Making a Market that Works for Everyone
PeerStreet’s “two-sided marketplace” wins across the board.
By Carole VanSickle Ellis
When PeerStreet co-founders Brew Johnson and Brett Crosby started PeerStreet in 2013, the industry lacked the vocabulary to even describe the innovative online marketplace they had created. Although “two-sided marketplaces” did already exist (think: Amazon, Uber and Airbnb), the real estate industry had a notable lack of them.
The new company’s aim was to change this and, in the process, create a completely unprecedented environment where real estate entrepreneurs, accredited investors and private lenders could conduct successful transactions in exponentially growing volumes.
PeerStreet is the industry’s first two-sided marketplace for investing in real estate debt with investors on the one side and lenders on the other, Johnson and Crosby explained.
“While a one-sided marketplace builds one business, a two-sided marketplace scales thousands of businesses,” COO Crosby said. “This creates a social-impact element in two-sided marketplaces that is one of PeerStreet’s defining advantages.”
That advantage has served to make the fintech platform one of the most attractive in an increasingly crowded field thanks to the transparency and market access the entire company—now more than 200 strong—holds in such high regard.
“It’s a $3.5-$4 trillion equity value market,” said Johnson, PeerStreet’s CEO. “There are about $150 billion in transactions and acquisitions that take place [in the broader real estate market] from investors buying investment properties every year. Only about 30% of the acquisitions have financing attached to them.”
PeerStreet believes it holds the answer to resolving that fragmentation and creating a positive, productive environment as part of the solution.
Hyper-Fragmentation Leads to a Growth Explosion
Solving the inherent problems associated with fragmentation was a top priority in 2013 when Johnson and Crosby first started the PeerStreet project. By 2015, when the company opened its doors to the general public, they believed they were well on their way.
“We had to level the playing field between Wall Street and Main Street,” said Jason Harris, PeerStreet’s director of strategic sales.
The fragmentation in the real estate lending market means that the local borrowers in the space frequently cannot access adequate capital. The local lenders in these instances have never had access to this kind of secondary market. Access to such a market, via the PeerStreet platform, provides new levels of liquidity, stability, technological capabilities and affordability in the mortgage market for private money lenders.
It was clear early on that the key to providing this kind of access is PeerStreet’s innovative two-sided marketplace. The platform exemplifies the fintech- enabled marketplace model, offering a combination of financial services, software engineering and market opportunity.
“PeerStreet serves to bridge the gap between lenders and capital markets by offering a secondary market beyond the traditional securitization market,” said Johnson. “Accredited investors can make more informed decisions and diversify their portfolios with unprecedented levels of data and transparency into their investment options. Private lenders can access myriad diverse capital sources and technology to make lending more efficient. Of course, key to all this are the real estate entrepreneurs who are borrowing capital, then going out and purchasing and enhancing more investment properties.”
Scaling Up Across the Spectrum
In an industry where investment capital can be difficult to access and retain, PeerStreet’s success and subsequent expansion is certainly due to its transparent, outwardly focused company culture. The entire team receives training on and participates in ongoing discussions on major performance metrics and corporate transparency. The company is also dedicated to employee growth, offering regular opportunities for leadership, growth and new challenges.
“This is a company that is built on the fundamental values of openness, transparency and unlocking value for our customers rather than trying to extract value from them,” said Crosby. “Part of that process involves cultivating a work environment that encourages a hardworking, talented team to continue to transform the way the lending industry does business.”
Harris added, “If we continue to execute that vision, we will continue to create and expand on a unique, self-sustaining market with limitless potential.”
Part of that potential exists in its most basic form in smaller-scale investors, who often struggle to find their footing in today’s highly competitive real estate markets. On the other side of the equation, many new investors are nervous about making large capital investments at the outset. PeerStreet offers initial investments as low as $1,000 and automated reinvesting for $100. “That ability to invest in a fractional piece of an individual loan is crucial,” said Johnson. “It gives every investor a shot at diversification.”
This scalability and accessibility generally did not exist before PeerStreet’s dual marketplace platform. A combination of legal innovation and technological development made the entire multilayered process possible.
“We’re investing tens of millions of dollars into technology to create value for investors so they can save money and time,” said Crosby.
