Real estate crowdfunding fees: if you're not paying, how does the platform make money?
You sign up, invest, wait, get paid. At no point do you receive an invoice, a maintenance fee or a charge for investing. And at some point you're struck by the question anyone who comes from the digital world knows by heart: if I'm not paying, who is? And what does that cost me?
IN THIS ARTICLE 7 sections
The answer is simple and fairly reassuring, but it has consequences worth understanding, because they change how you read both the return and the project itself.
The developer is the one who pays
Real estate crowdfunding platforms charge their fees to the developer, not to the investor.
The developer is the one who needs the money, so the developer is the one who pays for the service of raising it. What is charged varies from platform to platform, but it usually combines a fee for analysing and structuring the deal and another in the form of a percentage of the money actually raised from investors. If the round is not completed, in many cases that second part is never charged.
For you, this translates into something very specific: between what the fact sheet says and what reaches your account, there is no layer of platform fees. The published return is what you are estimated to receive, the only deduction being tax, which we cover at the end of this article.
Just because you don't pay it doesn't mean it isn't there
Here is the nuance worth taking away from this article.
That fee is part of the cost the developer bears to obtain financing. If you add what it pays the platform to the interest it pays you, you get what that money really costs it. And a developer who agrees to borrow at a high cost usually does so because, for that project and at that moment, it hasn't found a cheaper option, either because the bank won't cover everything or because the deal is at a stage the bank doesn't finance.
That doesn't make the project a bad one, but it does explain why the return is what it is. A high estimated return doesn't come out of nowhere: it is the price paid by someone who needs the money more urgently, or with more uncertainty, than others.
The platform's incentive
If the platform gets paid for raising money, it's reasonable to wonder whether it has an interest in publishing just anything.
In the short term, publishing more deals means earning more. In the long term, the only thing that keeps a platform alive is investors coming back, and investors come back when they get paid. A track record of projects repaid on time is a platform's most valuable asset, and one full of extensions and defaults gradually leaves it without customers.
That is why the track record of what has already finished says more about its judgement than any promise on its website.
In equity deals, what matters is how the profit is split
When you lend, you receive an agreed rate of interest. When you come in as a shareholder, what determines your outcome is how the profit is split between the investors and the developer.
That split usually follows an order, which the industry calls a waterfall. First, investors get back the capital they put in. Then, in many deals, investors receive a minimum return before the developer takes anything, known as a preferred return. And whatever is left after that is shared out in percentages set in advance.
Two deals with the same total profit can leave you with very different amounts depending on how that waterfall is written. Without a preferred return, your outcome depends much more on everything going well. With one, you are better protected at the low end and share more at the high end.
Late-payment interest: the small print of a delay
Many loans include additional interest if the developer repays late, intended to compensate the investor for the wait.
The thing to look at is whether it is actually applied. In an extension the developer usually negotiates new terms, and that is where it is decided whether that interest is kept, reduced or dropped in exchange for more time. How each platform handles that moment is one of the most tangible differences between them, and it almost never appears on the home page.
The only thing that does get deducted along the way
With no platform fees in between, the only deduction between the fact sheet and your account is tax.
Interest from a loan and profit from an equity deal are not taxed in the same way, and depending on the structure, tax may be withheld when you are paid. The full calculation for comparing two deals is therefore estimated return minus tax, always bearing in mind that the first figure is an estimate, not a promise.
