You've probably heard the term "Become the Bank."
Just like a bank uses your deposits to give mortgages, you can cut out the middle-man and use your money to invest in lucrative mortgage backed real estate deals.
There are some problems with this though. People generally need hundreds of thousands of dollars to close a deal and most people don't have that kind of money laying around to loan out.
On top of that, you need to spend all the time to vet each deal.
It's risky too. If one deal goes bad, you could be out tens or hundreds of thousands of dollars.
Patch of Land Review - Invest in Debt
Patch of land aims to solve these problems by vetting, assigning risk, and allowing the investor to diversify risk by having a low investment minimum of $5,000 for any one deal.
Patch of Land - At a Glance
The Big Picture - For Investors
Patch of Land is a platform for investors to find potential investments. The platform receives requests for funding, vets the deal, then puts it on their website if the deal meets their criteria.
As you can see in the video, the management of Patch of Land chose to pursue debt investments instead of equity.
In my opinion, this isn't necessarily a good or bad thing. Debt investments are inherently less risky than equity investments because they are secured by an asset. Equity, on the other hand, is the first position wiped out if a deal fails.
If you are interested in equity investments instead, check out my review of Fundrise.
I think it's a good idea to have some investments that are secure as an important way to diversify a real estate portfolio. If a deal turns sour, the equity investors can be wiped out while the 1st lien position can recover the majority of their principal.
Patch of Land Investments
The investments range from 1 to 36 month loans. Not every maturity option is available at all times simply due to their deal pipeline. If they aren't receiving requests for a certain kind of loan, then they can't offer it.
At the time of writing, you can see a variety of maturity options. The shortest I saw was 9 months and the longest was 24 months. You can also see the entire list of investments which they make available publicly (you don't need to sign up).
The interest rates are mostly around 10-11% but they are as low as 7% and as high as 12%. You'll have a variety to choose from depending on your objectives and risk tolerance.
It's time to move this patch of land review to the technical, behind the scenes stuff.
Underwriting is the most important part of investing in real estate, so it's important to cover it in this review of Patch of Land.
They have a complex system to underwrite every loan involving 5 major areas of due diligence.
This is pretty straight forward - this involves checking and inspecting the fundamentals including business plan, property info, zoning, plans, title report, as well as the project timeline and budget.
They check all the friction points such as ownership docs, investment memorandum / PPM, sponsor financials, and articles of incorporation.
This is a really important step. A lot of investors get so focused on the project, they push aside the small details. As you know, the legal "stuff" can come back to bite you if it isn't all in order beforehand.
Real estate is hyper-local. The market fundamentals can be drastically different for two properties that are even a few streets apart.
Patch of land works to understand and assign risk by analyzing the market. The analysis includes property appraisal, market overview, demographics, comparable sales, and mapping.
This area includes the capitalization structure, sources/uses of money, and repayment of loans.
In essence, the company should be well capitalized, have a solid plan to use the funds, and a repayment plan (and backup plan).
I think this is one of the most important pieces. There are a lot of "fly by night" operations in real estate. They may come for a while, but they also go as quick as they came.
Patch of land only works with experienced investors with a track record.
They look into the financial statements of the ownership, any litigation against team members, criminal, and bankruptcy records.
If a project sponsor can't be trusted, then who wants to work with them, regardless of how good the project might be?
I love technology and this part really interests me. Part of their due diligence includes pulling hundreds of data points to assess the risk.
I can't really say it any better than this video, so just watch it.
Creating a Risk Profile
We all expect to see the normal details of a deal - the financials, project timeline and plan, funding details, borrower details etc...
Have PPM's that are practically impossible to read. The details and risks are buried in run-on sentences and are nearly impossible to find.
Patch of Land actually makes this a bit easier for us. Once they put together a risk profile they assign risk categories and an appropriate interest rate to compensate for that risk.
They don't keep this information a secret by burying it into biblical looking scripts. They actually break it down into an easy-to-read document for every single project.
Right on their website, it's all clearly listed. Looking at the picture, you can clearly see what has been identified as the largest risks and the way that risk is mitigated.
I found this to be a really interesting aspect of Patch of Land.
"Patch of Land was the first real-estate crowdfunding platform to pioneer the concept of “prefunding” loans by investing its own money into the loan. Every project we prefund demonstrates our confidence in the project, our underwriting process, and the thoroughness of our due diligence. By prefunding loans, we are able to secure higher interest rates and retain borrowers because we can guarantee quick closings." - Patch of Land
I have no way to verify this, but they claim to be the first crowdfunding platform to prefund loans.
