Review of: Patch of Land
Reviewed by: Ruth Lyons
Last modified: January 2, 2018
Patch of Land is a peer-to-peer (P2P) real estate lending marketplace. They automate the loan underwriting, data management and risk assessment processes and provide a platform where accredited and institutional investors seeking high-yield, short-term, asset-collateralized investments can be matched with borrowers seeking more timely and consistent sources of funding for rehabbing properties across America.
Patch of Land (PoL) is a crowdfunding real estate platform similar to others we’ve previously reviewed, including Realty Mogul, RealtyShares, Sharestates, RealCrowd and Fundrise. Each of these services is slightly different and typically caters to a specific niche, but they’re all conceptually the same — providing an online technology platform that facilitates a match-up between real estate operators looking to raise capital and accredited investors looking to invest directly in specific brick-and-mortar real estate projects through cash-flowing loans.
Launched in 2013 and headquartered in Los Angeles (with a satellite office in New York City), Patch of Land uses technology and data to provide transparent and low-minimum real estate investing opportunities in both residential and commercial projects.
Investors are able to view the borrower’s real estate project proposal, due diligence documents, ARV/LTV, interest rates and other pertinent information in order to determine whether or not the borrower’s project is a good fit for the investing portfolio. Transparency in all deals allows investors to choose exactly which pre-screened real estate investments fit their investment needs and diversification by yield, term, geography and project or loan type.
Patch of Land Fees & Features
|Account Fees||10% of interest fee|
|Investment Length||1 - 36/months|
|Property Types||Commercial, Residential, Single Family|
|Regions Served||46 States; excluding MN, SD, NV and AZ|
Short-Term Debt Investments — PoL funds only short-term debt investments, which can be considered safer than equity positions in real estate because they’re in the first position of repayment, should a property lose its value. Most projects are short-term transactional real estate debt for rehab, refinancing and bridge loans.
Pre-funded Loans — PoL pre-funds all deals. The borrower gets funds at closing and can get started with the project immediately. Investors start earning interest the day they invest.
IRA Accessibility — If you have a self-directed IRA, you can invest in Patch of Land deals. At this time, you cannot invest with IRA funds held with a regular broker.
Terms — Most deals are 12-month residential loans. Some commercial loans are for 18 months, and PoL is rolling out a mid-term loan product that has a 36-month duration.
Fees — There is no annual fee for investors or borrowers. PoL takes between 1% and 2% of the interest distributions made by borrowers. PoL does not charge transaction fees or campaign success fees like many crowdfunding platforms do. They work much more like a regular loan marketplace and charge fees for property appraisal, closing costs and origination points that are already factored into each deal listed on the platform.
Access for Non-U.S. Citizens — Most P2RE sites exclude non-U.S. citizens, but PoL is happy to allow investors from around the world as long as they have a U.S. bank account and are accredited by the definition of their country of origin.
Due Diligence and Underwriting Process — PoL implements traditional underwriting procedures, including arm’s-length third-party appraisals that include a full walkthrough and value analysis, pulling comparable data and metrics to evaluate the local market, the performance of that particular asset class in that market, and the risk profile of the borrower.
AutoInvest(New> — PoL’s new AutoInvest feature automatically enters participants into new investment opportunities that meet their pre-selected criteria for as little as $1,000.
Patch of Land Alternatives
|Fees||10% of interest fee||0.30% - 0.50%/year||1% on equity; up to 2% interest rate spread on debt|
|Review||—||Read the Review||Read the Review|
How Does Patch of Land Work?
Patch of Land uses traditional underwriting procedures, including arms-length third-party appraisals with a full walkthrough, an evaluation of the local market, the performance of that particular asset class in that market, and the risk profile of the borrower. PoL works with experienced developers and limits funding to manage risk. The guidelines for investment deals are:
- Minimum loan amount of $100,000
- An LTV (loan to value) up to 80%
- An ARV (after-rehab value) up to 70%
- Loan duration between one and 36 months
- No prepayment penalties
While each property and project varies, Patch of Land’s investments start to accrue interest immediately, which is paid back to investors monthly or quarterly, with a balloon payment of remaining principal and interest at loan maturity.
Most real estate crowdfunding platforms will host a project and wait for it to become fully funded before moving forward with the developer’s rehab work. This is a disadvantage because investors who’ve contributed funds to these potential projects are left waiting for the project to be fully funded while their money sits dormant in a nonperforming investment.
Patch of Land’s business model is to pre-fund all projects before offering them to investors. They go to the closing table with the funds to make the deal happen. They’re so confident in their underwriting criteria and process that they invest 100% in the projects they approve — and get the borrower the funds and approval to move forward that day.
Patch of Land was started by two brothers, Jason Fritton, an e-commerce entrepreneur, and Brian Fritton, a software engineer, and system architect. In April 2016, the company brought on Paul Deitch from Oaktree Capital Management as chief executive officer. Deitch has over 25 years of financial services experience, including risk management, product development, finance, and compliance.
Stats as of July 2017 show that Patch of Land has funded 655 loans, delivering an average rate of return of 11.12% since inception. PoL is a BBB accredited business with an A+ rating.
Pros and Cons
- Low Minimum Investment — The minimum investment per deal is only $1,000.
- Projects Available Nationwide — Unlike many other P2P platforms that are regionally specialized, PoL currently operates in all but three states (Arizona, Nevada and South Dakota).
- Pre-funding — Your money will begin earning interest immediately, instead of sitting in an escrow account waiting for the entire deal to be funded (or possibly being returned to you from deals that never close).
- Hands-on Due Diligence — Patch of Land will host on their platform only those projects they believe show promise and are worthy of 100% pre-funding.
- Accredited Investors Only — Like most real estate crowdfunding sites, only accredited investors are eligible.
- 1–2% Average Investing Fee (Sometimes Even Higher) — High fees eat at your investment returns and, in our opinion, should be avoided.
- Taxes — As with all real estate crowdfunding sites, your gains are taxed as ordinary income rather than at the more favorable capital gains tax rate, which could be a major drawback if you are in a high tax bracket already.
- Be Aware of Possible Defaults — A few readers have reported experiencing loan defaults on Patch of Land.
There are many real estate crowdfunding platforms in this young market, each with its own area of expertise. Patch of Land’s niche is focusing on first-position debt loans only (no equity deals) and pre-funding all deals. A distinction that comes across when interacting with the executive team, listening to recorded presentations, and interfacing with their site is they seem sincerely committed (passionate actually) to efficiently and cost-effectively filling the funding gap that’s existed between individual real estate developers looking for short-term loans for their fix-and-flip, bridge loans, and other construction projects and investors who understand the investment value of real estate and want to fund those projects.
Patch of Land’s lending platform achieves their mission to reduce the cost and increase the efficiency of getting these deals approved and funded. If you’re looking to invest in short-term debt with generous yields (the yields posted with each deal are net the 1%–2% fee), then PoL may be right for you. Their pre-funding policy testifies to their rigorous due diligence as they put their own money down to pre-fund 100% of the deals.