Patch of Land (PoL) is one of many crowdfunding real estate platforms 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 investor’s portfolio. Transparency in all deals allows the investor to choose exactly which prescreened real estate investments fit their investment needs and diversification by yield, term, geography and project or loan type.
Investing with PoL provides a more passive real estate investing approach than buying and managing properties yourself, and involves six steps:
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 prefund 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, 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. With over 25 years of financial services experience including risk management, product development, finance and compliance, Deitch should be a nice addition to take the company to the next level.
Current stats show that Patch of Land has funded 266 loans, delivering an average rate of return of 11.5% since inception. PoL is a BBB accredited business with an A+ rating.
Accredited investors — You must qualify as “accredited” to invest. Accredited investors are defined by the SEC as (1) an individual who has earned at least $200,000 annually for the past two years and has a reasonable expectation of earning at least that amount this year; (2) a couple that has earned $300,000 annually for the past two years with a reasonable expectation of earning at least that amount this year; or (3) an individual with a net worth of more than $1 million excluding the value of his/her primary residence.
Deal transparency — Like most other real estate crowdfunding sites, PoL provides comprehensive information and documents on each project before and during the process. This allows investors to perform their own due diligence ahead of time, as well as receive ongoing support, information and updates prior to and after investing.
Short-term debt investments — PoL funds only short-term debt investments, which can be considered safer than an equity position in real estate because they are in the first position of repayment should there be a situation of a property losing value. Most projects are short-term transactional real estate debt for rehab, refinancing and bridge loans.
Prefunded loans — PoL prefunds all deals. The borrower gets funds at closing and can get started with the project immediately. Investors start earning interest the day they invest.
Minimum investment — $5,000 per project.
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.
Security — Patch of Land ensures all sensitive data is encrypted with bank-level encryption through industry-leading security provider, Symantec (formerly VeriSign), the makers of Norton Antivirus and other enterprise security products. They also pay for a 256-bit SSL encryption certificate and perform daily malware scans.
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 arms-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.
- Low Minimum Investment — $5,000 is the minimum investment per deal. You can test it out without risking too much, and you can easily diversify your holdings by debt types and location.
- Projects Available Nationwide — While many real estate crowdfunding sites are regionally specialized, Patch of Land currently operates in all but three states (Arizona, Nevada and South Dakota). The company is taking steps to accept projects in those states.
- Prefunding — Patch of Land was one of the first real estate crowdfunding platforms to offer “prefunded” loans. While most platforms wait to release funds to the real estate developer until the project is fully funded by the crowd, PoL takes their own money to the closing table and prefunds each deal. As an investor, that means 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). This is a feature that also tends to attract high-quality borrowers, because they know they can rely on quick, on-time closings in as little as 7–10 days.
- Hands-on Due Diligence — Some real estate crowdfunding platforms are not super strict with their due diligence, trusting the "the wisdom of the crowd" to weed out anything that isn’t a good opportunity. Patch of Land will host on their platform only those projects they believe show promise and are worthy of 100% prefunding. Prefunding means PoL “has skin in the game” and high confidence in their due diligence.
- Mobile-Friendly — All aspects of doing business with PoL is 100% electronic and mobile responsive.
- Untested Investment Strategy — As an industry that started in 2012, real estate crowdfunding is still in its infancy. Some platforms will succeed and some won’t. Cases of default haven’t been tested in the courts yet.
- Accredited Investors Only — Like all real estate crowdfunding sites, only accredited investors are eligible. However, several firms in this space are working on compliance issues to lift that restriction.
- 1%–2% Investing Fee — This high fee will eat at your investment returns and in our opinion somewhat high.
- 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. Best to reach out to your accountant for guidance to consider all the investment choices available to you.
There are many real estate crowdfunding platforms in this young market, each with their own area of expertise. Patch of Land’s niche is focusing on first-position debt loans only (no equity deals) and prefunding 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 prefunding policy testifies to their rigorous due diligence as they put their own money down to prefund 100% of the deals.