Real Estate Crowdfunding Platforms Have Yet to Face Their True Test - Will They Endure
Updated: May 23, 2022
Part 3 - No Liability
The real estate default and foreclosure process typically does not resolve itself overnight, especially if these loans are made in states that follow the judicial process for default resolution. This can therefore rack up extensive legal and management fees over time. Before committing to the investment, investors should review the crowdfunding company’s financial statements to determine if the company has any contingency funds set aside to secure the investments on behalf of their investors for the resolution process of a real estate correction. Investors will find the majority of the company’s income is allocated toward loan servicing and marketing to keep the online engine flowing. This means that when a default and/or foreclosure occurs, which is not an “if” but a “when”, there may be cause for concern about the investors’ principal investment. This is where the fine print of the PPM should not be overlooked.
The crowdfunding company is typically not obligated to pass through any monies received from the default resolution to investors, which means the company could potentially absorb the entirety of these funds to pay their fees; that is of course if they have a contingency plan for a real estate correction to protect the tangible asset at all. The company is not liable if there is a complete loss to the investor because the investor risk was defined and acknowledged by the investor in the fine print of the PPM that every day investors do not typically read.
So, how will the crowdfunding industry react to a market correction? It is yet to be seen. All investors can do is hope the people at the helm are prepared.