The Technology of Underwriting
PeerStreet’s underwriting engine is another example of the massive returns the company reaps from its investments in technological advancement. The platform’s automated underwriting engine works in tandem with traditional analyst review to create a fine-tuned loan review system with predictability and peace of mind a top priority.
“Between the loan originator’s credit evaluation, the underwriting engine’s investment criteria overlay and traditional analyst review, there are multiple layers of diligence that underlie every loan,” Johnson said.
That scrutiny of each potential investment from multiple angles could keep both the platform and the PeerStreet product in demand regardless of where the economy falls in its cycle. When real estate markets are heated, PeerStreet can enable active, experienced, high-volume investors to either leverage some of their returns into private loans or, through its loan-purchasing system, access return on capital more quickly and cycle that capital back into the system.
At the same time, the ease of access to the platform and relatively low barrier to entry may keep newer and lower-volume investors in the equation and participating in both housing growth and economic expansion. When markets cool and conventional financing becomes harder to come by, investors focused on acquisition can use the platform to fund their deals, while those who prefer to step back from acquisitions can put their money into the diligenced lending packages.
“The net effect is that the end investors can create pools of assets very, very dynamically. One investment at a time or one kind of loan at a time,” said Johnson.
New loans flow into the platform daily, which is a diversion from the traditionally static loan pools in the securitization market. This, combined with the ability to invest in multiple loans on a fractional basis, allows investors to potentially compound their interest and balances different financial cycles and risk factors.
Johnson believes this to be a fundamentally different investment vehicle that is better for the investor. “Here, you have more control, you get more direct access to the actual asset and, most importantly, it is transparent,” he said.
All that technology is accompanied by an additional advantage: PeerStreet’s technological resources and acumen come with one of the nation’s premier cloud-based infrastructures. That means private lenders using the platform also have access to unusual benefits that they might have searched for elsewhere or develop on their own.
“As we integrate and provide more software tools, we create consistency and standardization of data, documentation, legal legwork, etc., which actually is something that drives more capital to our lenders,” Johnson said.
Creating Competition While Rewarding Efficiency
PeerStreet’s ability to centralize both lending products and associated services in one comprehensive, expanding cloud results in the creation of a market that is both two-sided (and, therefore, in a state of near-constant expansion) and extremely efficient. This enables lenders and borrowers who might traditionally attempt creative financing or cash financing for all their deals in order to retain flexibility and agility in their market to use the PeerStreet platform in their current businesses.
“Smaller private lenders and real estate entrepreneurs who normally might not borrow capital are able to leverage the benefits that would come with working with a larger institution, such as document standardization, capital market expertise and access to capital. They do so without losing the advantages they value of being smaller, more localized businesses,” Johnson said.
As the platform and the market continue to expand, PeerStreet is working to meet the investor needs that are growing in volume and complexity daily. For example, prior to 2019, the company solely offered shorter-term bridge loans. Recently, it expanded loan offerings to include a new product, the “Residential for Rent” loan, to address borrower demand for residential rental financing. The RFR loan is a 30-year loan product with a competitive interest rate.
“It is better for everyone involved, especially the borrower, who can now acquire new property without using as much equity capital,” said Johnson.
He noted that the product fits PeerStreet’s goal of building up the real estate community—as the loans become more efficient and are made in greater numbers, they can positively affect more participants on both sides of the equation (including the many tenants who now can access those residential rentals) than a single private money lender would ever be able to influence alone.
Continuing to Build with Community in Mind
The PeerStreet platform continues to receive recognition for being among the most groundbreaking systems of its kind in the industry. However, the company does not plan to rest on its laurels in 2020.
“We are going to continue to expand our loan product offerings and, as we do so, we expect the network effects within the marketplace to bring in more lenders, more loans for investors, more data and, ultimately, more capital,” Johnson said.
“This expansion benefits both sides of the marketplace because it can help to diversify both property types and loan products, which can be good for our investors’ portfolios,” Crosby added.
That combination fits PeerStreet’s mission to democratize access to capital. “The borrowers can now go and buy the properties, fix them up, and either sell them or rent them to provide homes for first-time buyers and tenants seeking housing,” Johnson said. “As long as we continue to support both sides of our unique two-sided marketplace, we are confident we will be a crucial part of creating housing for people in areas where it was not available before—and that connection to community is what we love most about real estate, lending and the PeerStreet platform.”
