Real Estate Crowdfunding 10-Month Update – Patch of Land

pol_house200Here’s an update on one of my real estate crowdfunding experiments. In mid-April 2015, I invested $5,000 into a loan for a single family fix-and-flip in West Sacramento, California. The loan was supposed to be for 6-months (one of the main reasons I chose it). (More details in my initial update.) Well, the short version is that the fix part happened, but it has now been 10 months and the house is still on the market. The borrower took the option of a month-to-month extension. The loan is still current. Here’s a screenshot and some more thoughts:

pol_feb16

Interest received in a timely manner. So far, I’ve been receiving my $45.83 every month ($550 annualized) on my $5,000 initial investment (11% APR). I enabled the option of having my interest automatically swept to my bank account each month. So far, this investment has required zero maintenance.

Read your contract. Just because there is a “6-month expected term” doesn’t mean you’ll get your money back in 6 months. You should read the terms carefully to see what options are available to the borrower if they can’t make that date. Is an extension automatically granted? Is there an increased interest rate? How long does the extension last?

Liquidity, liquidity, liquidity. One of the defining features of this type of investment is that it is highly illiquid. If I buy a mutual fund, I can sell the entire thing and get fair market value as cash in my bank account in a few business days. With an investment like this, the borrower could pay it back early, take their sweet time, or even default entirely and they’d have to liquidate the home before I get my principal back. You must be prepared for all scenarios.

Be happy with your loan-to-value ratio. I personally believe the house is listed for too high a price, but that part is not under my control. What was under my control was choosing to invest only in a loan where I was comfortable with the collateral. For example, they may be asking ~$320,000 but the loan amount was only for $179,000. As I am (one of the folks) in first position lien on the property, the house would need to sell for under $179,000 in net proceeds for me to lose principal.

In other words, have an adequate cushion so that you don’t lose sleep about it at night. It also helps that I’ve already earned 8.6% of my initial investment back over the last 10 months, cash in hand. Finally, I will repeat that this is a speculative investment using “experimental money” that makes up a very small portion of total assets. (Even Burton Malkiel and Jack Bogle have such “funny money” accounts.)

Tax documents. I received a 1099-INT for the interest earned through this loan. The 2015 form was made available in a timely manner on January 27, 2016. As such, it should be rather easy to add this in at tax time.

Comments

  1. I think I have the same investment as you; I’m starting to get a bit worried now about the house not selling; this is a hot market and it should’ve sold by now; I guess the price is too high, but I did noticed they reduced the price recently;
    I’m not too impressed with patch of land; I don’t think I will invest with them again; they don’t do a very thorough job in vetting the loans.

    • I agree, if they really wanted to sell it, they should be more aggressive. But they appear to not be in a hurry and want max price, which I suppose is their prerogative. I’m not a big fan of the remodel details, did you notice the house was first re-painted a funky grey/blue color and then re-painted again back to more of a beige? New kitchen color scheme is similarly unique. These are small details, but you’d think they’d be more mainstream for a modestly-priced house like this.

      • Looking at the photo you posted, I now don’t think my investment is the same as yours; so that means there are at-least two homes in Sacramento that have not sold and are on month to month extension; how long does this month to month go on for? I haven’t read the find print yet; they should charge some sort of penalty for the extension other wise the seller has no incentive to sell fast; the other thing I don’t like about POL is lack of transparency; it’s really hard to get any information on the investments unless you invest in them;

  2. Jonathan – Will you be investing with them again?

    • That’s a good question. I have some constraints as I put $10,000 into P2P loan experiement before (Prosper and LendingClub), and now have $10k set aside for real estate crowdfunding. If anything, if/when I get my money back from Patch of Land, I will probably first invest it in another crowdfunding platform to compare and contrast. After that, I may just call it quits with real estate crowdfunding completely, I haven’t decided yet.

      • Still, 11% fixed on an investment is pretty good right now as long as you can get your principal back. What are the chances the person receiving the money runs with it? What fail safes are there for your principal?

        Paying out 11% would really make me want to sell quickly.

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