Why I Don’t Like Property Crowdfunding

Brandi Krauss @GoodPlaceHQ Given Malaysians are almost always laggards when it comes to adopting anything new (let’s not kid ourselves – we have never been the innovative kind), we just need to look at what’s happening elsewhere (say, the United States) to predict what’s going to catch on here later.

It makes a lot of sense if you think about it. In fact, just look at the most popular sites in Malaysia. Job sites? JobStreet was definitely not the first. E-commerce? Ebay and Amazon predate Lelong for donkey years. Property portals? Don’t even get me started. πŸ™‚

What this means for local entrepreneurs is that there is no incentive to be innovative. In fact, if you want to make it as an online entrepreneur on this side of the world here’s a surefire way:-

  1. Find something that is already working elsewhere.
  2. Copy it.
  3. Launch a local version.
  4. Go public.
  5. Cash out.
  6. Go on exotic holidays, post selfies with supermodel girlfriends, liberally use hashtags like #startuplife, #ballin and #justdoit (yeah yeah)

Now I am making that sound easier than it actually is, but I know the plan works because there’s this rather enterprising individual who has done it, not once, not twice, but freaking THREE TIMES. If you’re in the online startup circle then you’ll know exactly who I am talking about here, and no, I’m not naming names!

Of course, like tons of startup entrepreneurs out there, I have been tempted to follow the same path to fame, fortune and notoriety, but now that I am married with three kids my priorities are somewhat different from the typical starry eyed 22-year-old fresh out of college aspiring to be the next Zuckerberg. These days, I’d rather spend an afternoon at home playing father to my three toddlers than to frolic with supermodels taking selfies on a yacht off Selat Melaka. πŸ™‚

But I digress…

Michael Bolton

Buyers Need To Consolidate Their Power

In my blog post published two weeks ago, I had argued that in order to bring prices down, buyers will need to consolidate so that they have higher bargaining power vs the developers. I therefore laud initiatives that enable buyers to do this – such as iProperty’s Buyers Club. Indeed, if iProperty is able to pull this off, it will be a true game changer in the industry by putting the power back in the hands of the buyers.

To tie back to my earlier point about “localizing innovation” (sorry for the jargon), iProperty’s Buyers Club seems to take its cue from property group buying sites in China (I could be wrong). Another type of these buyer-centric platforms is property crowdfunding – which has originated as offshoots of general crowdfunding sites like Kickstarter and Indiegogo.

To the uninitiated, the concept of property crowdfunding is simple:- you get a bunch of people to pool money to buy property. When you sell (flip) the property, you then distribute the profits to the group. Similar to the syndicating idea which I have talked about here, here and here, but there are some crucial differences which I am going to talk about below. But first, I gotta let you know…

I don’t like property crowdfunding.

This idea just so wrong in so many ways. Let me tell you how so.

Β (Property) Crowdfunding Sites Are Guru Platforms

These crowdfunding sites are already mushrooming in Malaysia as I am writing this article (just do a Google search). It therefore wasn’t hard for me to locate one to do some investigative work. πŸ˜‰ When I emailed one of them to ask about how the process worked, this was the bog standard reply which I received –

First, our investment experts will work with only the top developers to get deals with high returns. These thoroughly vetted deals are available to be selected by the user upon registration at our website. Then all you have to do is to enter the amount of money you’d like to invest and fill in a form online to formally submit your application to invest. Once the amount of money is raised, then you’ll be certified as an investor of the property (sic). You can then enjoy the profits when we sell the property, or alternatively you can also sell your investment to a third party.

GoodPlace.my

If you’ve got your Guru BS detector up, then Godzilla-sized alarm horns should be blaring at full volume in your head when you hear phrases like “investment experts” and “deals with high returns“. Think about it for a moment. If a deal is truly “hot” with “potential of high returns”, the truth is that it won’t need to turn to crowdfunding platforms for financing. Banks will trip over themselves to give them money.

And likewise, why would an “investment expert” make money from charging a small fee (presumably) from running a crowdfunding platform than to do the “hot” deals himself and make money from the capital yield? Quite a paradox if you ask me.

Here’s the bottom line: the whole scheme reeks of a Guru scam, and as we like to say here at GoodPlace HQ, if it looks like a duck, walks like a duck and quacks like a duck, it ain’t no freaking chicken.

Quack quack

You Can’t Get Your Money Back

Given the long(ish) lead time between buying and selling property (unless it’s a wholesaling deal – quite unlikely), for most participants of the scheme the only way to make money is to sell their investment to another participant. And this is where the huge chunk of the problem lies… because you’re now trying to sell your “investment” off to another guy who presumably would want to buy with the hope of selling it off again to another person (sucker?) at a higher price.

Ponzi scheme, anyone?

Β  Do I Smell… Jail Time?

I am not saying that property crowdfunding is inherently illegal, but we are talking about super grey area here. And as much as I dislike overarching regulations which (often unnecessarily) impede the free market, but the Securities Commission (SC) should really take a closer look at the inner workings of these schemes. That’s all I am going to say.

Monopoly man

ADDENDUM: The Securities Commission has released some guidelines for equity crowdfunding (see this). Expect more regulatory intervention in this space in the coming year as more of these crowdfunding schemes pop up.

So Here’s The Bottom Line…

If you want to invest smaller chunks of money over a large portfolio of properties, here’s what you should do: go for REITs (real estate investment trusts) instead. Crowdfunded property deals are just shady business. And who knows, they could well be a scam to siphon money from unsuspecting grandmas into the pockets of slimy gurus and unscrupulous developers working in cohorts. Why take the risk?

Believe me; when it comes to “money making opportunities” in the property space, you can bet that I can smell dog poo poo from two miles away. Property crowdfunding stinks.

About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

Comments

  1. bravo..bravo Mr. property startup…. you really don’t put a brake when you start speaking up, and that’s what i love to read..

    Do it more and more… you really made my day…haha

  2. Ponzi schemes keeps coming back. Same ol’ shite just different form. And the stupid ones keep getting slaughtered.

  3. Great article Khai Yin, but what if you’re crowd funding a developer or a development project? That’s a different story then isn’t it. These are the kind of deals that I usually see in the crowd funding platforms and they allow u to reap the rewards when the developer succeeds. Your thoughts?

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