2017 resolution: transition from LC to PeerStreet

[brother7]

I've halted Automated Investing at Lending Club and plan to redeploy funds into real estate crowdfunding.
PeerStreet appeals to me right now. (use affiliate link for 1% Yield Bump)

What convinced me to switch was this Invest Like a Boss podcast (episode 13) comparing PeerStreet and Lending Club.
I like the idea of secured real estate loans vs unsecured consumer loans. The fact that PeerStreet has yet to have a defaulted loan speaks volumes. I expect year-end tax reporting to be a lot easier too.

I'm also researching Fundrise for relatives who are close to retirement and looking for retirement income.

[Fred93]

What convinced me to switch was this Invest Like a Boss podcast (episode 13) comparing PeerStreet and Lending Club.

That podcast is really weak.  Full of misleading comparisons.  For example...

1. They say LC loans are min 3 year whereas PS loans are 1 year, so PS is better.

MISLEADING AS HECK.  LC loans have 3 year maturity, but they are fully amortized, with equal payments.  That means that the average time the borrower has your money is 1.5 years.   The technical term for this is "duration".  Three year fully amortized loans have a duration of 1.5 years.  But wait, there's more.  The LC consumer loans are heavily prepaid.  There is so much prepayment that after considering prepayments, the duration is actually about 1 year.

PS loans are not fully amortized.  They are interest only with a big balloon payment at the end.  This means their duration is almost the same as their maturity.  About 1 year. 

Now when we compare duration of LC loans vs duration of PS loans, we see that they're about the same.


2. They say that PS has never had a default!  Wow.  Sounds incredible.  (Later note added that 1 had in fact defaulted.)

MISLEADING AS HECK.  The company is only about 1 year old, and they offer 1 year balloon payment loans!  If a balloon payment loan is gonna default, the most likely time for it to default is when that balloon payment is due, and very few of PS's loans have had that balloon payment come due!  The only loans that have come due so far are the ones that were issued way back when the company started, and of course the company started small and grew, so this is VERY FEW loans indeed.  Few loans have defaulted because few have had their balloons come due.

To get a better handle on what's happening, you need the data on all the loans.  Oops.  Does PS even publish the data?  Then they would have to have been around long enough to accumulate data in significant quantity to provide meaningful information. 

The good things I discovered about PS after reading their web site are

1. They compute Loan-to-Value ratio using the "as is" value estimate, rather than the "after remodeling" value estimate that some other RE P2P sites use.  When the lender takes over the property on a failed loan, chances are the remodeling hasn't been done, or hasn't been completed, or didn't really improve the value.  "as is" is much more likely to be representative of the value you could get from a foreclosed property.

2. Backed by some well known VCs, which means there's a chance of some adult supervision.

[rawraw]

I agree with the majority of the above.  One thing I'd tweak:

1. They compute Loan-to-Value ratio using the "as is" value estimate, rather than the "after remodeling" value estimate that some other RE P2P sites use.  When the lender takes over the property on a failed loan, chances are the remodeling hasn't been done, or hasn't been completed, or didn't really improve the value.  "as is" is much more likely to be representative of the value you could get from a foreclosed property.

Focusing on "as is" values is more useful.  But depending on the type of real estate, it can still be misleading.  I've been amazed at the use of brokers opinions and other valuation services in some of these real estate lenders.


I have no idea how Fred93 doesn't get tired of answering similar questions over and over again.  It is likely a fault of my personality, but when I read the first post in this thread I immediately thought to myself "Oh my,  not another one of these."  In my view, some of what Fred is pointing out is bare bone basics.  My expectation is that anyone investing in these sort of things should understand the nuance behind a "no default" claim and comparisons between consumer and real estate.  I'm increasingly concerned that these investors, attempting to be passive in income and knowledge, are going to fuel huge amounts of risk to be amassed by these platforms.  I've mentioned this off and on for years, but now the volumes are picking up to noticeable amounts.  I'm scared the progress we've made in allowing people access is going to get regulated away if things do go wrong.  I sure hope this doesn't happen, since I prefer direct access.

