Groundfloor has traditionally only funded “flippers,” who usually need tens of thousands of dollars to make improvements to older homes. But now the company is moving into new construction because the supply of “flippable” homes has deteriorated in many hot housing markets across the country, including the Triangle.
“The profitability of house flipping is in decline because (flippers) are having to pay” more for the properties, Groundfloor CEO Brian Dally said. But Dally also noted that while Raleigh’s house flipping market has become saturated, there is still a lot of opportunity for “flips” in Durham. According to the analysis earlier this year, four of the Triangle’s top five most profitable ZIP codes for house flipping were in Durham.
The company views the Triangle, as an ideal place to try out the new construction loans to home building companies, because so many people are moving to the area and needing homes.
The company has made several loans to local home builder Grayson Dare Homes to build three houses in southern Durham County, an area near the popular Streets at Southpoint mall.
Groundfloor was started in Raleigh in 2012, where it operated out of American Underground-owned space. The company eventually moved to Atlanta because the state of Georgia was one of the first states to allow companies to sell shares over crowdfunding platforms, which would allow non-accredited investors to invest.
North Carolina eventually joined Georgia to allow crowdfunding for businesses to raise money, but it was nearly two years after the company had uprooted to Atlanta and hired 50 employees. Groundfloor still maintains several ties to the Triangle, however, both on its board and with many of its original investors. One of the company’s shareholders is the American Underground, which is owned by Capitol Broadcasting Co.
How the investment works
The company allows small investors to put money into a fund that is then loaned to house flippers for a six- to 18-month period. Investors are allowed to choose what projects they put money into — and can invest as little as $10 with a return of about 12 percent. Flippers on average are getting $150,000 loans from Groundfloor and the company receives fees from the borrower usually $6,000 to $12,000 per loan, Dally said.
The startup has now loaned $70 million across 500 properties in the United States. Groundfloor never provides 100 percent of the financing, Dally said.
The average Groundfloor investor puts $200 into a project, with most investing in around 20 to 30 projects, Dally said.
For its first new construction loans, investors are expected to get a return 8 percent over a 12-month term.
Alleviating low housing inventory
For Grayson Dare Homes, a small home builder that builds around 15 homes per year in the Triangle, the loans from Groundfloor allow the company to build more homes than it could while relying on traditional banks.
The model is allowing it to strike while the housing market is still hot in the Triangle, said Barry Burnette, chief financial officer for Grayson Dare. Grayson Dare was able to obtain three separate loans of $586,770 from Groundfloor to build the homes.
“We thought that instead of doing one (house) and then waiting” on the bank for more funding, “we wanted to do three or more (new houses) at a time,” Burnette said.
Grayson Dare will be able to build three homes at 7221 Farrington Road, a four-acre property the company bought in 2017 for $540,000, according to Durham County property records. Two of the three loans are still accepting investors.
Burnette said the homes will likely be priced in the upper $600,000s, a price point that matches the reality of rising land prices in much of the Triangle. The homes, which will all be around 3,500 square feet, will be built on speculation — usually Grayson Dare does pre-sells.
“The availability of lots is becoming a serious issue,” Burnette said. “This market is so strong right now that now is the time to go.”
Dally believes that Groundfloor is helping alleviate a supply problem by stepping into new construction loans.
“In the markets we choose to serve, there is incredibly tight supply at all price points,” Dally said. “So many people are moving to the Triangle, and that is not going to stop. We are under-housed and millennials are entering the market at a time with the least amount of housing.”
But will services like Groundfloor stepping up to finance construction loans at a time when banks are moving slower cause instability in the market? Dally doesn’t think so.
“The thing about our approach is that because our minimum is $10 (and the maximum is usually around $10,000) in a project ... you are hardly so leveraged in a project that you couldn’t handle trouble in the market,” Dally said. “Individual investors putting $10 into investments in real estate didn’t cause the housing crisis.”
Groundfloor said its next round of new construction loans will likely be in its home market of Atlanta or in North Carolina.