I recently met up with Allen Shayanfekr and Raymond Davoodi, two of Sharestates’ three co-founders, to discuss the history and growth of their real estate crowdfunding platform. With a collective background in banking and securities law, real estate, and title insurance, the team is beyond experienced and well-equipped to successfully mesh the realms of fintech and real estate.
As Raymond said it best himself, though, real estate is a boots on the ground business. In an industry where origination is often spurred by referrals and personal relationships, how exactly does a crowdfunding platform impersonal by nature successfully bridge a gap and make a connection as other fintech platforms strive to do?
Luckily, Allen and Raymond seem to have answers to this question and others. You can learn more about the behind-the-scenes of Sharestates below.
CL: Raymond, you have a lot of experience in real estate from founding an insurance company, which then became a full real estate company over the course of 20 years. And Allen, you worked in the title insurance industry for some time. So why jump ship from stable jobs to build a crowdfunding real estate platform?
AS: It really wasn't so much about jumping ship; there's a lot of synergies between the businesses. Along with me, Ray and Radni are the other two co-founders, and what they have built over the last decade-plus prior to my entry was the foundation that helped us launch Sharestates as a finance company. They started by catering mostly to speculators, developers, and renovation projects and then continued building a database from their insurance side.
When I stepped in and started working with them on the title end, we were looking at different ways of growing the organization as a whole. Finance just made the most sense as far as the next evolutionary step because we already had this book of clients that we could leverage. All we really had to do was build the technology platform and plug in the financing. But in this industry, the commodity is your ability to originate.
There are many platforms out there that raised a lot of capital, but ultimately couldn't originate loans or business and failed as a result. We decided to start backwards—we already had the origination business, so we just had to find the capital. And the title company that I worked for, which was actually Ray and Radni’s title company, still works alongside us synergistically, so it’s difficult to say that any of us have jumped ship at all.
CL: For those that don't know, how do you define Sharestates as a business?
AS: There’s a handful of ways we could describe it; a crowdfunding platform, a marketplace funding platform, a hard money platform, et cetera. The core of our business, though, is made up of two different things. We have our borrowers on one end, and we have our investors on the other end.
Basically, what we've created is a marketplace where our borrowers and investors can gain from each other. Our investors are obviously looking for an alternative asset to invest in that's going to generate a nice return. Our borrowers need capital to continue to grow and scale their businesses. I guess the best way to characterize us is as a private bridge lender focused strictly on residential multifamily and mixed-use assets for loans covering anywhere from $100,000 up to $10 million. We can provide that capital that's going to allow developers to go in for a year or two to renovate an asset, lease it, and then take it out to a bank afterwards.
CL: Being an online real estate investment platform, what does the makeup of your current team look like?
AS: Right now we have 75 people part of Sharestates. 25 of those are on the tech side, which is actually all offshore. It's a company that we built that is technically a separate entity, but they're our exclusive developers. Then we have 50 people in-house, covering everything from sales and originations to underwriting and accounting. Our closing desk is responsible for scheduling closings with our different vendors that are involved—the title company's main concerns. We have a marketing team as well.
Our capital market team sources institutional capital and visual capital. We also have our investor relations team that's responsible for communicating with the individual investors that are participating through the websites and the platform. We're constantly growing. We have an open HR list of about 10 people right now, and I think we'll probably be north of 100 people by the end of the year.
Chris: How has regulation enabled you guys to have a platform like Sharestates?
AS: There's two governing bodies that we need to be concerned with. One is financial regulation at the state level, which consist of various banking laws and where we need to be licensed in order to lend. The securities end of it is mostly SEC related, and as long as we're doing what we need to do at the SEC level, we qualify for exemptions at the state level. When the Jobs Act went into effect in 2012 and loosened some of those regulations, which allowed us to do what we do today online.
From the finance end, there's actually only about five states that require a lending license for what we do. There’s 45 states that, for commercial-purpose loans, don't require a lending license. In the five states that require a license, we already have two of those licenses and a third pending. So we could theoretically lend in 47 states as of now.