[nonattender]

In my view, some of what Fred is pointing out is bare bone basics.  My expectation is that anyone investing in these sort of things should understand the nuance behind a "no default" claim and comparisons between consumer and real estate.  I'm increasingly concerned that these investors, attempting to be passive in income and knowledge, are going to fuel huge amounts of risk to be amassed by these platforms.  I've mentioned this off and on for years, but now the volumes are picking up to noticeable amounts.  I'm scared the progress we've made in allowing people access is going to get regulated away if things do go wrong.  I sure hope this doesn't happen, since I prefer direct access.

What's "bare bone basics" for Fred (and me and you, too) is likely, relatively, new and enlightening for a lot of those reading.

I still remember the hue and cry after some really vocal retail investors lost a point or two in the wild west days of Prosper in 2006-2008, before the SEC stepped in...  Granted, Prosper launched *totally* free market - every investor able to set a bid - reverse-dutch auction style - on the amount and rate at which they wished to participate in each individual loan.  A lotta bad (well-intentioned, sometimes - and green-eyed monster, most time) risk pricing decisions were made by amateur credit analysts (read:  lenders, or, later, post-SEC, "note investors") in a huge rush to deploy capital and not miss out on the "next big thing" - but there's always another loan (at a better price) and there's no rush.  The debt markets are huge and there's always tomorrow's borrowers...

I am *always* scared of "the public", "crowds", what have you - the lowest, mass-market, common-denominator discovering anything that I like - because it usually means that they're going to herd up and do some really stupid things that I would usually very carefully avoid --- and then ruin it for everybody.   The onus is not entirely on the "public", though - these platforms do have a responsibility to not make ridiculous "claims" about returns or defaults or whatever - beyond that, I am sort of a "caveat emptor" guy but always try to balance that against what I know will happen when overly-optimistic true-believers buy their own marketing or start reaching to scale.

Adult supervision is required for these businesses.  They can either do it themselves or they can partner with extant adult supervisors - but it does make me wince and shrug when I see a bunch of bright-eyed "entrepreneurs" - especially if they're the type who's just left some cushy bureaucracy (ie, they're drones who wanted to burrow into a big company - but maybe got greedy or weren't actually of a level of talent to rise to the level they thought they were "entitled") and now want to come and "disrupt" critically important industries, the first step of which, in their grand plan, is, naturally, to try to throw off the chains of history and get special rules (ie "looser" ones).

The state by state regulation stuff for retail investor access is burdensome;  I sympathize with them.  But the compliance/risk/capital - they better get used to those rules, because being a fiduciary for someone's retirement isn't something that you learn at coding camp --- or real estate school.

*shrug*

[SLCPaladin]

The state by state regulation stuff for retail investor access is burdensome;  I sympathize with them.  But the compliance/risk/capital - they better get used to those rules, because being a fiduciary for someone's retirement isn't something that you learn at coding camp --- or real estate school.

*shrug*

Can I just say, non-attender, it is an absolute delight to read your posts! Clever, really clever stuff. That's all, nothing more to add, guess I better get back to my MOOC course to teach myself how to code so I can great the next great tech unicorn.

[nonattender]

The state by state regulation stuff for retail investor access is burdensome;  I sympathize with them.  But the compliance/risk/capital - they better get used to those rules, because being a fiduciary for someone's retirement isn't something that you learn at coding camp --- or real estate school.

*shrug*

Can I just say, non-attender, it is an absolute delight to read your posts! Clever, really clever stuff. That's all, nothing more to add, guess I better get back to my MOOC course to teach myself how to code so I can great the next great tech unicorn.

Thank you.  It's nice to be appreciated and know I'm being read properly - and not like I'm an ancient harpy who just likes to bitch.

I paint with a broad brush, sometimes, but it's only to make sure I make my points.  Lots will be at stake in p2p real estate platforms - and - that pun aside - I want to make sure that all these f'n new guys know how hard they're gonna get it if they start to cut corners.

I know how most of the bodies got buried in the p2p finance industry --- and if I can cut down on the funeral rate, so much the better.

That said, I might be warning these guys too early - judging by the "differentiation" evident in the names of the p2p real estate plats - in the list of platforms topic - they're either all practically embryonic or haven't spent any time thinking about what to call themselves...

At least none have 'adverbed' themselves into a sure and certain death, yet, so there is at least that very sleight-ly comforting thought.

Thanks, again.

[brother7]

FUN FACT: PeerStreet's co-founder Brett Crosby also co-founded Google Analytics.
I'm familiar with website marketing/SEO so that credential carries a lot of weight with me.

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