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How do you bounce back from one of the worst financial crises in modern history to create a profitable, community-focused business?
In 2010, as the nation was still recovering from the collapse of the housing bubble, Jason Fritton began visiting distressed property auctions. He noticed something peculiar — the same 12 men were at every auction, consistently buying every piece of discounted real estate in the city.
Everyone else had pulled out of the market and left these wealthy individuals to buy everything for a fraction of the price.
But Fritton soon realized no one was touching what he called the “bones” of the real estate market: single and multi-family residential homes. Soon after, a property went up for auction in his neighborhood. Appraised for $300,000 (and currently worth $600,000) no one bid on the property and the minimum bid of $20,000 won the property outright.
“There was entire sections of the city that were tough to fund into but there is no reason for that — there is an opportunity everywhere,” Fritton said. “And if there are abandoned properties, you get crime, graffiti, broken glass and it starts to hurt the whole neighborhood. I told my attorney, ‘I’m going to take this online and I’m going to find other local investors and contractors and make the property nice again by bringing in people who believe the same thing — making a good investment while still doing good for the community.’ My attorney said, ‘That’s a great idea, I would invest in that. But if you do it you’re going to go to jail.’”
Fritton began searching for ways comply with the public solicitation laws while upholding his idea of crowdfunding real estate. His nighttime and weekend work slowly developed the company that has become Patch of Land.
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“Considering how interconnected everyone is today, being able to utilize a wide network of previously unrelated people to accomplish difficult tasks is where everything is headed towards in the future. And I thought, ‘Where can I apply this? What has real value that isn’t already being done?’ And I thought ‘real estate.’ Deep down everyone wants to own a corner of the planet or a patch of land.”
In 2013, Fritton found investors in New York, San Francisco and Los Angeles for the company’s seed round and decided on LA as the new home for the business, citing the city as “a real estate mecca and financial hub with very strong technology roots.”
The company launched its first property in October 2013 and expected the funding to take around a month.
The property was fully funded within a few hours.
Caught off guard by the eagerness of the market, the Patch of Land team scrambled to find their next properties. A few months later they were processing upwards of $600 million in applications coming to the site.
“A small company dealing with that kind of volume, brand new right out of the gate, shows you how fragmented this market really is,” explained Fritton. “We hadn't realized that at first, we just wanted to be able to bring the crowd into a very exclusive market and provide access, but we quickly realized that, because the banks aren’t able to operate well and everybody else is operating on 1990’s technology, there was just an enormous opportunity and we've been spreading like wildfire ever since.”
Patch of Land currently has 45 employees in the Century City area and hopes to hire 25 more by the end of the year. The company has built their commercial real estate team from scratch, accumulating $400 million in their pipeline.
But a good idea always has competition.
Also launched in 2013, RealtyMogul takes a similar approach towards crowdfunding real estate. But Fritton clarified that while RealtyMogul focuses on the equity side, Patch of Land focuses exclusively on issuing loans to real estate professionals.
“There is definitely competitiveness, but there shouldn’t be. Our real competition is the existing financial institutions — the huge, fragmented, dark, predatory network of private money lenders for commercial real estate. What RealtyMogul and Patch are doing is breaking in on the periphery. We should be more advocates for each other than competitors.”
While the two companies seem to be growing into different niches, Patch of Land announced yesterday they have returned $10 million of principal and interest payments to investors in less than two years with no defaults on loans to date.
“We’re growing up and becoming much more sophisticated. We’re transitioning out of that scrappy startup phase to being a recognized leader in our industry. We went from doing whatever deals were safe and available to receiving hundreds of millions of dollars worth of applications a month.”
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