CL: With a platform like yours that tells investors they only need $1,000 to invest, what kind of investors utilize the platform?
RD: Most of them are creditors, who are generally a little bit older, more seasoned, and a little savvier. They're looking for safe investments. They vary from very real estate savvy individuals to those looking to diversify their own portfolio of investments. So people are coming in from different industries, and the whole point is to be able to empower anyone, whether it be a college kid who's using his parents' money to invest for them or a retiree making sure she has income to pay the bills.
AS: It is a lot of professionals, and it really spans the spectrum as we see accountants, lawyers, etc. using the platform. As long as they qualify as an accredited investor, the $1,000 investment is more about letting people test the waters more than casting a broader net with non-accredited investors. A common misconception we’ve seen is that the $1,000 minimum means that we're going after the masses. Eventually, we do want to provide a product for that. The regulations there get a little bit more complicated with the SEC, so it's something that we'll do eventually in the future; probably sometime in 2019. But for the time being, it's strictly an accredited product and the $1,000 has actually been great for allowing people to test it out, watch a couple of months' worth of performance, and then eventually follow up with larger investments.
CL: To date, you've funded over $961 million in real estate deals across 19 states. What types of growth can we expect moving forward, and how do you plan to roll out to even more states?
AS: We're doing about $60-70 million a month right now. The goal is by the end of the year to be north of $100 million monthly. Our goal is to cumulatively do $1 billion dollars this year in 2018. As a little bit of background, in 2015 we did $80 million, in 2016 we did $180 million, and in 2017 we funded just under $550 million.
Something that we're doing that's unique in this industry is, rather than competing with the people who traditionally ran this industry which were smaller, local, hard money lenders, we're befriending them and actually becoming a resource for them. Throughout the country, there's smaller groups of family-owned offices that have anywhere from $10 to $30 million dollars on rotation. They have a core network of people that they lend to, but they don’t have an institutionally investible platform, and that's the space we fill.
We reach out to these local lenders and partner with them. We're providing them with a technology solution by white labeling our software and giving them an online presence. With it they can use all automation tools that they need to actually scale their business without having to build out their own infrastructure, and we’re also providing capital for them. The idea is that we can help them scale and grow their brands while they maintain their identities, but we’re running much of the behind-the-scenes. With these channels we’re working on growth in states that we’re currently in and also expansion to other states.
CL: These types of real estate deals are usually hard fought by figuring out ways to win the deal and get in on it. So how do you make that a scalable business? How do you apply technology that's trying to bring efficiency to that process?
AS: This is Ray's forté—he always says it's a boots on the ground business. Real estate has always been a relationship-driven business. You can do online marketing and advertising to find borrowers but, odds are, the people that are clicking on those links are clicking on them because they lack experience or relationships in the industry, which is ultimately not the borrower you want to be lending to. They're more likely to run into issues or fail to forecast correctly, and that's where defaults and delinquencies come in.
Many of our peers in the industry spend a lot of money on marketing and advertising online. They have been able to originate significant loan volumes out of it, but they're originating loans to first-time borrowers who have very little to no experience, and it's evidenced in their delinquency and fall rates. Our emphasis was to automate and augment the process that users go through in order to get them to close faster, make their experiences better, and convert into a scalable business. However, originating is always going to be more of what Ray likes to call a “white glove service”. It's about hosting networking events, connecting the clients with each other, getting a warm introduction, and capturing the business there.
CL: Do you think there will ever be some sort of an evolution event? Is this truly a kind of old boys club of real estate where you need to know the people, and there’s not much you can do to get around it?
RD: Automation and marketing is trying to change it, but it's not going to change. If we're going back a decade, the commodity of an investor was who his real estate bases were and who got him the deals, what agent in that brokerage is actually his contact, and how he got that deal before anybody else did. Now, if the investor is a private lender that no one knows about, they could call us if there’s a closure, a short sale, or a bankruptcy issue. They would be the first one to know about the property and could hence finance it faster than anybody else did.
