Patch of Land, require accredited investors to be verified. VerifyInvestor.com, started by entrepreneurs and investors, offers secure and streamlined verification processes to investors as well as companies looking to raise capital.
