Ben Schulman of Small Change and Dr. Adam Gower of Gower Crowd got together for a real estate crowdfunding chat. Watch part two of their conversation here, or read the transcript below.
Ben: Well, Adam, I think that this conversation has proven that education is really almost paramount to anything else and that all of us need to be having more conversations like this, but with a much broader audience until crowdfunding can really reach its full impact and potential.
Adam: Yeah, I completely agree with you there, it is. I think the big message at the moment is one of education for everybody – for developers, investors and for the general public, even if you’re not interested in investing in real estate. Just the very fact that a major industry is being radically changed is what they call ‘Code 20’ – it’s newsworthy.
Ben: That brings up another question that (I’m curious about your take) is that for so long, real estate was only available to what are called accredited investors. And with Reg D that is still the case. And the idea with being accredited is that not only do you have a certain financial threshold that you’ve passed that gives you some type of buffer to absorb any losses that may be incurred, but imbued with that definition of being accredited is that you somehow have this wherewithal and knowledge. But what you’re talking about is the language and I’m curious, do you really think that just because you may have financial wellbeing that you have a more sophisticated knowledge than non-accredited individuals?
Adam: Yeah, also super good question. So, the accredited investor standard was an evolution, as you now, of regulations that required that people were able to fend for themselves, right? So I think it came from Ralston Purina in, I want to say in the ‘50s, without getting into all the details. But the point is that the SEC set down this standard where the underlying assumption was, if you have money you must know what you’re doing.
How valid that is one doesn’t know, but that was the premise upon which this standard was laid down. Take that a step further and you think about the standard having been laid down in 1980, the actual accredited standard. I remember, I hate to admit, but I do remember 1980. I actually came to the States in 1982 and got involved in real estate investment right when I arrived, and in 1982, (you clearly weren’t alive then) but the interest rates – when you put your money into the bank on deposit, cash in the bank on deposit, they paid you 12 percent interest. Imagine that! When you got a mortgage you were paying 18, 20 percent for your mortgage. It was a completely different time when this standard was laid down. Plus, there were, at that time, 550,000 accredited investors who qualified under this standard. Spin forwards now – you get zero on deposit, you can get a sub-4 percent mortgage and there are 11 million accredited investors. Same standard, pretty much, as there was, however many years, that is, almost 40 years ago – a very long time ago. So the idea that simply by having a certain level of net worth, or a certain level of income over a sustained period of time, should somehow qualify you as being a sophisticated real estate investor is clearly a false idea.
This is why I’m excited. This is why I’m so excited, as somebody who has experience in real estate – I have a reasonably decent sense of the industry – but who also has recently started to, or has recently experienced the joys of educating in the courses that I’ve been teaching locally, at the local university. By extending that to an online platform, I think that it contributes to building the awareness in that community that’s out there, that has the opportunity to invest in real estate but has never known it and once they discover that they can, don’t really know how to or what they’re looking at.
But what’s evolved is the way that we now are exposed to it, because of the JOBS Act and because of crowdfunding, so now suddenly people that have never had exposure are suddenly exposed to these actually very sophisticated, complicated transactions about which they probably really have no understanding whatsoever. And so it’s really important that, especially the investing population I think, at least has a rudimentary foundation in the basic concepts around which all real estate transactions work.
Wanna see more? Click here to watch part I