The head of consumer-product marketing at Google Inc. (GOOG) and a former general counsel for a travel website are seeking to transform the mortgage-finance industry. Michael Burry, the hedge-fund manager who foresaw the housing market’s nosedive, is betting they can.
Brett Crosby left his post at Google last week to join Brew Johnson, once a lawyer for a company acquired by TripAdvisor Inc. (TRIP), to start PeerStreet Inc., a Los Angeles-based online platform for financing real estate through a form of crowdfunding. They’re partnering with small, non-bank lenders whose short-term commercial-property loans they can fund using a throng of individual investors.
“These guys are really out to solve a market inefficiency,” Burry, an early investor in PeerStreet and a subject of Michael Lewis’s 2010 book “The Big Short,” said in a telephone interview. “A number of large markets are not adequately being served by the financial sector, so it really is time for new thinking.”
Crosby and Johnson, who met at the University of Southern California’s Sigma Alpha Epsilon fraternity chapter, aspire to create the go-to website for real estate crowdfunding, a market already teeming with companies that raise large amounts of money through small contributions for U.S. property investments. PeerStreet also is part of a wave of businesses seeking to profit by providing alternative financing at a time when banks are reluctant to lend.
The company is focused on raising money for debt, rather than other types of crowdfunding that buy physical properties. PeerStreet is partnering with existing originators, such as Los Angeles-based Thorofare Capital Inc., which makes short-term loans of $2 million to $25 million each.
In most cases, the originators will hold a portion of the debt on their balance sheets, giving them an incentive to issue high-quality loans and preventing crowd investors from assuming all the risk, Crosby said.
“The goal is to get loans in front of people that are very easy to understand,” Crosby said. “We don’t want many variables. We want people to understand the terms, loan-to-value ratio and interest rate.”
Crowdfunding has been gaining steam since April 2012, when the Jumpstart Our Business Startups Act, or JOBS Act, went into effect. When final rules related to the law are enacted, restrictions will be eased on investments in closely held companies, including those set up to own commercial property, by people making less than $200,000 a year and with a net worth of less than $1 million. Firms can now market only to people who exceed those levels, known as accredited investors.
Real estate crowdfunding companies, which completed their first deals last year, have raised more than $110 million, according to Nav Athwal, co-founder and chief executive officer of San Francisco-based crowdfunding company RealtyShares Inc.
Crosby and Johnson said their experience leading the growth of technology companies will help them quickly expand their fledgling company.
Crosby, 41, co-founded Urchin Software Corp., a Web-analytics service purchased by Google in 2005. From his office at Mountain View, California-based Google, Crosby helped start the company’s mobile-advertising business and the Google+ social network. Until last week, he ran marketing for the Chrome browser, Gmail, word processor Docs and the Drive cloud storage service.
Johnson, 39, is an attorney with a background in real estate and technology. He was general counsel for the website VirtualTourist and oversaw its sale to TripAdvisor in 2008.
He said he wants to use PeerStreet to eliminate unnecessary parts of the lending chain and create a more transparent and inclusive platform for anyone who wants to put money into real estate, including residential properties bought by investors.
“Real estate is a like a dinosaur,” Johnson said in a telephone interview. “It’s like the last financial market to be really transformed by technology.”
For loan originators such as Thorofare, PeerStreet offers a secondary market that helps fill the void of securitization, which for private lenders, or non-traditional banks, dried up with the bursting of the housing bubble.
“It’s like a more efficient alternative mortgage-backed security,” Johnson said.
The businesses may provide needed liquidity to private lenders just as banks expanded their loans with the help of U.S.-owned Ginnie Mae, which guaranteed the first mortgage-backed security in 1970 and now backs $1.5 trillion of debt. Crowdfunding has the potential to disrupt the mortgage market, according to Burry.
He’s known for predicting disruption. Burry, at his Scion Capital LLC hedge fund, bet against bonds backed by the riskiest home loans, and investors in his hedge fund walked away from the housing crash on top, having more than quintupled their money from 2000 to 2008, according to “The Big Short.”
While crowdfunding is a relatively new method of investing in real estate, PeerStreet is entering an already crowded field, with RealtyShares, Fundrise LLC and dozens of similar companies financing deals. The firm also has to wait before it can solicit money from non-accredited investorsu.
Property investors can’t yet take advantage of the JOBS Act, which changed parts of the Securities Act of 1933, because proposed investor-safeguard rules are still being worked on by the Securities and Exchange Commission. The SEC missed its own end-of-2013 deadline for drafting the regulations.
“Ideally we’d like to let as many people as possible in in the future,” Johnson said. Initially, PeerStreet will require a minimum investment of $1,000 per deal. Johnson and Crosby wouldn’t disclose their funding goals for PeerStreet.
Burry, who declined to say how much he invested in PeerStreet, said he’s backing the company because of the management team, the unique way Johnson and Crosby are approaching the business and their focus.
“There could be a problem here if you try to be all things to all people,” he said. “Like I’ve often said, Chipotle (CMG)
didn’t invent or reinvent the burrito. They just had a management, an
approach and a focus that made them more successful than other burrito
shops. And I think that’s what these guys can do in this space.”