Provides a marketplace where individual investors can fund short-term, high-yield loans to "flippers" -- borrowers who use short-term debt to buy a distressed property, fix it up, and either refinance it as a rental or resell it for a profit.
- Low minimum investment of just $10
- High deal flow and a variety of deal risk/return loans to choose from
- No investor fees
Bankruptcy Protection 3/ 10
Deal Flow 9/ 10
Deal Transparency 2/ 5
Diversified Fund Options 0/ 5
Due Diligence 7/ 10
Ease of Use 9/ 10
Fees & Commissions 8/ 10
Investment Minimums 5/ 5
Investor Resources 8/ 10
Leadership 2/ 5
Non-accredited Investor Offerings 5/ 5
Platform Financials 4/ 5
Skin in the Game 0/ 5
X Factors 3/ 5
Total 65 / 100
What is Groundfloor?
Groundfloor is a real estate crowdfunding platform that specializes in residential property loans for "flippers" -- borrowers who use short-term debt to buy a distressed property, fix it up, and either refinance it as a rental or resell it for a profit. Think Flip or Flop or any of the myriad of fixer-upper shows on cable TV.
As a crowdfunding platform, Groundfloor essentially makes hard money loans for individual projects and then sells pieces of those loans off to investors who are paid interest on the money they loan to finance the project. A hard money loan is a loan backed by a "hard" asset -- a tangible property that's projected to produce a profit to repay the loan quickly.
In contrast, a traditional mortgage is secured by the value of the home and backed by the borrower's ability to repay the loan in monthly installments over 15 to 30 years. Using Groundfloor, a flipper secures a loan rather than self-financing, adding partners, or using a traditional bank or other hard money lender to finance their residential real estate project.
As a real estate crowdfunding platform, Groundfloor provides a marketplace where individual investors can fund these short-term, high-yield loans to flippers with as little as $10 per loan. What's unique about Groundfloor when compared to other real estate crowdfunding platforms is that it provides a marketplace where both non-accredited and accredited investors can participate directly in real estate investment loans on a fractional basis. Because of it's low minimum and high deal flow, it's easy to diversify your portfolio without leaving Groundfloor's platform. In practice, you have the opportunity to achieve higher returns on average by taking on more risk in part of your portfolio while being conservative in most of your portfolio.
Summary: Is Groundfloor a good investment?
At Groundfloor, the process starts with the borrower, who submits a loan application that's reviewed by Groundfloor. If accepted and underwritten, the loan is assigned a risk rating.
Groundfloor is very transparent that its underwriting goal is not to never have a loan in default. In some cases, a default (defined as a borrower missing a loan payment) benefits investors because it allows Groundfloor to take action, which can speed up the repayment or increase the return.
The level of deal volume on the site allows investors to choose how much risk they're comfortable with and create a diversified portfolio of loans that meets their personal investment objectives. Groundfloor emanates the attributes that make real estate crowdfunding so attractive to individual investors: access and choices -- giving investors access to the information they need to make informed choices.
As an investor, you can browse the summary view of available loans and click to see more in-depth information on each loan's detail page. You decide when, how much, and where to invest. Investing is simple and efficient.
Once a loan is fully funded, a closing is initiated with the borrower. The loan closes, and the borrower draws money according to a schedule and completes the renovation or rehab project. The property is then listed, sells, and eventually closes. At closing, the borrower repays Groundfloor, who then distributes a lump sum of principal invested plus interest into the Groundfloor Investor Account of all investors in that loan. The repayment deposit shows up in your account within four to five days after the loan closes and can be withdrawn or reinvested in other projects.
Groundfloor is currently the only site with individual note purchase investments for non-accredited investors; however, your choices are limited to the most high-risk class of real estate: lending cash to house flippers.
What are Groundfloor's pros and cons?
- $10 minimum investment makes Groundfloor a platform where anyone can invest.
- High deal flow.
- Variety of deal risk/return loans to choose from.
- No investor fees (borrowers pay all fees).
- Open to non-accredited investors.
- Investors maintain control of investment choices (unlike REITs, where management picks and chooses the investments that make up the portfolio).
- Open to self-directed IRA investments.
- Higher loan default rate when compared to industry trends tracked by the Federal Reserve.
- Investors get updates on every loan every 30 days.
- No bankruptcy protection policy in place.
