Groundfloor is a platform that lets investors fund portions of hard money loans. It’s distinguishing factor is that it is open to non-accredited investors, like its direct competitors PeerStreet, Fund that Flip and Patch of Land.
In addition to investing in the loans, you can invest in Groundfloor, the company. Starting in March 2019, they will be selling shares to investors directly. But should you?
While we support their mission to give everyday investors access to these investments, their financials raise some red flags.
How Does it Work?
Groundfloor originates loans to borrowers, vetting them via credit and background checks and third-party appraisals of the property.
Like their competitors PeerStreet and Fund That Fund, they pre-fund the loans with their own capital.
Groundfloor then lets investors like you and me purchase pieces of the underlying loan through their site.
Groundfloor rates the riskiness of their loans from A to G. The highest quality, lowest risk loans are awarded A, while the highest risk, highest yield loans are graded F.
Pay Attention to Type of Payment
You can choose from two types of loan payment structures: Deferred Payment or Monthly Payment.
With a Deferred Payment loan, you won't receive interest payments until the very end of the loan. We don't recommend this structure because you have no way to know if the borrower is actually making good on the interest payments until when the loan is due.
Monthly Payment loans are exactly what they sound like: you receive interest at regular intervals throughout the loan's term.
According to their latest SEC filing covering the period until July, 2018, Groundfloor's loans have a 2% default rate and 17% workout rate.
A loan in “work out” means there's been late or missed payments or the original terms were modified.
|Loan Grade||Loans Issued||Loans in Workout||Loans in Default|
Here’s the most worrying part about investing with Groundfloor: they will go bankrupt unless they raise more cash.
Despite raising nearly $9.6M in venture funding, and an additional $4.2M through their online stock offering, the company is going to be insolvent unless they sell more stock or get a loan.
Back of the Envelope Calculations
From their latest financials, they made $900k in profit from origination fees and loan servicing fees for the 6 months ending June 30, 2018. They racked up $3.3M in administrative, sales, compliance and marketing costs. This puts them at a $2.4M operating loss for the last 6 months ending in June 2018.
How Much Runway is Left?
They have $3.2M cash or cash equivalent on their balance sheet as of June 30, 2018. Two million of this is straight cash and $1.2M is from interest income from the loans they’ve underwritten.
They are going through about $2M every 6 months, with about ~$3M in cash left. At this rate, they’ll be out of money within the year.
It’s normal for startups to intentionally punt on achieving profitability in favor of growth. Uber, a $100B juggernaut that has yet to have a profitable quarter, is the poster child for this.
If Uber folds, you can just dust the cobwebs off your bicycle. If Groundfloor folds, your investments might be stuck in bankruptcy limbo for years.
"Over time, we expect that the number of borrowers and lenders, and the volume of loans originated through the Groundfloor Platform, will increase and generate increased revenue from borrower origination and servicing fees."
Maybe this strategy of growth before profitability will pan out. But there's a high probability it won't. We saw this scenario play out with Realty Shares. Like Groundfloor, RS was never able to achieve profitability, relying instead on venture capital funding. When they weren’t able to keep raising money, they folded.
2019 Stock Sale
Speaking of raising more money, looks like Groundfloor is tapping the public for another round of funding.
They will sell up to 900,000 shares at $13.50 a share, raising a maximum of $12M. The minimum to invest is $135. By comparison, they sold 530,000 shares at $10 per share in February 2018.
It's important you understand that when you buy a share of Groundfloor, you are investing in the success of the startup. You aren’t investing in their portfolio of loans.
You are hoping that Groundfloor will eventually turn profitable and surpass the valuation you bought in at.
Typical liquidity events for successful companies involves either being acquired or IPOing. According to the CEO, "For Groundfloor, we would probably need to grow the company by 10X or more in order to achieve an exit via an acquisition, and probably by 50X or more in order to list our shares successfully on a public exchange (via an IPO)."
Venture investing is notoriously risky because of this "boom or bust" type situation. Ask yourself if you believe Groundfloor can achieve 10x growth before you buy their shares.
What if Groundfloor Closes Shop?
With the precarious state of Groundfloor's finances, you'd hope that they would have bankruptcy protection measures in place for investors.
While competitors like PeerStreet mitigate platform risk by holding the loans in a bankruptcy remote entity, Groundfloor doesn't take these precautions.
When you invest in a loan, you receive a Limited Recourse Obligation (LRO). LROs are not bankruptcy remote. If Groundfloor goes bankrupt, your investments will be entangled in lengthy bankruptcy proceedings.
If you bought Groundfloor shares, you will likely lose a large part of your investment, since debt gets serviced before equity. You may recoup a portion of your investment from Groundfloor selling liquidated assets.
They also don't have a backup administrator who can step in to manage the loans if Groundfloor folds.
A personal finance blogger who has invested in over 12 loans with Groundfloor says he has "nothing negative to say about [his] experience." He nevertheless decided to stop investing because he is concerned about the company’s solvency.
For now I’m letting my investment wind down, but honestly, I would love to keep investing on Groundfloor. In fact, if they do become profitable, and if it seems likely they’ll stick around, I’ll be ready to invest even more with them.
One investor reports that after a year of using both PeerStreet and Groundfloor, 10% of his PS loans and 15% of his Groundfloor are in default. He says he will stop using crowdfunded real estate altogether.
"It looks like I will have a 5-10% loss after asset recovery, accounting for the interests I got from the performing loans. And this is happening when the market is booming, RE is going up-up-up, lowest unemployment, etc. I can't imagine if market is slow or going down. Oh, and if somehow I make a profit, I will have to pay 40% income tax."
"I've been using Groundfloor for about a year now and have been happy with the service. Like others here, I've had deals that were extended past the due date, and had deals that were canceled, but nothing yet where I actually lost my principal (knock on wood)."
"I joined Groundfloor at the end of June. So far it's been a mixed bag and it seems to me like they're going through growing pains."
I joined Groundfloor at the end of June. So far it's been a mixed bag and it seems to me like they're going through growing pains.
It's exciting to see funds targeted towards non-accredited investors. And loans backed by real estate collateral are much safer than unsecured debt.
However, we think the returns aren’t worth the risk. If Groundfloor is able to shore up its balance sheet and raise enough money to fund its losses for at least a few years, it might be worth taking a look at again. Otherwise, you risk having your investments sit in limbo.
If you’re interested in buying shares in Groundfloor, just be sure to do your homework. You are investing in a startup, the majority of which fail.