Listen to this episode and read the transcript in the shownotes page, right here.

I'm originally from the Canton Cleveland Ohio area. I got started in my entrepreneurial journey when I started a landscaping company in high school and ended up doing a lot of a lot of work for real estate investors and people that were primarily either flipping houses or buying rental properties and fixing them up and then sending them out. These guys would hire me to come in to not only do landscaping but occasionally hire my truck and trailer, and three or four buddies from a football team would come in and also help with the demo of the houses.

I got to see a lot of projects kind of at an early age you go from the ugliest house on the block to one the nicest house on the block and I also saw these guys parading their checks around town about how much money they were making on the flips. It was just totally fascinated with the transformation of the property as well as the opportunity to work for yourself and make a good living. So about that same age I said that's what I want to do when I grow up. I want to be a real estate investor so I sold landscaping business off to pay for college, and studied finance with an idea of getting into real estate development post graduation.   Fortunately or maybe unfortunately I graduated in 2007 right when the real estate world was imploding on itself.

It was not a great time to get into the business with college tuition bills to pay so I took a job with a large commercial property insurance and risk management company that insured about a third of the Fortune 500 companies and Global 500 companies and worked my way up through the ranks to the point where I was running sales and marketing for their middle market group which is about a $900 million company.

I got a lot of great exposure to business and was involved as a subject matter expert on technology development and helped rehang our sales processes and marketing processes and alignment and CRM systems, working on a lot of really cool strategic projects. I had a lot of exposure as well to the executive team of the business at a pretty young age and learned a lot about risk management and insurance management from an underwriting perspective as well. The biggest thing I learned was that I didn't want to be a corporate insurance executive for the rest of my life.

In 2010/2011 the real estate market started to come back around and I thought why don't I get back to my initial passion in the real estate business. I had a little money saved up and started to buy houses to fix and flip and potentially rent out. My exit strategy was to build a large enough business here and retire from corporate America and go run this real estate empire. Through that kind of exercise of flipping a couple of properties I learned of the hard money lending industry which at the time was charging four points and fourteen percent interest without a whole lot of great experience customer experience.

The guy that I borrowed from had 4-6 page application.  It had to be filled out by hand and scanned and faxed and was just an overall bad experience. I thought I could probably be a better lender and at the same time I was doing some investing on Lending Club and Prosper the peer to peer lending sites and they were still pretty new Back in 2010/11 and I was clipping maybe a 9 or 10 percent return on those investments and paying out the 18-20 percent on my hard money. I'm scratching my head saying this makes no sense. Like why am I receiving a 9 percent return on unsecured consumer credit while I'm paying 18 percent or more on a first lien. I've got 20 percent 25 percent equity in a first loss position to this guy, right. Like what's up?! Something was out of whack in terms of the efficiency or how capital is being formed in this hard money lending space. A light bulb went off in my head. Why can't I create a Lending Club or Prosper for real estate investing specifically in the single family space. There seems to be a demand for yield and arguably this asset classes is better because there's a real asset behind it opposed to just the consumer's promise to pay it back and that was where the idea for Fund That Flip came from, all pre Jobs Act.

I had taken the idea to my father in law who was a former SEC attorney and over Thanksgiving in 2012 and he said ‘Great idea but you can't do it legally without a lot of expense; you can't sell securities online, there's this thing called general solicitation. You can't do it.’ Anyway, the idea kept me up at night literally to the point where I eventually did enough research and stumbled across what Regulation D offerings are an then what a regulation A offering is, and bumped across FundRise who was doing some Reg A stuff even before the JOBS Act and followed that rabbit hole down deep enough until finally I stumbled across what at the time was somewhat of an obscure bill called the JOBS Act which is still kind of being debated on the floor of Congress. Read the whole thing in a weekend and said this is going to pass. If I'm reading it right when it does, it will make what I want to do a lot easier.

I took it back to my father in law and he introduced me to some attorneys within the firm that were also tracking the bill and we started more or less to put together a framework that would allow us to do what we wanted to do in terms of having a crowdfunding platform for real estate.

I moved down to New York City from Rhode Island where I was living at the time and started building a team and technology and trying to work toward getting deal number one done figuring that we would learn a lot through that process and then take what we learned in a second and third, working on up from there.

