Technology, real estate and general solicitation are all part of the plan for real estate portal Patch of Land, which took part in an interview to explain how all these aspects of its business are coming together.
Patch of Land is a Peer-to-Real-Estate (“P2RE”) online lending marketplace that matches accredited investors seeking short-term investments to borrowers seeking more timely and consistent sources of funding for rebuilding properties across America.
Patch of Land has operated on a lean budget of just a few thousand dollars from friends and family money during its first year of operation. Now, the company is turning to SeedInvest to raise $1 million of a $2.5 million seed round through a Rule 506(c) offering that allows general solicitation of accredited investors.
SeedInvest’s platform has aggregated investors seeking to invest some $250 million in capital, and it previously used its own platform to source $2.15 million of a $4.15 million Series A round.
Dealflow.com talked to Patch of Land CMO AdaPia d’Errico about the online real estate market and the use of the Rule 506(c) offering to find investors and build out its technology.
Dealflow.com: How will Patch of Land use the new influx of capital?
d’Errico: The funds will mainly be used to bolster the sales, marketing and technology teams, as the company will be heavily focusing on further developing its automated due diligence and scoring engine, and sourcing more borrowers with good quality projects who need fast financing.
Dealflow.com: Is Patch of Land scaling up its data driven technology that matches investors and borrowers?
d’Errico: Yes, we have already launched our matching technology in version one, so we’ll continue to iterate and improve this piece of tech, while also investing in more development of the due diligence and data gathering components of our processes. These will be the pieces that allow us to scale quickly and effectively.
Dealflow.com: Online real estate is growing rapidly in terms of both dealflow and specialized real estate portals. How much does Patch of Land expect to expand its operations over the next year to serve new lenders and borrowers?
d’Errico: We have been steadily growing our loan volume and now post between $1.5 and $2.0 million in loans per month. We expect to reach $10 million in monthly loan volume by the middle of 2015, and $20 million per month by the end of next year.
Dealflow.com: How will the use of general solicitation and advertising play into the current capital raise? Are you using marketing channels other than SeedInvest?
d’Errico: We are using general solicitation in multiple ways: we are running a digital marketing campaign that includes social media, public webinars, and displays, all offshoots of a solid base of multimedia content. We are also engaging in PR through public events and media outreach. We aren’t going as far as billboards, but it is an option.
Dealflow.com: What investing advantages does P2RE lending offer over the LP equity investments available on some portals?
d’Errico: Senior debt, secured by a first lien and personal guarantee(s), offers several advantages over equity investments. However, we want to be clear that debt and equity investing are both components of an overall portfolio, and we do not recommend one over the other. Loans such as those on Patch of Land’s platform offer the following ‘advantages’ over an equity investment: debt is first to be paid back in the event of a default by the sponsor/borrower.
And in the event of a default where the underlying property must be sold, an ARV of 60%-65% (which is maximum) means that a property can be sold quickly, even below market value, and still allow a reasonable recovery of the initial money invested. Speaking only for ourselves, we are conservative underwriters, and do not take unnecessary risks with the loans we issue. We are trying to find only the best quality loans by experienced developers with a long history of successful rehabs.
Dealflow.com: In choosing to go the Rule 506(c) route, issuers need to balance the offering’s general solicitation capabilities with the need to verify accredited investor status. How is this verification being accomplished, and how much of an administrative burden does it present?
d’Errico: Verification of accredited investor status is being accomplished internally by Patch of Land’s through third party verification services and vendors. Patch of Land’s loans are also offered through Rule 506(c) general solicitation, and thus we are very comfortable and experienced in verifying accredited investor status. It does present a slight burden, but one that we feel is well worth the effort.
Dealflow.com: The Securities and Exchange Commission is still weighing some proposals that could change the existing Rule 506(c) offering. These proposals include a 15-day pre-filing period and a requirement to provide marketing collateral to the Commission. How much is Patch of Land concerned with these unsettled issues?
d’Errico: These issues do present some concerns be¬cause of added administrative burdens and preparation which, in the case of the kinds of loans we offer (which often require rapid financing to the borrower) and would not be conducive to our business. However, because we directly pre-fund loans to borrowers, we can employ our revolving line of credit to ensure a rapid close, hold the loans on our books, and then offer them to our investors on the platform. Regarding marketing materials, we are lean in this department, and providing marketing collateral should be simple.
Dealflow.com: Some issuers are conducting their own campaigns of general solicitation through their own websites or social media platforms like LinkedIn and Facebook. How does working with SeedInvest help meet your marketing and regulatory needs?
d’Errico: We chose to work with SeedInvest because of their focus on technology, strict compliance, and providing high quality investment opportunities to a larger investor audience. Working with another portal and going through a thorough due diligence process has made us a stronger company, and more confident in the materials we are presenting to potential investors. Seeing our offering laid out in a simple yet thorough manner on their website speaks volumes to the power of transparency, ease and efficiency of technology. On a less technical note, we also wanted to ‘practice what we preach’, and partnering with SeedInvest to crowdfund our own offering was the best way to achieve this and demonstrate our commitment to this philosophy.
Dealflow.com: Is there a significant difference in cost of capital between a Rule 506(c) offering and a traditional Rule 506(b) offering?
d’Errico: We have not experienced a significant difference in cost of capital. We run a very lean marketing department and rely on low-cost methods to reach investors on a large scale. There are costs associated with both, and being able to use general solicitation to raise awareness and attract investors has been a worthwhile decision.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer