THE RISKS OF INVESTMENT IN CROWDFUNDING REAL ESTATE

  Investors interested in diversifying their portfolio, be it of any size, will have realized the benefits and benefits that real estate crowdfunding can give them if they consider it as another product to be included. In the same way from here I have always emphasized the virtues that this new alternative formula of real estate investment can bring both promoters and investors. However, it is worth remembering and putting in black on white the risks that can be incurred.   

As every investment has its risks and to evaluate them you have to know them. If they do not know each other, there is no "cons" to be able to balance them with the "pros" and therefore one can not reflect on the decision to invest rationally, although in the end it will be done in a more emotional way. The latter will be further enhanced if possible in real estate crowdfunding when projects that generate a social resurgence equal to or greater than the economic begin to appear, which I call projects with heart and soul for a true real estate crowdfunder included in the guide. What seems like a truism is what camouflaged the financial system in which they "placed" products just talking about their benefits and hiding or ignoring, you go. namely, the toxicity of many of them with the consequences that followed. Therefore, we must avoid it. 

One of the maxims that technology has brought to the world of investments through Internet platforms, be they real estate, loans or any other kind is transpariencia. The power of decision is transferred to the citizen. He decides where, when, how much and with whom he invests. Citizen empowerment makes effective the triumph or destruction of a business with "word of mouth" on the Internet and through social networks. 

Transparience brings confidence. It is what in a collaborative economy is called a "prosumer", that is to say, the citizen who at the same time consumes, produces. We are in the era of "crowd-based capitalism", that is to say capitalism based on citizenship in which the next step is the citizen-investor. In such a way for these citizen-investors, we will remember the risks that can arise when investing in real estate crowdfunding. 

We will divide them into two, the intrinsic and the extrinsic.   

Intrinsic risks: 

Loss of investment or money invested: As indicated on other occasions, investments through PFPs are not guaranteed by any fund, deposits or investments. In the case of real estate, it is not different. However, the great difference with respect to others lies in the fact that there is always a real estate that supports the investment, therefore the total loss is impossible, not the partial ones.   

Risk of not being able to manage the project company or manage the invested projects: Therefore, passive investments must be considered and this way also expect passive and recurrent income. With what more than a risk is a reality. This means that even if one or several participations in societies are obstructed and we are for theoretical purposes partners in them, for practical purposes it is the promoters with whom we invest in their projects who actually manage these societies and the project in question. The intervention of the platforms as intermediaries is reduced to being the interlocutors and at the same time "guardians" of the project being carried out as it was openly exposed for participation in it by the investors. In its absence nothing prevents and it will be appropriate that this is documented in a contract between the platform and promoter to ensure their own interest and consequently that of investors.   

Risk of not obtaining the projected profitability and failing to receive dividends: Studies of the profitability of the investment associated with a project are carried out by the promoter. The platforms must have real estate experts that check and audit these data to approve them and consequently if they see them as opportunities, it is when they "upload" them to offer them to investors. Given that past returns never guarantee future returns and these, as I say, are based on the promoter's business plan for each specific project, it is not guaranteed that they will be met. Moreover, depending on the evolution of the business and the aggressive or conservative policy to carry out the business plan, the returns may be higher or lower than the initial ones. It is the platforms that in their good practice should carry out the studies in a conservative way and if they do not reach an agreement with the promoter, discard the project. Therefore, it will be the real returns once the business is completed that will result in dividends higher or lower than initially projected.

 Liquidity risk of investments: As long as there is no mechanism to make liquid investments through real estate crowdfunding, they follow the same pattern as traditional real estate investment, that is, wait for the sale of the good to recover them. The mechanism that the few existing Spanish platforms are up to now for the introduction of investors is the social participation in the project companies and therefore until there is no free transfer of these shares in a secondary market over time. the investment lasts, it can not be made effective. However, in equity projects or long term the proportional part of the rents is received while waiting for the sale and / or revaluation objective that may occur before the expected time and therefore make the investment liquid. Something different would occur in real estate crowdlending operations, a case not yet given in Spain and that would be treated for another article.   

Extrinsic risks:   

The bankruptcy of the platform as a company: Should this occur, because we must not forget that PFPs are companies that, like any other, may not generate sufficient income to stay alive or die for any other reason, the exit is the one follow. The Law requires them to be audited and in case of foreseeing their collapse, they must have protection mechanisms. These consist of a third party taking charge of the operations they have in place to try to harm investors as little as possible. The peculiarity is that the platforms, as connectors of these operations articulated through mercantile companies do not have any responsibility on them or on the projects but it is the promoter who obstructs it and therefore it is towards this that legal actions should be directed in case of having to do it. Therefore it is the third party who and according to the terms of the contract between promoter and platform, hence its importance, will enter to safeguard the interests of investors. It goes without saying that in the case of real estate there is always the only asset of those companies that are the real estate supporting the investments.    

Dilution risk: When an investor operation is closed in a real estate crowdfunding platform, a capital increase of the project company is then made to allow investors to enter in proportion to the capital contributed. Well, it is normal that within the project includes a game that some call "mattress" and that serves precisely to absorb unforeseen contingencies and that depending again on the policy of the platform can reach up to 5% or more of the total from the investment.

 As a general rule and good practice, it is true that if work is to be carried out, these will be carried out with "turnkey" contracts with the contractors, that is to say at risk and venture, which for practical purposes means that pay what is signed, neither more nor less, if it is more work worse for him and if it is less better, but the contractor knows in advance the closed figure and thus forget about the "vicissitudes" that in any construction work do or do occur.   

Having said that, it is difficult that in an investment project through real estate crowdfunding, more capital should be used. However, if this were to occur for whatever reason, it would have to be justified in a reliable way, and the way to give access to this new capital would be through another capital increase. This means that the incorporation of new partners to the capital of the company implies the reduction of the percentage of participation of the previous partners whose effect is precisely the dilution of the capital and that for practical purposes translates into that they will receive less dividends for the initial investment.   

In short, they are not all that they are but they are all that are. Perhaps those that are missing will appear in the not too distant future with the development of the business model by the active platforms and those that will appear, those that, in the heat of a promising business, pretend to enter it fraudulently. Stay tuned.   

As a final reflection: The greatest risk is in each citizen and the use that you want to give to this way of investing and like so many other things in life in general and the Internet in particular, the solution lies in individual responsibility.