I'm not a lawyer and I'm not by any means the smartest guy in the world. But what I knew from the feedback that I had gotten was that the thing that was prohibiting me from doing what I wanted to do without a whole lot of regulatory burden was with the general solicitation right. So the idea of offering up the opportunity to invest in something without having a preexisting relationship with that person was really the key to why you can't do it.

After reading the Jobs Act it became pretty clear to me that what they were trying to do was to remove that general solicitation ban and allow businesses to offer up investment opportunities to investors so long as you followed a certain set of rules primarily being that you need to take reasonable steps to confirm that any money that you do take comes from an accredited investor.

My father in law helped me focus on some of the details, like was I raising a blind pool or are just going to raise money and then go invest in real estate. There was some precedent in the '80s like how those went really bad with a lot of fraud that was something I was looking at. And then also the registered investment advisory kind of rules around are you going to be making recommendations.  He asked did I want to be a registered investment adviser if so explained how that might work. The pieces that started to fall in place I think were good on all of this because the general solicitation is the big one, and the blind pool goes away because we're not investing on behalf of investors; we’re presenting to them opportunities on the platform that they get to decide which investments they go into. Unlike the RIA, we don't recommend any of our investments we just present them. We present the facts and let the investors come to their own determination on whether or not it's an investment that fits their individual risk return profile based on that set of facts that we produce.

One of the things that I learned about being an operator was that, one, it's very hard to scale it. You've got to have a lot of good people to operate the projects you've got to be able to source products, you've got to understand your market really well. I was flipping in Providence Rhode Island. I knew that market well and I could feel comfortable investing there but if I wanted to go even to Boston, that’s a different market that I have to get smart on. So the idea of being a lender seemed to be more scalable to me.

You're leveraging a lot of local sponsors’ expertise and to the extent that you can align incentives appropriately with them and make sure you're partnering with people that have some experience and can demonstrate some competency around their markets and how to manage a project you leverage other people and their unique ability to find properties manages those properties etc.. And to me that the lending piece was a much more scalable business. One of my tech cofounders likes to say the people who got rich in the gold rush were not the prospectors they were the people making the shovels.

I look at it is like this; we are a shovel manufacturing business as opposed to a prospecting business. Not as sexy maybe but higher probability of scalability and wealth creation by leveraging all the people that do want to go out and actually dig for gold if you will.

I decided that it was probably going to be hard to build this business in Rhode Island. I was also not in a position that I necessarily want I want to quit my day job and go all in on this because there's still so many unknowns around will this work, will borrowers want to borrow from us, will investors want to invest. Can we originate loans etc. etc. Can we raise money. And I thought, I can probably increase my chance of success if I'm in an environment that has other entrepreneurs and Fintech companies etc. New York was right down 95 from Rhode Island and I like to say a lot of a lot of my success and I think probably a lot of entrepreneurs success is a function of timing.

I came up with the idea, the Jobs Act thing was kind of happening around the same time I had enough experience in this space and Lo and behold a job opening within my company opened up in New York City that was a good fit for me.  So I moved down to New York with my current company and really start to build on my idea nights and weekends.  I enrolled in the Founder Institute which is a Don't quit your day job incubator kind of program that walks you through a 13 or 14 week process around how to how to go from an idea that's in your head into something that's a little bit more real so everything from branding and marketing to product market fit to building a financial model, they kind cover all of that 13 weeks.

We had like 40 or 50 people start the class and we finished with 12.  The program does a pretty good job of helping people realize that either their idea sucks or they're not cut out for this type of effort. But what it did for me is it also validated like maybe I really do have something here and ‘post-graduation’ they give you some good advice, like build an advisory team, start to build some tech and some MVP and really press for your first customer. That's what I did. I brought on an advisory board that had a lot of a lot more experience than I did in real estate investing and raising capital. And those guys helped us really push from an idea into something that was real and one of them even then joined as the co-founder and our COO. It helped grow the business once we all determined that we were on to something pretty cool.

