Crowdfunding real-estate: A tool to combat displacement or another nail in the coffin?

Pub date April 10, 2014
SectionPolitics Blog

A key provision in the JOBS Act, a legislative package signed into law by President Obama in April of 2012, was hailed as a huge victory for the ever-growing real estate industry, removing many of the bothersome impediments that keep it exclusively in the realm of the upper echelon.

The vast majority of real-estate deals are controlled by private equity firms and “accredited” investors whose individual net worth is $1 million or more. But the JOBS Act opens up new territory by allowing for “crowdsourcing” investment funds, introducing the option of pooling financial resources with up to 500 other “non-accredited” investors, meaning anyone making $100,000 or less a year for an individual, or $300,000 for couples.

This potentially opens the floodgates to a much larger portion of the population — but it could have positive or disastrous implications for San Francisco’s housing affordability crisis, depending on how it’s used.

Walk down nearly any street in San Francisco, and you can virtually watch the city change by the moment. With reports of mass displacement and staggering income inequality, the city is desperate for a way to stem the tide of evictions and curb the loss of affordable housing.

This idea of using crowdfunding has drawn some interest as a possible tool for restoring balance. At the same time, at least one company has seized on it to do just the opposite, making it easier for real-estate investors to flip properties and escalate displacement, the only difference being that one need not be a member of the exclusive upper crust to get in the game.

The recent campaign to save the historic black owned bookstore, Marcus Books, led by the San Francisco Community Land Trust, sought to take advantage of crowdfunding as a way to preserve an iconic cultural location and housing for long-term residents.

Fundrise, a D.C. based real-estate startup, helped the Land Trust set up a fundraising campaign in an effort to raise $1 million. Although it failed to hit the target, the organization “was able to raise $750,000,” according to Tracy Parent, SFCLT’s Organizational Director. (Marcus Books is hosting a town hall meeting on Sat/12 at 1pm to discuss plans for the future.)

The campaign inspired hope that even the non-rich could band together with crowdfunding campaigns to preserve rent-controlled housing, by moving historic properties under Land Trust ownership with perpetual tenancies for long-term occupants. Fundrise, meanwhile, held several meetings with representatives of San Francisco’s Office of Economic and Workforce Development to explore ways of working together to respond to the affordability crisis.

Yet a different picture emerged when we talked to Aaron McDaniel, CEO of San Francisco real estate startup Tycoon Real Estate.

McDaniel says the JOBS Act provision “can be used as a tool to get into the industry” for those who want to break into the business of flipping houses, a sentiment echoed in a Business Insider article by Nicholas Carlson earlier this year that asked the question: “How can I get into San Francisco’s house-flipping, rent-gouging market?” To wit:

“It used to be that if an investor wanted in the San Francisco real estate market, that investor would have to have at least a few hundred thousand dollars around for a down payment. Not anymore. Thanks to the JOBS Act and a new Kickstarter-like website called Tycoon Real Estate, people with a few thousand dollars in savings can now invest in flipping houses the way only millionaires used to be able to.”

In other words, anyone looking for a get-rich-quick scheme can cash in on the city’s red-hot real-estate market. As the Business Insider observed:

“If [Tycoon Real-Estate] gets big and starts funneling even more capital into the San Francisco real estate market, all those people throwing rocks at Google buses and whining about rents are certainly going to come after the startup, accusing it of fueling an already dangerous bubble.”

Therein lies the danger that could actually speed up displacement in the city. And with San Francisco housing prices at an all-time high, there’s strong incentive for any random person with a thousand dollars or so lying around to give it a go.

As Parent noted, to her knowledge, no other organizations looking to combat displacement have sought to create crowdfunding campaigns of their own for the purpose of preserving rent-controlled housing, rather than flipping it. But Parent is holding out some hope. Even though “we were not successful” in raising the $1 million needed to save Marcus Books, she said, “we will use Fundrise again.”