Not Everything Should Be Crowdfunded - Pacific Standard

Not Everything Should Be Crowdfunded

The explosion of real estate investment start-ups gives us a peek into the dangers of peer-to-peering everything.
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Aaron McDaniel listening to Shark Tank investors. (Illustration: Susie Cagle)

Aaron McDaniel listening to Shark Tank investors. (Illustration: Susie Cagle)

"We're on the brink of an exciting new era where anyone can be a real estate tycoon," Aaron McDaniel said, beaming at his potential investors, the sharks of ABC’s Shark Tank. McDaniel was trying to sell them on his start-up Tycoon RE, which aims to crowdfund real estate investments. He valued the company at $1 million, admitting that so far the site had only funded one investment, “a part of a house in San Francisco.”

One after another, the sharks ripped McDaniel limb from limb. Mark Cuban at turns called Tycoon “a rip-off name,” and buried his head in his hands, groaning.

Many of the sites could be generously described as "underdeveloped," and more accurately as "sketchy as hell."

It was the most delightful bit of techie schadenfreude in recent memory. McDaniel was not struck down for posting a dumb tweet about the meritocracy, but because his business idea is the worst possible brain child of a real estate bubble and a well-meaning but misled trend of peer-to-peering everything.

The idea is very, very bad in large part because McDaniel is far from the only one selling this kind of snake oil.

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Buying property is generally a good bet, if you have the time and the extra money to see the investment through. But it is also inherently risky. Large financial services firms already offer real estate investment trusts, or REITs, for people looking to buy a little piece of a diverse property portfolio. When one of the Shark Tank investors asked McDaniel—who has no previous realty experience—about REITs, he responded that they “aren’t sexy.”

There are, in fact, dozens and dozens of Tycoon-style crowdfunding sites attempting to sex up the property game. They claim to democratize property investing, once the realm of only the rich, making it more “transparent” and “social.” But they’re unclear on how they’ll actually do it. Many of the sites could be generously described as "underdeveloped," and more accurately as "sketchy as hell." Most of them obscure the actual investments they’re making and how they’re finding and valuing their properties. At least one, Rich Uncles, seems to have a questionable (and not very rich-uncle-like) strategy: buying up Del Taco buildings in California suburbs.

With a few exceptions, the realty crowdfunding investment craze looks like a bubbly California phenomenon. The Bay Area’s white-hot real estate market was no doubt an inspiration to McDaniel and other founders—it is certainly true that some people can make a lot of profit in a boom. House flipping seminars and reality television shows have been a near-monthly occurrence in the Bay over the last two years. A Kickstarter seems like the next logical step down the rabbit hole. We seem to have entirely forgotten about the real estate bubble that burst less than a decade ago and left people all over the Golden State penniless after their undiversified investments went sour.

But sure, yes, let us descend. Transparent. Social. The pride of ownership.

“Tycoon real estate is not a sleazy company looking to swindle money out of anyone,” McDaniel told the camera after he was rejected from the Tank. It felt sincere and a little sad. Deception is not always malicious. Sometimes it means well, and it wants to do great things. Sometimes the man who sells the snake oil thinks he is helping you. Unfortunately, he is just very stupid.

But McDaniel is right about one thing: We are on the brink of something. Hopefully it's an exciting new era of investors calling out very, very bad ideas for exactly what they are.

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