The big ‘aha’ moment for me going through that program was, we have a marketplace business, we have sponsors or borrowers on one side and lenders, the guys that are writing the passive checks and the other side.  My initial assumption was that the more important of the two was the money side the investor side we had to build a platform and our main value proposition was geared toward them. On the other side were those who needed the money; they would find us - if we build it they will come kind of a thing. The very quick realization was it like. It's actually the other way and this now makes sense to me and I even understood it as an operator.

But if you have a good deal like the money is out there that will fund it. So the big aha moment for me was with the question Who's your customer? It's obviously both but where we spend most of our marketing dollars and where we spend most of our energy from a sales perspective is actually on the on the borrower side. So getting the good deals in and how do we make their lives easier and what's our unique value proposition for them feed into our ability then to get the other side because if we do have good products and if we have better product relative to our competitors and if we can offer a better risk adjusted return that money that money has naturally has for us to flowed in.

Something that I learned especially in the early days is there's always more to do than time to do it in. You've got to be very good at figuring out like what's the most important thing to get done to advance you to the next stage. There was a lot of time and energy and effort spent on figuring out the borrower dependent note structure and how we were going to put together the legal framework for us to raise money. We got that figured out and felt pretty good about that. And then I needed at least some framework of a technology platform so investors can invest and see deals and borrowers can sign up and submit deals that we hacked together a minimum viable product or MVP from a technology perspective. I spent a lot of time on that.

Once I had the foundational pieces that I needed to do a transaction, I decided to see if we can get a transaction in the pipeline so then it was really sales and marketing to the borrower side of our business to see if I could get a real deal on the hook and have something to fund and kind of simultaneously while I was doing that as I have created a kind of a fake project. I was shopping it around to potential investors on a one on one coffee meeting saying hey if I bring you a deal that looks like this would you be interested in writing a $10,000 check or $15,000 check to finance it at a 10 percent return. Got enough of those to say like okay if I do get one in a hook I probably got $300,000 dollars worth of yesses lined up. Half of them will flake out so as long as my first loan is under $150,000 I should be able to actually deliver to the borrower. And then it is just a matter of doing that. So we got our first borrower on the hook and I had to figure out how do I actually originate a loan. I've never done that before. So finding some good representation from a legal perspective and getting our loan documents drafted and reviewed and then we originated our first loan.

The first deal was in Trumbull Connecticut. The guy bought a property for a great deal he made it. He made a killing on it which was good for us too because it was a good notch in our belt from valuation and underwriting perspective. I got paid off in five or six months as well so it allowed us to return some principle to early investors and wash rinse and repeat that capital into the subsequent deals.

Scaling

In a marketplace business liquidity is very important. You have to have enough deals to attract the capital, you have to have enough capital to be able to actually feel good about funding the deals. So it's like any marketplace business or even eBay; if you have a ton of people listing stuff for sale but no one buying it you will lose, there's no value in the marketplace. That was certainly a challenge for us and we figured out about six or seven months into actually having funded our first loans some ways to find cheap liquidity on the capital side. We got some commitments from some larger funds here in New York to commit to funding a certain percentage of our loans early on which allowed us to just more focus on building the deal flow on the borrower side.

As we got more deals more investors became interested and things started to snowball to the point when we launched a deal this week that sold out in six and a half minutes to our investor base. It has largely grown that side organically through word of mouth and doing podcasts like this and what have you don't pay a lot in marketing dollars for investors. The idea being we're originating a good product. People will talk about us and find us and they'll dip their toe in the water with a couple of thousand dollars let us perform and then grow that or that allocation over time.

Listen to this episode and read the transcript in the Shownotes Page, here.

I am the co-founder and managing director at Arborcrowd. I have been surrounded by real estate my entire life. My entire family works in real estate. My father Ivan Kaufman began working in real estate at 24 years old and now he runs a publicly traded real estate investment trust, Arbor, it's called, and they are a leading commercial lender in space. Arbor has a lot of different arms to it and the newest arm is Arborcrowd where we focus on multifamily investment offerings to this new class of investors that the JOBS Act created in 2012.

