When I first heard the news of RealtyShares closing its doors to new investors on November 7, 2018, I was taken aback and filled with sadness. As someone who had developed good relationships with multiple people from RealtyShares since mid-2016, the news hit close to home. This San Francisco-based company had become a familiar presence in my professional life.
Just weeks before the closure, I had a lunch meeting with RealtyShares' Chief Marketing Officer and a marketing employee. They excitedly shared their plans for the future, including a revamped website, rebranding efforts, and the launch of a second fund with a lower minimum investment. It seemed like they were on the path to success. Little did we know what was to come.
The Surprising Shutdown That Nobody Expected
In an email to investors, RealtyShares expressed their own surprise at the sudden wind-down. They were in the midst of a Series D funding round, which was set to bring in $30 million in new capital. Unfortunately, at the last minute, the investor backing out. The celebratory dinner planned to commemorate the successful funding round quickly turned into a somber affair.
In retrospect, it appears that RealtyShares expanded too rapidly, hiring too many people and securing a large office space in 2017. Although demand for their deals had always been high, they struggled to maintain the necessary supply. The delicate balance between supply and demand is crucial in any business, and RealtyShares found themselves facing mounting customer acquisition costs due to excess demand.
Additionally, their linear growth without the ability to scale quickly highlighted a lack of technological infrastructure. RealtyShares relied heavily on manual processes to review, finalize, and manage deals. It's possible that pressure from venture capitalists to achieve hyperbolic growth played a role as well. This serves as a reminder of the trade-offs between accepting VC funding or bootstrapping a business.
What's Next for RealtyShares Investors?
RealtyShares is currently in the process of assigning a new manager for the equity investments. This individual will be responsible for ongoing asset management and reporting. The transition plan is being carefully crafted to ensure a seamless handover. NES Financial, the fund administrator, will operate and manage the specific investments until the scheduled completion.
It's important to note that investors in RealtyShares, the business itself, are the ones who will bear the brunt of the closure. Their equity holdings are likely to be devalued or even rendered worthless. However, for investors on the platform, their individual investments should continue as planned, albeit with less involvement from RealtyShares.
RealtyShares acted as a marketplace, connecting investors with sponsors for real estate crowdfunded projects across the United States. Each investment was structured as a separate LLC subsidiary of RealtyShares, making it independent from the company during the wind-down process. NES Financial will be compensated for managing and operating these investments until their completion.
To safeguard your investments, it is recommended that you document every deal in detail and maintain contact information for each sponsor. Given the diminished oversight from RealtyShares, this proactive approach will ensure that you can stay informed and engaged throughout the lifespan of your investments.
RealtyShares Alternatives: Exploring the Future of Real Estate Crowdfunding
While RealtyShares' closure is undoubtedly a setback, the real estate crowdfunding space continues to offer opportunities for investors. If you're looking for alternatives, here are two platforms to consider:
1) Fundrise
Fundrise, founded in 2012, has been a prominent player in the real estate crowdfunding arena. They have raised capital through both traditional venture capital methods and an Internet Public Offering, demonstrating their innovation and adaptability. Unlike RealtyShares, Fundrise is open to non-accredited investors, making it accessible to a broader audience. Their tailored funds, such as the Heartland eREIT and West Coast eREIT, provide a diversified investment approach for those who prefer not to select individual deals.
2) CrowdStreet
With a direct-to-sponsor model, CrowdStreet offers efficient communication and transparency by allowing investors to correspond directly with sponsors of real estate offerings. By investing on the sponsor's platform, rather than CrowdStreet's, investors eliminate platform risks. CrowdStreet meticulously screens all deals and provides comprehensive sponsor rating designations, ensuring transparency and peace of mind. Their specialization in emerging cities aligns with the current focus on heartland real estate opportunities.
Both Fundrise and CrowdStreet are viable alternatives for investors seeking to diversify their portfolios and take advantage of real estate arbitrage opportunities. While the road ahead may require more due diligence, the lessons learned from RealtyShares' closure will undoubtedly shape the future of real estate crowdfunding platforms.
Looking Ahead: The Future of Real Estate Crowdfunding
The RealtyShares closure serves as a reminder that only a few winners will emerge in the real estate crowdfunding space in the long run. The key lies in striking the right balance between technology, supply, and demand. As news of this closure spreads, investors will undoubtedly reevaluate their alternative investment strategies and scrutinize real estate crowdfunding platforms more closely.
Platforms themselves will work to improve their balance sheets, increase deal supply, enhance their technology, and refine their messaging. RealtyShares, despite its sudden closure, will likely do everything in its power to see existing investments through to completion. With ongoing asset management revenue, a dedicated wind-down team, and a fund administrator in place, the transition process should proceed relatively smoothly.
As investors navigate these uncertain times, it's crucial to remain diligent and informed. By being proactive about understanding your investments and keeping track of sponsors' contact information, you can mitigate risks and ensure the best possible outcomes. The future of real estate crowdfunding holds promising opportunities, and with the right approach, investors can continue to make sound investment decisions in this evolving landscape.
About the Author: Sam, the author of FinancialSamurai.com, has been investing his own money since 1995. With an MBA in finance and real estate from UC Berkeley, he has spent over a decade working at leading financial service firms. His website, Financial Samurai, provides trusted personal finance advice and garners over 1.5 million organic pageviews monthly. Featured in esteemed publications such as the LA Times, The Chicago Tribune, Bloomberg, and The Wall Street Journal, Financial Samurai is a go-to resource for financial wisdom.
