What is wrong with Real Estate Crowdfunding?

In recent years Crowdfunding has been a successful strategy for some startups to fundraise the necessary capital to jumpstart their business with a fair amount of success in some cases; however, what happens when people decide to “fundraise” the capital they need to buy a property?

It is well known that Vancouver Real Estate’s prices are very high if compared to the rest of Canada, and most buyers end up paying inflated prices without doing the proper research prior to signing any deal.

The Globe and Mail reported that several properties in Vancouver have been recently sold for astonishingly higher prices, some with the promise of “zero risk, high return” for the buyers; however the proper information on zoning and rezoning of these areas is not offered to the buyers during the negotiation.

In recent days, the Vancouver Securities Commission started an investigation on local companies offering crowd-funding services for real estate, following to an analysis of the inflated prices that properties were selling for in given zoning areas.

“ The Molson brewery site in Kitsilano, assessed at $43.7-million. But a source confirmed to The Globe and Mail it has sold for $190-million. The site is zoned for industrial use only; ….but …a real-estate company called Sun Commercial, affiliated with Sun Crowdfunding, appeared to be advertising it recently on a Chinese-language website to potential investors as a “high return, zero risk” property with development potential for “330,000 square feet of great sea view apartments.”” Read the report.

The same company was earlier last year offering investors a 58-storey tower in a different property; but again, they did not mention that the property’s zoning required ¼ of the units to be assigned to social housing as part of the city’s West End plans.

As a buyer, it is essential to research the market, get second and third opinions, and look at the local regulations on zoning and taxes, and understand the conditions for crowd-funding, as some invertors will demand higher percentages for their money, or even and important part of the property or business.

The final recommendation is to carefully understand the business scope of the investment, as some of these campaigns might be a very pricy scam strategy to new investors in Canada.