We go after accredited investors and we created the company first in 2016 with the simple concept in mind that the industry is evolving and as a company we're always looking to evolve in the industry and this whole new class of investors can now access the same institutional quality deals and transactions that we were looking at on our desk regularly and we thought that the next best step would be to form Arborcrowd within the Arbor Family of Companies. In doing so. We were cautious and we were hesitant. We understood that there were a lot of other companies that jumped to the opportunity with the passage of the JOBS Act and we took our time to really sit back and watch and see how these other companies were forming, the way we thought they were doing things well the way we thought they were doing things not so well.

Ultimately when we came online in 2016 we thought that the direct to investment model of offering one investment opportunity at a time was the right way to do so in the crowd funding vehicle. And it was during an interesting time where a lot of the other crowdfunding platforms were moving to the Reg A plus model that online fund or eREIT type of model. And we didn't think that that was going to be the long-term play in the industry.

So we decided to choose one deal at a time to go with on our platform and marketed to accredited investors to come in and invest in those transactions. Why did we think to do this because we think that this model really offers the most precise and accurate level of transparency into each transaction for investors to really feel equipped and armed to make investment decisions that are based on information that we are making ourselves to invest in these deals. And that's why we chose this model at that time.

Challenges

Where we are with the market today I think that everybody knows it's hard to find good quality deals and you know as a company we are always looking for momentum to post deals in our platform. But what our experience lends to us is that posting quality deals will build a long-term company with happy investors. So we spend a lot of time looking at our relationships that we've cultivated over the past 30 years in the industry finding and securing it really off market transactions that are not available to the public that we are that we have been participating in for many years and doing the diligence that we think is necessary to really offer a quality deal to the crowd.

We're patient and we think that right now finding quality deals has been difficult. We think people are overpaying for their deals. And at the end of the day when the market cycle changes or shifts they're going to be caught like a deer in headlights because there's going to be no value created in these transactions. And we are at an interesting point in the industry because crowdfunding is so new and the market cycle has only been good since crowdfunding has really been enacted.

A lot of the life cycle of a lot of the deals being presented hasn't really come to fruition. So we don't really know what the crowdfunding industry is going to look like in a down market. And that's why experience and transparency matters so much to how investors are looking at deals and how we are at Arborcrowd presenting deals to investors.

You see in the industry phrases like ‘democratizing real estate’, right, making real estate available to everyone. But if everybody is getting in and they don't really know the risks and the downside and they're not really being presented with enough information to understand the risks and downside it's a very dangerous thing that ultimately I think is going to push a lot of the companies that are more technology focused or have less experience in real estate or are trying to show a lot of traction and growth in their own company and focusing less on the investors and the transactions themselves out of the industry altogether.

For us, more is everything. We only present to the crowd a deal that have been closed. We actually front the money for the transaction at closing for the deal to close and then we market and offer the investment to the crowd where the crowd money comes in and replaces our money that we put on the line on day one. Why do I say this? Because it's important for two reasons. One is that you can actually secure the deal and close at funding because a lot of the sponsors wouldn't want to say, Well where is the equity, and all of a sudden you say well hold up let me turn around to the crowd right now and raise that money.

We literally put our money on the line, ensuring that transaction closes and also showing investors that we believe in the transaction so much that we literally invested on day one before passing the equity interest over to them. If the deal doesn't fund we’re in the transaction no matter what. So why that's important is that ultimately when we go to build out the offering materials to present this information over to the crowd because the deal is closed we are able to present the crowd with a detailed business plan an offering overview and a detailed private placement memorandum of the same materials that we looked at to underwrite the transaction and literally invest in to the crowd.

The terms aren't changing. The deals not changing. We present to them you know 30 or 40 pages of an offering overview that outlines everything from you know where their investment is going to what's happening on a property level to increase value to the market demographics and jobs being created that can support the value that we're projecting on a rent level. So we do a lot of work putting together that offering material and really what it is doing is repurposing the material that we looked at to underwrite the transactions and present that to the crowd and we take a lot of time to do so and we go into an enormous amount of detail to present to the crowd so people ultimately feel when they're going to invest that they were able to really understand the transaction in the same way, in a digestible way, that we were looking at it from day one.