With so many different Instagram and Facebook pages that blast every transaction that happens, you can find out info on the broker, the finances, the title, and the attorney. I could, theoretically, find out how each and every one does business, but they're still not going to change the relationship. The broker is not going to break his loyalties to get the same broker fee from you when he's used the same broker for 30 years.
Access to information is not necessarily going to change it. It might offset the numbers a little bit in situations of bad deals with brokers or other scenarios, but you're never going to change that handshake relationship.
Even with a lot of our borrowers, they sometimes see ads saying the money’s cheaper and they might get called on and pitched. We might not always be the best product out there for them, but they're not leaving. We’ve built up a relationship with them already; we’re a safe platform and they know the money’s there.
AS: It’s also important to remember some developers have hundreds of thousands upon millions of dollars online in deposits, so when you have a contact and you have to close in 30 days or 60 days or even longer, you're no longer going to save a couple of points. Those online lenders that utilize digital marketing and advertising have pitches that hinge on the fact that they’re providing a lower cost of capital because of their technological efficiencies. But we’re doing the same thing.
Eventually our cost of capital is going to be there as well. But, even today when there’s an online lender that might be a point or two cheaper than us, those developers are not going to run the risk of putting hundreds of thousands of dollars that's on deposit on the line in order to save a point or two.
RD: The other aspect of that is, the real borrower in this business model isn't a person that's on Facebook or Instagram. It’s those that work hands-on on job sites. They’ll check their emails only when there's an insurance policy coming in, when their license expired, etc. There's a reason why they're using their email, and it's not to communicate with their vendors. So they're not necessarily going to see YouTube or Facebook ads; it’s not capturing their attention.
We’re doing a very good job of expanding, starting with the strategy of moving down the east coast and then moving westward strategically, as opposed to looking at our 46 eligible states and choosing dots on the map. We have to move into markets that have some sort of synergy within each other, so it's easier to get that warm introduction throughout where you go. Networking with industry people has helped us get there faster.
CL: What is the monetization strategy at Sharestates look like, and is the organization on a path of profitability?
AS: We've been profitable since August 2015 and still the only profitable company in this space. We're also the only self-funded company in this space—we never went out and raised private equity in venture capital. Ray and Radni funded the entire operation, quickly started originating, and we've been investing everything back in to maintain growth.
RD: We take a very traditional approach to the business. We’re not burning through the money as fast as we can in order to get more; we look at every penny as if it's our own money so that it's not wasted.
AS: We own the company entirely, so every dollar we spend is not a dollar of venture capital money, it's a dollar of our money. We invest it back into the avenues of advertising and communication that we think are absolutely necessary.
As far as monetizing it, our revenue streams today primarily come from two sources. One is what we call servicing fee income, which is basically a yield spread. If we're lending, for example, to a borrower at 11% and paying investors 10%, we're making a one-point spread in the middle. And then we also have origination fee income, which is paid by the borrower at the closing. There are a few additional sources through extension and due diligence fees.
CL: What benefits have you found in offering a wide array of real estate investments on the platform rather than just focusing on commercial or just focusing on residential housing?
AS: This goes back to the two distinct sides of the business. The investors, on the one hand, want diversity—they want to be able to invest in multiple asset classes for diversification to theoretically lessen risk. But on the borrowers’ end, they are naturally going to evolve over time. Ray and Radni’s initial clients in the title insurance business were single family residential fixer-uppers. Over time, they made a lot of money doing that and they evolved. They started doing larger projects by getting involved in small multi-families and small mixed use properties. Then, it became a middle-sized, multi-family, and mixed use ground-up construction, and that evolution continues.
But the point is that borrowers are deal makers. They identify good opportunity whether it's residential, multi-family, commercial, or retail office. And if the numbers make sense, they’ll want to do the deal. So we, as a service provider, need to be able to cover all those bases so that we're not running the risk of losing the borrower relationship. We want to be able to be a one-stop shop for all their lending needs. And eventually that's going to lead us to do other types of lending products that’s not just the bridge, but eventually midterm and term products. That way we can take them from the bridge phase to permanent financing so we can capture the client through their life cycle.
