In late June, PeerStreet filed for bankruptcy protection in federal courts. While not a complete surprise, the firm’s failure rattled industry insiders as PeerStreet has long been viewed as a respected player in the real estate crowdfunding sector.
Launched in 2013 and serving accredited investors, PeerStreet provided access to high-yield, short-term loans provided on the platform. During its existence, PeerStreet reported more than $3.5 billion in short-term, first-lien real estate loans.
The once thriving firm is now in the process of liquidating almost all of its assets as it seeks to maximize the value for its shareholders.
CI connected with Groundfloor, another real estate investment platform that provides a similar service with a marketplace providing short-term loans for residential projects. Using the Reg A+ securities exemption, these offerings are available to retail investors.
Brian Dally, co-founder and CEO of Groundfloor, told CI they did not have any inside details on the failure of the platform but they were surprised each time that PeerStreet announced big rounds of financing:
“It didn’t make sense to us, because we felt PeerStreet’s business model wasn’t conducive to the value creation that would warrant such investment,” said Dally. “I say this not just as a casual observer, but because I invested in many projects over the years. I think the result we see today reflects our observation.”
Dally said that he suspects that people got caught up in the “Silicon Valley hype” and they did not consider the nuances.
“After 10 years in this space and experiencing many ups and downs, I’ve come to realize that the source and structure of capital matters because it drives behavior. Limiting offerings to accredited investors seems great early on, and many startups achieve early traction that way. Not doing the hard work of building a better model, such as going through the regulatory qualification to serve all retail investors, however, has consequences,” Dally stated.
He added that it appears that PeerStreet ultimately suffered from these strategic choices of how it sourced its mortgages, and to whom and how it sold them.
It has been widely reported that the Commercial Real Estate (CRE) market is going through a rocky period. Certain troubled markets like San Francisco is experiencing a population decline driven by high cost, high crime and political incompentance. At the same time, the shift to more remote work is making rural areas and other communities more popular as people look for bigger spaces and better ameneties at lower price.
Dally noted that PeerStreet was not in the CRE space as it is typically appliec but insteand provided financing to local originators of business purpose residential property mortgages as a source of financing to investors nationwide. He said that in effect PeerStreet purchased specialized mortgages in order to resell them.
“I wouldn’t be surprised if institutional buyers called the shots, squeezed the economics, and made up most of the volume. In this case, accredited investors on the PeerStreet platform would receive the leftovers, and would be charged huge spreads for the privilege. When rates skyrocketed, institutions stopped buying, and PeerStreet was trapped. They couldn’t supply enough capital to keep their originators going. The strong ones moved on. Investors found better places for their capital. And it’s no wonder: The same types of loans available for investment on Groundfloor offer yields that are 200-300 basis points more than PeerStreet’s, and have performed much better in every other dimension as well.”
As was previously stated PeerStreet held first lien on debt issued which should have helped to protect the debt sold on the platform. Groundfloor takes a similar approach by offering collateralized loans. Dally said that nothing can save a good product from the effects of a bad strategy, fueled and spurred on by a bad financial structure.
“I hope the investors who own fractions of PeerStreet’s loans will be made whole,” added Dally.
As both Groundfloor and PeerStreet overlap, we asked Dally if they would be taking a look at PeerStreet’s assets.
“We’ll take a look, but suspect there is no business case for Groundfloor or our investors to purchase these assets. However, we are offering an attractive promotion for PeerStreet investors or any other investor from other “accredited investor” platforms to join tens of thousands of other satisfied investors on Groundfloor.”