We usually have third party reports that we commissioned those costs money and you can't share them but we can share the findings of them you know exactly what was drawn out of those reports and we can cite them. You can't distribute those third party reports but we will share in our offering overview to a great level of detail just why we think a market is the way the market can support the business plan based on facts because we do not we are not investment advisers. We don't advise on the investment we simply present facts based on the facts that we understand and know.

We basically pass on the information on why we thought this deal was good and bad. We present the good and the bad of the deal the risks and the positives. Ultimately we think the transaction is worth investing in and what we do in the offering overview is that really you will not find anywhere else be present even the partnerships so we require that our sponsors other the other equity in the deal who are running the day to day of the deal, co-invest with the crowd so they could invest significant amount of their own dollars so that really the interest is aligned at the end of the day and in our offering overviews you'll see the background presented of these sponsors to the detail of their realized and unrealized investments and their performance there so that investors can really open up the offering overview and say Who am I going into business with, who am I partnering with. What has their track record been like. And we present that information as is so that investors can make a decision on their own whether they would like to invest or not with those with those partners.

We are not the principal on these deals but we're not going out and actually soliciting sponsors because we have these relationships with the sponsors over 30 years who are securing financing or debt from Arbor Realty Trust who we are transacting with every single day that we are all of a sudden offering additional equity to and the crowd coming in to great quality off market transactions that crowd the crowd can't really find as an opportunity anywhere else. We don't have to do much work soliciting sponsors. We're really just opening up our network for the crowd investors to invest alongside the sponsors.

It's an alternate source of equity for many of the borrowers who come to Arbor because if they are constantly participating and buying transactions. Maybe bigger transactions that they're participating in. Now they can secure through Arbor crowd vehicle as a company they can secure additional equity via crowdfunding.

What we'll do is we don't charge anything for the deal we basically say we have a passive equity vehicle namely the crowd to come in to give you additional equity and they're happy with those terms you know they're happy to get more equity they're always looking for more equity they don't have to source it from family and friends or from institutional capital so they're happy to receive the equity. To the crowd we're IRR driven and it basically present to them either or as in our offering overviews net of the fees charged to the deal which we think are common real estate fees.

What type of terms do we look for from sponsors. We really look at each deal individually and look at the strength of each deal and what our focus is we focus on multi-family particularly workforce housing from good sponsors so the terms that we look for and the fees they charge. It really depends on the strength of the deal because we like to present to the crowd you know mid to high teens IRRs in secondary and tertiary markets. If the deals can support you know those returns to the crowd before going on the platform we'll look individually at each deal and look at it differently for what it can support on a sponsor requirement level. One additional thing I'll talk about so we are not, Arborcrowd as a company does not also co-invest in the deal.

However, part of the Arbor family companies includes our private equity shop, eMac. And oftentimes in the transactions that we've posted to the platform they have invested in the transaction and have the same principals as a crowd. So another Arbor family company or entity eMac or private equity shop also invest in some of the transactions alongside the equity and that's outside of Arborcrowd as a company.  Because they have the same principals, Ivan and me or my brother Maurice, people feel generally pretty good about the fact that that vehicle is coming and investing in the equities as well.

How does Arborcrowd make money. We charge fees but we think our standard real estate fees which we present very clearly in our offering overviews. We charge an acquisition of a point to a point to five, a disposition fee of a point and a AUM fee of about a quarter of a point to half a point and a refinance fee of a point, if there is a refinance on the property. Now the returns that we project in the business plan are net of these fees. None of our investors have to go in to do the calculations on their own. We show these calculations in the offering overview and the returns that we project on the deal level are net of these fees.

We tend to just underwrite really conservatively and be careful about the deals we present on the platform which is why we're so selective. You won't go to our platform every day and see a deal posted live to invest in. And that's just because the market right now we do not think is going is so great to buy in and is not going to survive. You know the projections right now are not going to survive a downturn so we're really carefully selective in the deals that we post on the platform and we're really conservative in our underwriting as a whole. And that's really what sets us apart from a lot of the other platforms with they're constantly rolling out new deals for investors to invest in that we've passed up on a lot of transactions they've crossed our desk and we have not decided to invest in them.