Prefunding is great because deals close quickly. When deals close fast, they can demand higher interest rates from borrowers.
Prefunding also protects the investor - if the deal doesn't get fully funded by investors on the platform then Patch of Land is stuck holding the rest of the note. You know they are ensuring the loan is worth holding if there is a chance they could get stuck with part of the loan.
Review of Patch of Land for Borrowers
If you're on the other side of the deal, it's pretty straight forward for you as well. The application process is pretty straight forward and doesn't take long at all.
Patch of Land Lending Criteria
Here are some general parameters as a guideline. I know I look at every deal individually and Patch of Land does as well.
$100,000 - $10,000,000+
Loan to Value (LTV)
After Repair Value (ARV)
Purchase, refi, renovation, & more
Starting at 7.99%
1st Lien, Personal Guarantee Required
USA Except for NV, SD, and MN
Residential: Single Family, Multi-Family, and Condos
Small Commercial: Mixed Use, Office, Shopping, Apartments
Pros & Cons
Patch of Land is an overall excellent service and I believe their system and process are top notch.
I like how they are not trying to be everything to everyone - They are focused only on 1st lien debt. If you want to invest in a mortgage, this is the place to go.
Here are some more reasons to Patch of Land is a good investment platform:
- Mortgage-backed investments are less risky than equity investments
- Access to private lending without having to find and vet deals
- Quick closing for borrowers
- Investment potential in most states
- Low minimum compared to private lending
- No investment has defaulted yet
Though I really like this company, there is always room for improvement. Here are some things I hope they can change soon:
Accredited Investors Only
As of right now, their services are closed to non-accredited investors.
I understand their need to protect the company from litigation and stay in compliance with the ridiculous federal regulations... but other companies are open to non-accredited investors.
I hope Patch of Land will quickly work to allow more open access to their platform.
Not in every state yet
This isn't a huge factor, but just an area to work on.
I hope to see Patch of Land funding deals in every state. It would allow investors to diversify to any geographic area they want, and protect their portfolio from local or regional real estate fluctuations.
As I mentioned above, there are 3 states they don't invest in - NV, SD, and MN. I imagine it's because of regulations or other factors stopping them, so this isn't a big deal.
Here is a map of the states they have funded deals in.
All the major population centers around the country are represented here. The smaller states with small populations clearly don't have as much activity in their real estate markets, so underwriting deals can be a bit trickier.
Either way, I'd like to see this map become more orange and less green.
Setting up an Account and Investing
Setting up an account literally took me 15 seconds; I'm not even going to talk about it any further.
Instead, let's jump ahead and take a look at the investing dashboard.
I don't have any money in this account I made just to make this Patch of Land Review, but you can see how straight forward it is. Everything you need is right there and easy to access.
Investing in a Deal
It's pretty straight forward to pick a deal and invest.
I already showed a list of potential deals to choose from. Go through the list, take a look at all the risks and details. Once you make your selection, go ahead and choose the amount you want to invest.
Moving forward does get a little more difficult. I have a feeling that Patch of Land makes it as easy as possible, but it's still pretty detailed.
After choosing the amount you want to find, you need to punch in your info.
I put in my address, name, SSN, etc. Simple so far.
Then the document is generated that you need to sign. I think my heart skipped 2 or 3 beats when I saw it was 165 pages long.
Sure, it only required 2 signatures and they make that really quick and easy, but still...165 pages is a lot.
Unfortunately, this is pretty standard for this sort of investment, so, no marks against Patch of Land. It's par for course.
Don't forget, you will need to verify your "accredited" status. Be prepared to provide documentation to the satisfaction of Patch of Land.
Summary - Patch of Land Review
Patch of Land is an innovative company that focuses on finding, vetting, and funding loans that are secured by the 1st lien position on a potential property, then they allow you to buy a portion of each loan.
They are an extremely fast growing company and haven't lost any principal balance yet. That means at the time of writing there have been no defaults. This is really huge.
Their investments are a solid way to diversify a real estate portfolio into private real estate loans. They find the deals, conduct all due diligence, underwrite the deal, and then prefund each deal.
As the investor, you can diversify your portfolio and not be exposed to the primary risk of private lending - too much money invested into too few deals. You can simply invest a small sum as low as $5,000 into as many deals as you want, effectively limiting your exposure to any one deal.
Borrowers also have a simplified process to apply for and get funding for their deals. Instead of having to wait for the deal to get funded by dozens of investors, the simplified process allows loans to get funded in as little as two weeks.
Patch of Land is definitely an up-and-coming company you should pay attention to. In the next few years, they may be one of the biggest players on the block.