New technologies rarely succeed and gain traction until their efficacy is discovered. This has been demonstrated among several revolutionary technologies such as the internet, PCs and the printing press, among others. These technologies were dormant until their killer apps were discovered, which caused them to explode and spread rapidly. Real estate crowdfunding has gotten its killer app – pre-funding – and it has the potential to transform the industry tremendously.
Pre-funding, like several other killer apps, perform one main function – solving a big problem. There are various ways in which real estate crowdfunding companies ensure that the projects listed on their platforms are profitable. Majority of the companies apply superior due diligence when vetting these projects. However, the outcome varies among companies, and can be either exceptional, fair or below average.
This makes it challenging for investors to differentiate among the different investments when looking for one in which to invest their money. Pre-funding is the solution to this challenge. The main essence of Pre-funding is this: the crowdfunding company pays the project sponsor the total investment amount even before the project is made available to investors. This compels the company to be totally attached to the project thus ensuring it carries out the optimal due diligence.
Pre-funding demonstrates the level of confidence that the company has in the project’s performance because they have also put their money at risk. If the investment is not fully purchased by investors, the company takes ownership of the remainder. This means that if the company has not conducted proper due diligence then it ends up paying the price together with the other investors.
Pre-funding also enhances investment returns and dependability.
Pre-funding also enhances investment returns and dependability. Once the money is given out to the sponsor, it starts working immediately thus guaranteeing investors’ participation in the project.
This is also a killer app for sponsors because they will be guaranteed returns without having to wait for weeks or months like that of non-pre-funding platforms.
Currently there are only three real estate crowdfunding companies that provide pre-funding: Fundrise, Patch of Land and Acquire Real Estate. Other companies have also realized the advantages of pre-funding and are making plans to provide it.
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