How Origin Differs from Crowdfunding Platforms
If you’ve been reading the news lately, you have probably seen headlines about a sponsor in two real estate crowdfunding deals who has gone missing amid accusations of financial misappropriation. About 800 investors are out millions of dollars, with more questions than answers. This particular situation appears to involve a single bad actor. And while this is no consolation to the affected investors, bad actors are only one of many risks inherent in real estate investing, regardless of the investment vehicle being used.
We know that some of our investors use this type of online intermediary to invest in multiple real estate deals with many sponsors, in addition to investing directly with a sponsor like us. We don’t intend to disparage this investment approach or hop on the bandwagon of criticism. But we are concerned about the dent that private real estate investing’s reputation may take with this recent news.
We take our role as a steward of our investors’ money seriously. We have worked hard to create and manage 10 Funds and scores of successful deals over the years, and we operate within multiple layers of due diligence, review and compliance. We put in the time and careful effort to build relationships with our respected joint-venture investment partners in the more than 15 years that we’ve been in business, and all these efforts have paid off with our track record of performance as a top-decile Fund manager.
Alignment Versus Deal Volume
Intermediary real estate crowdfunding platforms invite investors with available capital to browse real estate deals from many different managers and sponsors. They straddle the middle, connecting the two parties and collecting revenue in the form of fees. By their nature, they are incentivized by transaction volume: The more deals available, the more investors can choose from, and the more deals they sell, the more money they make.
At Origin, we have always believed that an alignment of interests among our investment partners and our team is critical to our success. We practice alignment in two ways: First, we are a performance-based organization. Our team is incentivized through the performance of each investment, not the number of deals in a Fund. Second, as co-CEOs, we remain one of the largest investors at Origin, with our personal investments totaling more than $80 million across all our Funds since the firm was founded in 2007. We invest significant personal capital in every deal because we believe it’s the best place for our investment capital, and we invest here for the same reasons thousands of others do: to grow and protect personal wealth.
“Skin in the game” impacts every decision we make: We evaluate deals through the lens of an investor rather than a broker. We are not a middleman or an introductory service; we are a real estate operator. This means that investors who participate in our Funds are investing directly in our real estate along with us.
Stringent Due Diligence and Oversight
We decide what properties to acquire and what price to pay, and we evaluate hundreds of deals to find the one or two that fit our investment criteria. We build and execute the business plans and decide when it’s time to sell. We utilize an objective pricing model to quantify and evaluate each major risk category of every deal. We’ve spent more than 15 years refining our approach to due diligence and our risk management policies. And we formulate a business plan for every asset during the acquisition process and before a letter of intent is issued to a prospective seller.
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This process requires a high level of discernment and keeps us focused on the deals we determine to have the highest potential for returns. As a result, we only approve a fraction of the deals we review. Every investment or operating decision is made with risk management in mind. Downside risk exposure and mitigants are considered in every potential investment, and any investment that requires all assumptions to work out to make money is not approved. We forge direct personal relationships with our deal partners, utilizing a strict policy for evaluating and approving joint-venture partners.
Funds and Managers Versus Deals
Investors interested in allocating money to private real estate have many choices. On intermediary real estate crowdfunding platforms, a number of deals that have been reviewed and vetted by the site are presented, and the investor combs through the information to determine whether individual deals are worth their investment. At Origin, we offer investors the opportunity to invest in portfolios of deals, through our Funds, rather than presenting a menu of individual deals.
We deliberately chose this strategy because we believe this diversification reduces risk for our investors. We allocate investor capital across multiple deals based on a strategy outlined in a private placement memorandum. We place each investment in a special-purpose entity and never cross-collateralize the debt, limiting debt covenants. We also never guarantee debt at the entity or Fund level. At both the property and Fund level, we use hedges to help us reduce or limit risk in long-term interest rates.
Access to Deals Has Changed—But Approach Shouldn’t
We study and underwrite scores of deals before we decide to invest our—and our investors’—money in a property. Our approach allows the investor to focus on finding a top-performing manager with resources and expertise rather than undertaking a time-consuming deal-by-deal analysis that’s beyond the reach of even the most astute investors.
In reiterating how Origin differs in significant ways from real estate crowdfunding investing sites that operate as an intermediary to investment deals, we invite potential investors to ask us and other managers tough questions about modeling assumptions, fees, funding and incentives.
Real estate deals are illiquid; they involve long-term commitments with a variety of risks spread over several years, and there are no guarantees of success. The hundreds of investors who opted into the recent real estate crowdfunding deals got a harsh reminder of all this, and we hope they find a satisfactory conclusion to this situation.
While technology has evolved and marketing guardrails have shifted to allow investors greater access to real estate investment opportunities, some things shouldn’t change. Investors require—and deserve—a manager that can oversee that risk responsibly and increase the chances for a meaningful return.