Launched in 2013, Patch of Land earned enthusiastic praise initially and quickly raised $24M in funding to expand its marketplace model. However, they’ve hit a rough patch in recent years, with investors complaining of high default rates and lack of communication.
How it Works
Patch of Land underwrites thousands of real estate loans, typically for developers working on residential SFH rehabs.
PoL "splits" the loans, making each piece available for investors to buy. For example, you can pay $5,000 for 5% of a $100,000, 12 month loan set at 10% interest rate. You would receive $50 dollars a month for 12 months, totaling $600. If all goes well, you get the $5,000 back at the end of the year.
Your return is capped by the APR, so you don’t get to share in the upside if the flip is very profitable. However, unlike owning equity in the stock market, your investment is secured by the property.
How the Loan is Secured
There’s some confusion online regarding whether the loan is actually secured. In a word, yes, though the legal structure is a little convoluted.
Instead of making a loan directly to the real estate developer/borrower, you make a loan to Patch of Land, which acts as an intermediary.
PoL gives the funds to the developer and receives a promissory note in return. PoL also receives a mortgage ("PoL Note") on the underlying property as collateral.
PoL assigns this promissory note and the collateral to a special purpose, bankruptcy remote entity. In turn, this special purpose entity issues you a borrower payment dependent note (“BPDN”) which states that you are owed a share of the interest rate of the underlying loan.
The BDPN is secured by the underlying property. If the developer defaults, a trustee of the special purpose vehicle acts on behalf of all investors of the loan in overseeing foreclosure and the return of principal from foreclosure proceeds.
In a move towards greater transparency, Patch of Land openly shares < ahref="http://go.patchofland.com/legal">its legal documents.
What if Things Turn South?
If the developer isn’t able to make the interest payments, PoL forecloses on the property. Whatever proceeds from the sale minus the costs (property taxes, legal and court fees, etc) go to the investors to help them recoup their principal.
But don’t get lulled into a false sense of security just because the loan is asset-backed. There’s no guarantee that the sale will generate enough money to give you back the principal.
Market conditions can deteriorate, sending the market value of your property down. The appraisal could have been too optimistic. Legal costs (yes, you are on the hook for that) also eat into your principal, which investors often overlook.
PoL passes all the legal and admin costs of a foreclosure to the investors. Certain judicial-only states (NY, PA and NJ) have foreclosure processes that notoriously long. This can add to tens of thousands of dollars of fees. One PoL investor reported that legal fees for her defaulted loan cost $50k, or nearly 30% of proceeds from the sale of the house. That’s 30% less to pay back the investors’ principal with.
PoL doesn’t disclose their acceptance rate for loans, so it’s difficult to gauge how strict their quality control process is. However, they do say they consider the following when issuing a loan:
Did the developer put money into the deal?
How “seasoned” is the developer?
Is the developer buying under market value?
That said, this platform seems to be less about curating the highest quality loans and more about giving investors the most options. This leaves the due diligence mostly up to you.
When you go to the investment portal, you’ll be able to browse the available loans. As of January 2019, there are 27 loans you can invest in. You’ll find the APR (avg 9%) and After Repair Value (ARV) highlighted for each property.
The ARV is an estimated value of a property after renovations. Third party appraiser arrives at the ARV by assessing several comparable homes in the area. But ARV is a notoriously speculative number since it depends on the quality (not the mention, completion) of the repairs.
Instead of relying on the APR, you should calculate the Loan to Value (LTV).
To their credit, PoL does provide ample information for each loan. For example, they have a licensed third appraiser evaluate each property. You can find this appraisal report for each property.
As of Q3 2018, PoL has funded more than 157 cases, originating over $725 million in loans. They report an average IRR of 10.5%.
They won’t provide the most important statistic: their default rate. We inquired, how many loans defaulted? And what percentage of loans ultimately saw loss of principal?
We received this response:
"We do not provide origination statistics to individual accredited investors at this time; however, if you are investing on behalf of an institution we can begin exploring options."
This is pretty vital information that investors need to gauge the quality of loans on the platform. PoL’s direct competitors PeerStreet, Fund That Flip and Groundfloor all disclose this.
Complaints of High Defaults
Even though PoL won’t release their default rate, there are many reviews from unhappy investors that suggest the rate is quite high.
Joel Katzen, an investor from New York, reports that 8 of his 12 loans are in default. Six have been in default for over 12 months.
Scott P. from Massachusetts reports that 5 out of 12 loans defaulted. However, he adds, "PoL has done an excellent job with updates; they send a brief monthly update for loans that are not current or have other issues."
Not everyone is dissatisfied. “I invested $30,000 in 6 loans between 2014 and 2016, and have been paid back every penny plus interest.”
"I’ve been an investor on Patch of Land for well over 1 year and have invested in approx 12 loans over that time. I’ve also tried others (RS, iF, PS, etc..) and my opinion is that Patch of Land offers the best value."
Lack of Communication
A common complaint lobbied at Patch of Land is its lack of communication, especially as a property moves to the foreclosure process.
Taxes Because this is a loan, your proceeds are taxed as interest. This means profits are taxed at ordinary income.
Investors seemed pretty happy when Patch of Land first started in 2013, but the past two years has seen growing dissatisfaction and management turnover. Crowdfunded real estate has become much more crowded and competitive in the years since PoL first debuted, and we wonder if this increased competition led to poorer quality underwriting.
We are a hard pass.
Our biggest complaint is their refusal to disclose their default rate. This coupled with anecdotes of a high proportion of notes falling past due makes us suspicious they are struggling with poor performing loans.
Crowdfunded real estate has become much more crowded and competitive in the years since PoL debuted in 2013. IMHO, there are much better options out there like PeerStreet.