RD: As far as investors are concerned, I think our initial coming to market was to create something similar to E-Trade. You’re want to make and close investments across the real estate industry, and you get to see the diversified landscape in front of you.
CL: If you had to boil it down, what unique differentiators that Sharestates' offer in comparison to other crowdfunding real estate platforms?
RD: We like to say that we're real estate guys getting into the financial world, while they’re financial guys trying to get into the real estate world.
AS: I think there's differentiators at a couple of different levels. For one, you want to invest on a platform that's going to be around long term. Given that we're self-funded, have full control of our business, and are profitable, that’s a good sign at least. There's no runway that we have to worry about where we would have to go out and raise additional capital.
Another is, of course, that we're real estate guys and we know this market. We’ve been incredibly hands on with any delinquencies that we have had because we're problem solvers and were able to step in and use our network to fix the issues. We can solve issues like that by either bringing in someone else to partner with the borrower or even stepping in ourselves. There’s a range of solutions.
At the third level, we're probably the most diverse in our product offerings. Like you mentioned earlier, many platforms have chosen to focus on a single asset class or a single geographic location, while we’re diversifying across multiple geographic locations and asset classes. You can get funding from us for anything from a short-term residential fix-and-flip to a multi-family buy-and-hold on either coast. It gives people a chance to diversify within our platform without having to go to 10 different websites to get that same diversification.
CL: If you could provide one tip to someone considering starting up, what would it be and why?
AS: For me, I think the biggest piece of advice I could give is to find the right partners, because you can't build a company by yourself. If you're going to take the one-man-show approach and not give credit where it's due, you're just setting yourself up for failure. You don't need to be the smartest guy in the room. You just need to be able to identify partners with whom you have synergy and are able to cover each other’s areas of expertise, strengths, and weaknesses.
Ray and I are two completely different personalities and we work well together because we never step on each other’s toes. We’re able to trust that if there's something that I need to deal with that's in my domain, I handle it, and vice versa. I don't need to worry about what Ray is doing on a day-to-day basis because I know he's taking care, so I can focus on what I need to do to make the business grow.
RD: I would say don't set up a company just because you see a long term financial gain in it. Start up a company with a real sincere passion for your product and by just virtue of that, it will grow into something special.
CL: If you could model yourself after one founder, who would it be and why?
AS: Honestly, I got very lucky with the opportunity to work with Ray and Radni as my co-founders, and I've pretty much made it a point to model myself after them. They have taught me everything I know, and I don't think you need to look very far to find a role model. It's the people that are close to you that respect you and take care of you, and it goes both ways. So they are my role models.
RD: I'm going to flip that on him and I’d say Allen. I think Allen, at a young age he found something he really had a passion for. He has a hunger for learning, and I think he's been able to take himself out of any situation that he's vested financial or emotional interest in and be able to look at it from a third party angle. He'll do the right thing and I think he has a great grasp of being a visionary and looking 10 years into the future. He’s great at collecting his own information without the reliance on third parties and then arriving at the correct decision. He utilizes his surroundings and people's talents and is able to appreciate people for who they are and not expect them to do what they most likely cannot.
Synergy seems to be an eminent theme in both Sharestates’ organizational convention and customer relations. In the seemingly indisruptable culture of real estate, that synergy may be the key to assimilating into the relationship-driven industry. By cultivating a top-down approach, Sharestates can utilize their vast network optimize their strategic expansion in order to build on and augment the pre-existing concrete relationships; not replace them.
In terms of internal culture, Allen and Ray’s unabashed admiration of each other speaks lengths to the functionality of the executive team. The symbiotic group seem to work well together given their self-awareness and diverse backgrounds.
I’m excited to see the future expansion and evolution of the platform given a taste of the plans that Allen and Raymond have in store, both on the borrower and investor end of the model. Many thanks to both of them for taking the time to chat.