Founded in early 2013, Patch of Land was among the earliest crowdfunded real estate platforms, and have since raised more than $24M in venture funding to fuel their growth.
Patch of Land positions themselves as a “P2P lending marketplace” (they’ve even trademarked the term “P2RE” – as in “Peer-to-Real-Estate”, natch), emphasizing the matchmaking role between borrowers and investors. Although they do include some commercial projects, their average loan size is about $500,000 and most of their loans are for rehabbing individual residential properties (ie, fix-and-flip). Borrowers apply for loans directly with Patch of Land, and if approved the loan is “pre-funded” by Patch of Land. That means the borrower can start the project right away without waiting to be fully funded by investors.
Related: You can read more about my investment with Patch of Land in Baby Steps: Getting Started with Crowdfunded Real Estate.'
Types of investments Patch of Land offers
Patch of Land only offers real estate debt investments. Most of their loans are for residential rehabs (fix-and-flips), though also include some multi-family and commercial projects. Most of the loans offered have 12-month terms, though occasionally include 18- or 24-month terms. The loans are interest-only, which means investors receive interest payments monthly over the term of the loan, and then receive the principal back when the term ends (or if the borrower pays off the loan early).
Once you’re logged-in and have verified accreditation status, you can review details of each prospective investment, including background on the borrowers (which includes, usefully, previous Patch of Land projects), financials and budget for the project, and property information, including an appraisal if available.
What do you get when investing with Patch of Land?
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 is, strictly speaking, not actually secured by the underlying property. Instead you receive what Patch of Land refers to as a “Borrower-Dependent Payment Note” which entitles you to a specific share of the principal and interest payments received from the borrower on the mortgage.
How does Patch of Land make money?
Patch of Land charges investors between 0-3% of the loan amount, for costs associated with administration, servicing, and compliance. Additionally, if a loan defaults, there are other fees from late charges, default rates, extensions, workouts, and other additional monies collected in the workout process.
Potential returns and cashflow
While Patch of Land advertises returns of “up to 12%”, at the time of this writing there were only two open investments, both offering an 8% return (and at an 80% LTV, which is relatively high). While some loans are occasionally offered at 12%, most are in the 9-10% range.
Investors receive interest payments monthly over the term of the loan, and their principal back at the end of the loan term (or earlier, if the borrower refinances or pays off the loan).
Breadth of offerings on Patch of Land
Although they’ve funded more than 500 loans (originating more than $300M), there are often only a few open investments available at any given time.
Regulatory framework and due diligence expectations
Patch of Land offers investments only to accredited investors, under SEC Reg D. They are not a registered broker-dealer or investment advisor. Their loans are originated through a wholly-owned subsidiary (Patch of Land Lending, LLC).
Their advertised due diligence process for their loans includes 5 main categories (Project, Legal, Market, Management, and Finance), and they also emphasize an algorithmic component to their underwriting process:
Patch of Land has also developed proprietary technology to provide a strong algorithmic understanding of the real estate that secures each loan. We are able to evaluate a large amount of individual data points in order to construct a risk profile for each property and to cross check the data being provided by independent appraisals or price opinions. This data enables our underwriters to make a more comprehensive analysis of each project and to increase the efficiency of our due diligence without sacrificing our standards.
You can read more about the specifics of their due diligence process (and even watch a video about it) on the Patch of Land blog. In theory their relatively high loan volume gives them a lot of data to work with to hone and improve those algorithms, though in practice none of these crowdfunded investment platforms have been through a major downturn yet that would truly test their underwriting algorithms.