Groundfloor positions themselves as an online real estate lender, similar to “hard-money” lenders commonly used with residential real estate rehab projects. Groundfloor reviews a borrower’s loan application (they say only 5% are approved), grades the loan on a sliding scale, and then open it up to the investor base for funding (some other platforms “pre-fund” the loans as a lender themselves, reselling those loans to investors over time).
Groundfloor began in Georgia, and has received more than $13M in venture funding to help fund their growth, and as of January 2018 is now available to investors nationwide.
Types of investments GROUNDFLOOR offers
Groundfloor is a real estate platform focused very narrowly on funding short-term loans for residential 1-4 family projects, including straight “fix-and-flips”, as well as buy-and-hold projects and refinancing. All of their early investments were in Georgia, but as of January 2018 are available nationwide. Though they have no pre-set limits, their current loan target amounts are $75,000-$2,000,000. Prospective investors should note that for deferred loan investments, the larger the loan amount, the more investor interest required to fully fund the loan.
What do you get when investing with GROUNDFLOOR?
One of the appeals of real estate investing (especially debt investments) is that the investment is backed by a tangible asset that can be sold off to recover investor money if something goes wrong. But as with many of the crowdfunded real estate investment platforms, your investment with Groundfloor is, strictly speaking, not actually secured by the underlying property. Instead you receive what referred to as a “Limited Recourse Obligation” (LRO) which entitles you to a specific share of the principal and interest payments received from the borrower on the mortgage. From the Groundfloor FAQ:
Once you purchase a GROUNDFLOOR Limited Recourse Obligation (LRO), you become a creditor to GROUNDFLOOR. We repay the LRO when the borrower repays the loan in which you've invested.
These kind of securities are quite common among real estate investment crowdfunding platforms, but investors should be sure to understand their limitations. And while some platforms create separate entities for each investment, in the case of Groundfloor you as the investor become an unsecured creditor to Groundfloor itself, and that means that in the event something happens to Groundfloor, you’re in line with other unsecured creditors irrespective of what’s happening with the specific property you’ve invested in.
Groundfloor says they do a few things to ostensibly mitigate some of that risk, like originating the notes via subsidiaries and keeping investor funds in isolated FBO accounts. As with any crowdfunding investment, investors should be sure to review the offering documents clearly to understand exactly what they’re investing in.
How does GROUNDFLOOR make money?
Groundfloor doesn’t charge any fees to investors. While some real estate investment crowdfunding platforms charge a “spread” of 1-2% between what the borrower pays and the investor receives, Groundfloor charges borrowers an origination fee (typically around 4%) as well as a range of other administration and processing fees, putting their fees in line with similar platforms.
Potential returns and cashflow
While some loans offered via Groundfloor now include monthly payments, others are “deferred” which means investors do not receive any monthly interest payments, instead receiving a “balloon” payment of the full interest and principal amount at the end of the loan term. While that does mean the borrower retains more cash on hand to complete the project, it also means that investors lose a useful tool for monitoring the health of a project (regular payments). Groundfloor does provide monthly updates on project status via their asset management team, but investors should take care to understand which type of loan they’re investing in (one with monthly payments or one that’s deferred with the balloon payment).
Breadth of offerings on GROUNDFLOOR
To date, Groundfloor lists about 650 funded loans, and says their borrowers have repaid 438 loans for $53M. As of this writing, there are 4 available investments, all of them deferred loans. Investors can select individual properties to invest in, or specify an allocation across the loan grades to automatically invest as new loans become available.
Groundfloor’s interface for browsing loans and reviewing property details (and monitoring loan performance) is excellent, and stands out among investment platforms. There are screenshots below, including some taken from their offering circular.
Regulatory framework and due diligence expectations
Groundfloor had been operating under SEC Reg A+, using “Tier I”, which is subject to certain state-level review (which is why they were only available to investors in a few states). As of January 2018, Groundfloor will begin offering investments under Reg A+ “Tier II” which does not require state-by-state review. Reg A+ offerings must also be registered with the SEC, including detailed offering circulars, and offering firms are subject to a number of financial disclosure requirements.