Credit: Shutterstock photoCEO and co-founder of Patch of Land, Jason Fritton and his brother Brian, started in 2010 with an idea about a crowd-funded real estate platform. The idea was to fill a vacuum not being filled by traditional bank lenders.
Since then the company has returned more than $20 million in principal and interest payments to investors with no loss of principal. To date, the company has funded more than 200 projects, with an average blended rate of return to investors of nearly 12%.
Fritton spoke with Benzinga about the company and its unique position helping both investors and real estate professionals in a safe, secure and profitable manner.
Benzinga: What is Patch of Land?
Jason Fritton: We are an alternative marketplace lender for commercial real estate. We service the massively inefficient current industry market. It’s an area where banks do not adequately play and, in fact, have all but abandoned. It’s also a $100 billion a year addressable market in single family residential alone.
Our borrowers are real estate professionals who have a proven track record of success in their chosen market and asset class. Our investors are thousands of individuals across the country with a specific interest in real estate and highly sophisticated institutional funds looking to be able to get solid returns backed by hard assets.
Why aren’t banks addressing this market?
There are two basic reasons. One, just common economics. It costs a bank $15,000+ to underwrite a project like this. They’re using traditional methods which have been fine-tuned for consumer mortgages and cost a great deal of money.
These types of short-term opportunities, interest only, with no prepayment penalty don’t make sense for banks. They can’t recoup their money and they can’t be responsive.
On top of that banks are way overregulated. They are a depository institution. They’ve got a standard of operation that is extremely high and extremely burdensome. They cannot take speculative positions on these types of opportunities.
When banks left this market they were replaced by a fragmented network of very unsophisticated, often predatory operators.
What you are seeing now are companies like ours rushing to fill that vacuum. Patch of Land has been privileged to be among the largest and most successful.
What’s the minimum for a loan and for an investment?
Currently our minimum loan is $100,000. We’ve had some talk about lowering that for markets that would support it but that’s where we stand right now.
Our minimum investment is only $5,000. So when we ask somebody to take a position in real estate, we’re not asking for a million dollars. It’s a relatively low hurdle for our investors to participate.
The rate of return is the same no matter the size of the investment. If the return is 12% it’s 12% for a $5,000 investor or a $500,000 investor.
We write the note for about 12 months plus an optional 6-month extension. The average length of time before a loan has been repaid is about 9 months.
How do you balance institutional investors and retail investors?
We need to work hard to make sure the two sides work together well. We can’t for example, have a situation in which one side or the other gets to cherry pick the good stuff. We make everything transparent about both the institutional funded loan and the retail funded loan.
The real estate market is cyclical. As an investor, I can come to you and say, “The market has changed. What worked before no longer works.” I can then say, “Here’s what is working. Give it a try and here’s why.”
If I have a hundred thousand $5,000 investors that’s a lot of funding and that’s the real power of the P2P marketplace. On the other side, there are the institutional investors who can just literally dump $250 million on your platform for scale.
What sets Patch of Land apart from the competition?
One is our sole focus on the debt side of the equation. Most of our competitors are primarily equity. Equity has its purposes. On the other hand, it’s harder to make scalable and it’s less secure in my opinion.
We are the “in your debt” position. We get paid first if anything goes wrong. The equity piece is what disappears first.
It’s hard to become expert at both. We decided early on we were going to keep a laser-like focus on the debt side.
We’re also a systems company and an architecture company, a best practices and a policy company. We are not specifically a deal company. We’re the other way around. We built a system that will take care of our borrowers – take care of our investors to track everything to do good loans on a systematic scalable basis.
With us the risk for one 12% loan is comparable to another 12% loan. We’re not all over the map trying to chase down deals like an investment bank.
Finally, we have a very strong focus on alternative data. One of the issues in the past has been companies making bad loans – just trying to get volume through. We combine tried and true battle tested underwriting with a full walk through appraisal on every property we do along with alternative data.
We pull in excess of and evaluate in excess of 4,000 different data points. We take a look at crime rates, unemployment rates, BLS information, school system reports and so forth. Ultimately we want to be able to say this is a good property in a good neighborhood with a good borrower.
You and your brother were co-founders of Patch of Land. How does that work? Do you fight a lot or is it more Kumbaya?
(laughs) we fight from time to time, but more importantly, we trust each other. It’s always a challenge to work with family but in the end it’s not really any different from working with anybody else who has a passion for what they do.
Actually that applies to anybody we work with. Anybody who doesn’t care and doesn’t care deeply should not be part of this project. My brother, Brian and I care very, very deeply about Patch of Land and sometimes that leads us in different directions. That’s when we fight.
We have a great system though. If things get too heated, we take a break, sit down and have a beer.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
