3rd September 2015 Crowdahouse

Crowdfunding Property: Why Don’t Banks Buy Their Own Property?

Because Lending Based on Past Performance is Far Safer

“Past performance is not an indicator of future returns”

How many times have you seen that important caveat on investment advertisements?

Past performance is not an indicator of future returns, right? With P2P Lending It Can Be

What happened in the past is no indicator of what may happen in the future. Well, that is absolutely true if your predictions for the future are based entirely on guess work like most investments actually are. The capital price growth of properties, the ability to let a property, the income from rental, inflation rates, voids, management costs, maintenance and repairs – the list of guesses needed to price the ‘hoped for’ returns on an investment property purchased for rental and capital growth is very long indeed.

To qualify these investment decisions the past simply cannot be used as an indicator for the future returns on investment. This is why regulators the world over insist that advertisements carry this disclaimer. But the same is not true of bonds or other contractual obligations. The future return on investment of a contractual return should always be the same as stated in the contract. That sounds a little obvious, but sometimes the obvious needs a little thought.

For example, if a contract states that the borrower will pay 10% per annum for 9 months then the lender knows from the outset exactly how much return he or she will get. Of course, if the borrower were to default then the contractual rate might not get paid. That is why lending institutions the world over seek collateral to a value higher than the loan in order to ensure that, in the unlikely event that a borrower defaulted on their contractual payments, the asset (in our case a property) can be used to recover the loan and any interest due.

Investing in people

At Crowdahouse since we switched our model from the guesswork of predicting the future of house price growth, tenant voids and other key elements that damage investor returns, we’ve also had to concentrate less on the actual property and more on the Borrower.

Clearly, we will always be concerned with the absolute value of the asset which the borrower gives as security, just like a bank would be. But, unlike modern banks, we look very closely at the borrower who is requesting the loan for a project.

Credit Scoring is Based on Past Performance

When deciding whether to give credit to individuals, most lenders do in fact use past performance as an indicator of the likelihood of getting their money back. It’s called credit scoring, and virtually nothing happens in today’s world without it. From getting a mortgage to getting a mobile phone contract, lenders use the information from past performance of their borrowers in order to judge risk.

So, whereas judging the past performance of a property for capital and rental growth truly cannot be based on past performance (is there still growth? has the area peaked?), the ability and likelihood of a borrower to repay a loan, can and should be judged by this criteria.

And that is really the key difference in risk between equity crowdfunding of property and loan based lending. The former is a calculation of all known risk factors looking forward into the future and hoping the crystal ball will tell all.

Imagine Having Invested in Crowdfunding Property in 2007? Ouch.

With most equity crowdfunded properties investors are locked in for 5 years. The last boom in UK house prices peaked in 2007 with buy to let investors paying record sums for property. Five years later, many of those buyers had lost their deposits and were trapped in negative equity.

It could easily be argued that investors are once again buying in to the top of the market in 2015. New punitive landlord taxes and the coming ‘Mortgage Market Review’ style changes for Buy to Let mortgages, along with events in China, may cause a similar short term crash just at the time those 5 year crowdfunded properties need to be sold to repay investors. All of these make investment into property a risk – especially for part time landlords or investors looking for good annual returns, when compared to investing against property.

The gambling nature of equity crowdfunded property mostly disappears when the variables are easier to see and understand.

Why Not Qualify Your Investments Based on Past Performance Instead of Guessing the Future?

So, the past performance of a borrower – what kind of experience they have, what kind of credit history, how they have conducted themselves in the past – coupled with a valuation by a member of the Royal Institution of Chartered Surveyors at today’s price (rather than some hoped for future value) combine to make loan based crowdfunding a far safer proposition.

All Crowdahouse loans are secured on property with a first charge, just like a bank, with no other borrowing allowed and all our borrowers must be professionals with a proven track record.

Loan based contracts also provide contractual returns not ‘estimated, possible returns’ if all goes well. Contracts are generally shorter at around 9 to 18 months and most borrowers are keen to refinance as soon as possible to lower commercial rates once their Crowdahouse loan comes to an end. We even have a ‘hands off’ process for lenders to recover their money in the event that a borrower did default.

Which Makes More Sense – a 2.7% Proposed Return or 10% contractual return?

Some of the very successful crowdfunding equity platforms are currently offering their investors annual returns of as little as 2.5-3% – providing all goes well. That so many are willing to invest for so little return is a sure indicator that the hype involved in crowdfunding is steadily mirroring the late 90s when the word ‘internet’ also saw a common sense bypass. However, the move towards higher interest rate secured lending is bound is already happening as investors wake up the risks and rewards of both types of crowdfunding.

So Why Don’t Banks Buy Their Own Property?

There’s no doubt that investing in property can bring excellent returns. But if you want excellent returns with the lowest risk, then you’d do well to do as the banks do. Lend, don’t buy.

As someone interested in crowdfunding and property, you should make sure that you don’t compare apples with oranges when comparing the risks of equity crowdfunding a property and secured lending against property. After, banks don’t buy property themselves, do they? They recognise that lending against property at profitable interest rates is a far safer option. In fact, rather than risk their money investing in property where it’s impossible to use past performance as a future indicator, banks and other lenders prefer to lend because they know that predicting behaviour of people based on past performance is far less risky than trying to second guess the future.

  • Gary Corben

    CEO, Co-founder

    Gary Corben
  • Gary Corben

    CEO, Co-founder

    Gary Corben

About Crowdahouse®
Crowdahouse is a business-to-business (B2B) property crowdfunding platform lending to business borrowers, always secured against property. Instead of lending to individuals, we’ve reduced the risk by offering you the chance to lend only to property businesses. You join a crowd to lend money in return for interest on your money. Your loan is secured with a first charge over property, just like a bank, and you pay no fees as a lender.

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