By David Karle, AVP, Asset Management
Originations and Underwriting
Before a deal finds its way onto the RealtyMogul platform, it must pass through a series of steps to ensure that the transaction, the operator, and the real estate all meet RealtyMogul’s stringent criteria. RealtyMogul sources most of its transactions from inbound leads, meaning that real estate companies are actively pursuing the capital that we offer, and we sift through all of the requests to select those that match our investment criteria. In some cases, deals may be sourced through outbound business development, however given the number of requests we receive on an annual basis, we are usually unable to touch every request. Of all the deals we scrutinize, only a small minority actually meet all the criteria of our rigorous underwriting process.
At this stage, a deal may be rejected for reasons such as: We do not invest in that asset type or business plan (e.g. single tenant, development), the real estate company is not established enough to provide capital to or the real estate is located in a market that RealtyMogul is not interested in transacting in. If a deal makes it past the initial screening process, it must then pass through RealtyMogul’s investment committee approval process. At this stage, RealtyMogul does a deep dive into the due diligence and underwriting of the deal. RealtyMogul visits the property, does a zero-based underwriting (to generate a non-biased analysis) and negotiate the structure of the deal. If the deal holds up in investment committee, the deal may make its way onto the RealtyMogul site to begin fundraising.
Closing an Investment
Once all the funds have been raised, the deal moves to the closing stage. At this point, most of the deal terms have been finalized and all that remains is to reconcile the outstanding debits and credits with the lender, the title company and any other parties that are to be paid at closing. The closing process rarely goes smoothly, with numbers usually being shifted around up until the final moments, so the RealtyMogul team is deeply involved every step of the way to ensure that everything is double-checked before our funds are released.
Once the deal has closed, the real estate company commences execution of the business plan, which as with closing, rarely goes exactly according to plan. Asset management refers to the ongoing monitoring and management of the investment throughout the hold period. Sponsor reports are provided quarterly and are investors’ best resource to track the performance of their investments. As such, ongoing review of these reports is key to successful asset management. This includes ensuring the reports are complete, analyzing the financials and balance sheet, comparing the property’s financials to proforma, and more. Oftentimes, we find ourselves asking the sponsors follow-up questions that come up as a result of this review. RealtyMogul’s Asset Management team translates the quarterly reports into an easy-to-review summary and provides them to investors along with the Sponsor reports.
One of the benefits of aggregating investors into RealtyMogul controlled Single Purpose Entities is that we may make up an amount of the deal equity, and as such, have control rights over certain aspects of the deal. In some cases where the business plan has gone too far off track, RealtyMogul’s Asset Management team will step in and enact changes or negotiate favorable outcomes on our investors’ behalf. Examples of this include calling for a change in property management, pushing to sell the property or negotiating a buyout of our investors’ interests.
When the time comes to sell the property, either due to completion of the business plan or to take advantage of favorable market conditions, disposition of the asset is where the value created is realized. Most of the transactions on RealtyMogul’s platform are ‘’value-add’’ investments, meaning that much of the gain on the investment comes from the eventual sale as opposed to the distributions made during the hold period. Some of the transactions on RealtyMogul’s platform have an investment horizon of 3-5 years, however the actual hold period may vary based on market conditions, business plan execution, or other macro-economic conditions. Oftentimes, the property may be held longer than the original business plan in order to maximize investor value.
The RealtyMogul Difference
RealtyMogul views investor protection, due diligence, and strict underwriting discipline as the core strengths of our investing platform. Our strategy is quality over quantity, and instead of just being a middle man passing deals along, we want to be a partner to our investors, helping them to better navigate the complex decision making that comes with real estate investing. With our strong track record, we are proud to have fully funded over 300 properties on the platform and disbursed over $120 million in distributions to our investors.*
*As of July 2019