- Property foreclosure risk.
- Lack of diversification across real estate asset types.
- No equity investing options -- you can only fund loans to property flippers.
Is Groundfloor legit? How strong is it?
Groundfloor originates 60 to 70 loans a month. Groundfloor's business model is high volume and high liquidity. The result is that Groundfloor is very transparent that their goal is "not to never have a default, but to maximize net returns by proactively pushing default to quickly liquidate and return investor funds or put together a workout plan when default seems likely," according to Brian Dally, Groundfloor's CEO.
The deal offerings on Groundfloor's platform are not as detailed or transparent as other crowdfunding sites, and their business model has led to a few investor complaints that Groundfloor's due diligence is subpar.
Their loan default rate would tend to indicate that tighter due diligence could offset loan defaults. Of course, you'll have more deals that don't work out as planned when you support the high deal volume that Groundflow outputs. But the uncured default rate (the percent of notes that had to go through foreclosure) on Groundfloor's loans is over 4.5% (28 defaults out of 594 loans), which is high compared to the industry trend of 2.5% tracked by the Federal Reserve.
Groundfloor's management team is not steeped in real estate experience. CEO Brian Dally, with a Harvard MBA and law degree, spent his 20-year career building disruptive technology start-ups in Silicon Valley, Boston, and London prior to co-founding Groundfloor in 2013.
Co-founder Nick Bhargava has a financial services background and leads product development and regulatory strategy. Rich Pulido is the only senior executive with real estate experience, which is limited to the lending side of the business.
Groundfloor has a building contractor on staff who reviews the budget and renovations plans for all projects. A deal can easily and quickly underperform if this aspect of fixing and flipping isn't actively managed by a professional who intimately knows the costs and time involved in rehab work. Keeping the project on schedule and within budget is a key success factor for flippers to make the money needed to pay back the loan.
How Groundfloor works: How are investments sourced?
Groundfloor charges borrowers 2% to 4.5 % of the principal of the loan to be on the platform. Groundfloor prescreens the loans and pre-funds them prior to offering them for crowdfunding.
For most of the offerings, the borrower pays investors all accrued interest at the very end of the loan along with a balloon payment of the balance owed. Some loans (around 10% to 20% of the total loans available) also pay monthly interest along the way.
The site ranks the project riskiness of the offered loans from A to G. Grade A loans are determined by Groudfloor to be the least risky in terms of default rate and loss ratio. Grade G loans have a higher risk determination. These ranks are just best-guess projections, however, and they don't take into account the credit-worthiness information on the borrowers. Flipping is a risky real estate investing strategy as things often go wrong, and when some things go wrong, the expense is very high.
As described, once a loan is fully funded, a closing is initiated with the borrower. The loan closes, and the borrower draws money according to a schedule and completes the renovation or rehab project. The property is then listed, sells, and eventually closes. At closing the borrower repays Groundfloor, who repays investors by depositing a lump sum of principal invested plus interest into their Groundfloor Investor Account, which can then be withdrawn or reinvested in other projects.
Investors don't directly own the loan notes -- instead they own an investment security called a Limited Resource Obligation (LRO), which legally obligates Groundfloor to pay participating investors according to the performance of each individual loan in which they've invested but also limits investors' recourse to only the funds repaid on the underlying loan.
Who can invest with Groundfloor?
Groundfloor's niche is to be one of the few real estate crowdfunding sites that welcomes non-accredited investors. And, Groundfloor touts one of the lowest minimum investments in the real estate crowdfunding industry. Keep in mind, however, that you can only invest in one type of asset class on Groundfloor, so the low minimum comes with the risk of investing in house flipping, which many consider to be the riskiest loans in which to invest.
What is the minimum Groundfloor investment?
There is no fee to invest on Groundfloor, and the minimum investment is $10. This low minimum means it's easy to spread your investment risk among a multitude of projects with limited risk of loss per loan, and without too much exposure on Groundfloor's platform. Of course, investing $10 won't result in much return. According to management, most people on average invest $3,000 their first month, $8,000 within 12 months, and up the ante to $20,000 by year three.
What are Groundfloor's fees?
Groundfloor charges borrowers a fee of 2% to 4.5% of the loan principal, $1,250 for closing costs, and an application fee of $250. Hard money lenders typically charge a similar range of upfront fees as a loan origination charge, so the borrower costs are not out of line. As we mentioned earlier, those fees are paid by the borrower; investors pay no fees on Groundfloor.