I have a background also in advertising technology you know power the power of big brands finding their consumers online and how to do that. I have had some experience there but I think the common mistake that people are making in crowdfunding is actually focusing on the technology because at the end of the day for us the technology really serves as the access point to the product. And if we lose sight of that product by focusing on the technology at the end of the day when the investments do not perform well you lose your investors and nobody cares about the technology.

I think that all investors really want at the end of the day is technology that serves them to access that product they want basic fundamentals to really access manage their portfolio how are they getting the information and once the transaction closes, how is information being delivered to them. And that's really the power of the tech in this industry. It's really servicing the product and the investors to access the product. And that's in our view towards technology overall. And unfortunately I think a lot of other companies have taken the opposite approach and they've invested a lot of money into their technology and now they really don't have the deals to support that. And in a few years from now I think there's going to be a lot of conversation around how much is that technology worth and whoever is left, do they want it even so I think to wrap to really address your question, we look at real estate first in this industry and we look at technology to service the product which is real estate.

We haven't had too many challenges with the sponsors. We're working with.  Ultimately I think it's just about educating them that crowd funding is a means in which to raise capital right now. And they the common response is Well what is that. I've never heard of that or how did you do that. And I think after a brief conversation usually you get a that's very interesting and you've been successful doing that and you know you can raise the capital by doing that. And when I say yes, they say we're interested to see how that happens. And they're really not too involved on the capital raising side other than providing all of their information and track record to us. And once it happens I think you know they're a part of it and they see a little bit of how it happens that they get excited by it but they don't really look to adopt it on their own because they're busy out there finding properties investing managing properties and they really look at the funding side of the fund raising side as a different aspect of the business.

The biggest problem with investors is that there are so many crowdfunding companies out there and they offer a really flashy returns. You know really they have a lot of you know glitzy sexy projected returns and they're not showing their risk so much so when investors come to our platform and we're traditionally more conservative it takes a bit more of time to explain to our investors or potential investors.

You know the diligence and the expertise that we have in the industry that really drives the type of deals that we present to them. It takes that extra conversation especially when you're competing against flashing lights that read You know 25 percent IRR you know that equity multiples 3x.  People are basically looking at those numbers, they're investing today because they're being told you know promise I should say really these returns. And when they come to our site they seem more realistic returns. But you know if you give us the time to explain you are stable a more stable approach towards selecting these deals it's a little bit more time consuming and requires more of a conversation.

We've cultivated a big investor group and potential investor group on the basis of education. So when we don't have a deal live or even when we do we're constantly sending out educational pieces or articles or basically describing you know different aspects of real estate how to understand real estate how to look at how we approach underwriting how we approach different markets even sharing some of our investor stories and you know their backgrounds which investors to really build up the community so that when a deal is ready to invest in a lot of our investors feel like they're equipped with enough of the devices to make the investment decision of whether to invest or not.

We focus an enormous amount on education and the distribution of content. Additionally we do a lot of webinars so when a deal goes live we'll do a sponsor webinar where you'll have me and the sponsor of that deal walk give the investors the chance to see that business hear the business plan I should say walk through my eyes and the sponsors eyes and you know field live Q And A's at the end. We'll do a lot of education related content to even FAQ sessions or infographics and content to really deliver each deal and real estate as a market in general to drive the details home to make investors feel like they're investing something they know how to invest in and that they really feel a part of.  We put a tremendous amount of effort in that community.

In the past couple of years alone you've seen crowdfunding will be a small slice of the overall commercial real estate market in general grow tremendously. And I think as investors become aware that they can now invest in commercial real estate to diversify their investments and their portfolio and or access these investments that were really previously excluded from them exclusive to them. I think it has a tremendous amount of growth that is really going to play a significant amount of of of dollars in the overall commercial real estate landscape and people are going to look at crowdfunding as a legitimate source of capital that is more everyday more regular. So I think that growth is going to be great. And I think particularly on the equity side you know there's so much money that's going to enter the market it will shift actually how people look at sourcing capital whether they go for institutional dollars or not. And the amount of players in the space as a whole. So I think there's a tremendous amount of growth that will be where we are seeing today and we'll continue to grow. I think the dangers and the perils in that growth are that you know it has to be regulated and done effectively and that's on the responsibility of the different platforms out there.