How did the idea for Sharestates come about?
The big idea for Sharestates originally came out of a dinner conversation that I was having with my partners.
What problems did you set out to solve?
We wanted to create a platform where people could invest across the country in real estate assets without needing the local expertise. They would rely on the platform to provide all of the data necessary to make an informed decision, and we’d lower the investment size. We were talking about how fragmented the real estate market was, and we saw a couple of major issues.
- One, unless you had a local presence or experience in a particular market, you couldn’t access deals there. Instead, you end up looking at other asset classes whether it be stocks, bonds, commodities, or currencies where you can easily go online and invest.
- Another major issue that we saw as a barrier to entry in real estate investing was the cost. Furthermore, in order to invest successfully, you needed to have an intimate understanding of real estate finance and how leverage works to properly structure deals.
Why did you settle on debt investing instead of equity?
As we started to build the business, we realized that debt was the preferred investment opportunity because it gave investors access to real estate without some of the risks associated with equity investments.
Early on in the business, we switched from an equity-based platform to a debt-based platform. We made that change for two reasons.
- First, it was easier to frame each loan, which ultimately made it easier for the individual investor to understand it.
- Second, it came with a fixed interest rate, so investors knew what they were going to get as opposed to a floating target return of fifteen to thirty percent depending on the performance of the property.
The debt product was easy to put a box around by clearly defining: the loan to value ratio, the borrower’s credit score, how long they have they been in real estate, how many projects they completed, etc. When we put that box together, it’s easy for institutional investors to check those items off and provide a discretionary commitment for loans that meet their criteria.
How does what you do compare to traditional hard money lending?
For our borrowers, the business that we were disrupting was what was traditionally known as the hard money lending market, which had historically been dominated by local mom and pop shop type of lenders. They were not very tech savvy, and in some cases, just a few people sitting in a room with paper files. They had zero sense of how to scale their borrowers’ business.
We were able to build a technology platform for borrowers looking for hard money that streamlines the entire financing process. They can submit an application online or on their phone from a project site. They’ll be able to see a live checklist of what they need to provide in order to get the loan cleared. We’re building tools that help speed up the process for borrowers so that they can get a loan closed within ten days or less if necessary.
How did the JOBS act affect your business?
I had just completed my law degree with a concentration in securities law. The timing was perfect because President Obama had just put the Jobs Act in place which directed the SEC to create new rules around securities offerings that would ultimately allow us to create an exemption called Regulation D Rule 506 C. This new exemption allowed us to overcome a major hurdle that existed in the old regulations which were primarily related to public advertising and the number of investors that could accept an offering. The old rules wouldn’t allow us to publicly market and solicit to investors for a particular investment product. The presence of an online investment platform is inherently marketing and soliciting, so without that change, we wouldn’t have a business.
How did the business model evolve over time?
We officially launched in February of 2015, and from the onset, we realized the need to pivot with the marketplace. We started with a plan to build a syndication-based platform but ultimately had to be receptive to the market. We started by strictly offering equity investments to non-accredited investors through an exemption in the securities laws called Regulation A. We qualified with the SEC to offer Regulation A and launched it, but it failed to take-off. It wasn’t a bad idea on paper, but we had zero credibility at that point in time. We were asking people to give us their money without a demonstrated track record of success.
We pivoted from non-accredited investors to accredited investors, from Regulation A to Regulation D. The Regulation A model required us to take every offering that we were doing through SEC qualification, which at the time was taking between eleven to twelve weeks. Given the fast-paced nature of real estate, it wasn’t efficient. With Regulation D, we didn’t have to go through the qualification process every time; we could send a notice filing to the SEC, instead.
How did Sharestates become profitable?
Unlike many of our peers in this space, we did not raise any capital to build the business. We funded the company ourselves and generated enough business to break even in just 13 months. After we broke even and were profitable, we’ve been reinvesting the profits to continue driving growth. The more loans we close, the more profitable we are, and we have been able to increase our staff and continue growing the business with further technology development.
Why choose Sharestates over another marketplace lending platform?
For investors, it boils down to a couple of things.
- First, relative to other players in the space, we’ve had an almost spotless track record. We’ve had less than a two percent default rate on our total volume of loans originated, and we’ve had zero loss of principal to date.
- Aside from that track record, we also provide investors with a broader selection of loans to invest in across the country, in different asset classes, and phases of development. Other players in the space are focused either geographically, by asset class or by the phase of development. We offer our investors diversification across all of these different elements.
For borrowers, we offer a few competitive advantages over traditional hard money lenders.
- Our technology has automated processes that allow us to offer lower rates and quicker closings. We’re also a one-stop shop for our borrowers. Local lenders have limited access to capital.
- Sharestates has so many different capital sources that there is no limit to what we can originate on a monthly basis. As long as you’re a good borrower with the deal flow to support the loans, we will fund it for you.
- Additionally, we cover all asset classes for our borrowers: residential, multi-family, mixed-use, commercial assets, and ground-up construction. Over time, we grow with our developers.