Groundfloor returns: What should you expect?
Groundfloor's product is based on venture loans to real estate entrepreneurs, originated and serviced by Groundfloor. Prior to offering, every loan is pre-funded by Groundfloor after they vet the borrower's experience, credit-worthiness, and business plan and vet the project by doing an assessment of the property value in "as-is" condition as well as an "as-improved" projection.
Each loan is assigned a grade when underwritten. Grade A loans are considered the least risky and generally offer returns of 5.5%, and Grade G loans, the most risky, generally offer returns of 26%, with each letter grade offering a rate somewhere within that in range. On average, Groundfloor says loans return 10% annually on a typical six- to 12-month term.
The key to successful investing on Groundfloor is diversification. Investors who have diversified their portfolios into a large number of loans can still realize high overall rates of return, even when losses occur. Groundfloor's analysis shows that a model portfolio comprised of an equal investment made into 671 loans repaid as of August 2019 would've earned an annualized net return of 10.68%. The same diversification analysis shows that a model portfolio composed of equal investments in all 671 loans repaid to date would've experienced a loss ratio of -0.61%.
When (and how) can you sell Groundfloor investments?
The investments on Groundfloor are short-term. You're loaning money to a house flipper for three, six, nine, or twelve months while they complete renovations, after which time they will either sell the property or refinance the loan into a more traditional mortgage (if they intend to rent the property for monthly cash flow), paying investors back. There's no secondary market, and there isn't really a need for one.
Going mobile: Is there a Groundfloor app?
No, there's not a Groundfloor app. Groundfloor's website is optimized for mobile devices, which works well across every feature for both investors looking to loan money and house flippers looking to get funding for their next deal.
Groundfloor risks: Is Groundfloor safe to invest with?
While the Groundfloor platform is legit with sufficient deal flow, it's important to understand the risk of what you're investing in. There are two primary reasons why traditional banks don't make hard money loans:
- The short-term nature limits the profit potential.
- The risk of default is higher than with traditional mortgage loans.
There's a lot that can go wrong with a fix-and-flip project, and many of those problems cost a lot of money to rectify.
According to CEO Dally, "What investors need to understand is that it's important to take a portfolio management approach; the majority of investments will work out and a few will not. If you diversify your investing dollars into a lot of individual offerings, you'll inevitably fare much better than picking and choosing just a few."
It's important for investors to also understand that while it is easy to create a diverse portfolio of loans across geographical areas and loan terms on Groundfloor, Groundfloor provides investments in only one asset class -- house flipping -- and that is one of the more risky real estate asset classes.
If a borrower defaults, Groundfloor will pursue foreclosure to take the property. The foreclosure process is expensive and time-consuming, and each state governs the process with different rules. Some have long waiting periods, and when it's all said and done, investors will likely lose most if not all of their investment once the process is finished.
Like banks who aren't equipped to deal with real estate owned (REO) properties, Groundfloor prefers not to take possession of a foreclosed property. Borrowers' plans and progress are closely monitored, and if there's an indication of default, Groundfloor will either proactively push default to quickly liquidate the funds and return investor principal or work with the borrower to create a workout plan. Most of the time, a default is a temporary setback on the project and a reworking of the deal terms fixes the issue.
Many of Groundfloor's loans are true deferred payment balloon loans that do not pay monthly interest. That means you'll have to wait for the project's end to get any of your money back. And without the reminder of how the loan is performing in the way of monthly income, it's important to read the monthly reports you get to make sure the project is moving forward as it should.
Groundfloor has been able to raise capital from investors, and its platform has grown substantially. However, it consumes a tremendous amount of cash to fund its operations, and at some point it needs to show it can make money for the platform to be sustainable across every part of the real estate cycle.
Although Groundfloor makes sure all their loans are in first position if there is a default (unless specifically structured otherwise with a higher rate of return to compensate for the higher risk), you have no true ownership of the properties as an investor. All loans are essentially backed by a promise from Groundfloor Finance to pass interest and principal payments to investors. Groundfloor is transparent with investors. While only required to release financials annually by the Securities and Exchange Commission (SEC), Groundfloor publicly releases statements twice per year.
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