What is AlphaFlow?
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2021-01-28: Alpha Flow has exited from the accredited investor business. Its last review is being kept here for historical purposes.
AlphaFlow specializes in residential real estate debt (sometimes called hard-money loans). One one hand it's a stunning Mona Lisa of revolutionary and industry-leading features. On the other, in my opinion, it has several substantial shortcomings that compare very unfavorably with best-of-breed competitors, and risk benchmarks that will be show-stoppers for many conservative investors. Additionally, some investors have alleged their leverage and defaults were much higher than expected.
AlphaFlow's revolutionary advantage over most of the hard money loan crowdfunding platforms is diversification. Instead of purchasing an individual note, the investor is put into 70-100 notes within the first 30 days, which AlphaFlow purchases from the other platforms.
This diversification is a great feature because it protects the investor from the risk that the single note they purchased was a dud and under-performs the average.
This diversification also protects the investor from geography risks caused by local problems. For example, when the price of oil dropped from over $100 a barrel down to just $50 a barrel and stayed there, many Houston investments suffered greatly. In a diversified portfolio spread out over the country, the rest of the country will offset problems if only 1 or 2 areas are affected by something.
Additionally, the technology they use to perform the diversification is both technically and legally impressive.
AlphaFlow is also one of the only platforms that is a Registered Investment Advisor. This means they have a legally enforced fiduciary obligation to put your interests above their own. Advice from an RIA is much more valuable than from a .
The AlphaFlow fee is also fair and reasonable. They charge an additional fee of about 1% on top of the fees that the platform already charges. This is a pretty modest cost for the protection that diversification provides.
At the same time, AlphaFlow has some fairly serious shortcomings compared to other options (which includes not just crowdfunding platforms, but also funds that offer diversification).
First, their uncured default rate (which is a benchmark for measuring the risk of a portfolio) is about 2-3x higher than the best platforms and best funds.
Alphaflow currently has a 3.33% rate for 120+ overdue (combining both the AlphaFlow current dynamic portfolio, and the 2 fixed portfolios they previously offered). In comparison, Fund that flip (#3 ranked currently) has a 1.8% uncured default rate. Peer Street (#1 ranked currently) has a 1% default rate. Also, hard money loan funds like BroadMark have a 1.7% default rate and Arixa 1%.
In past recessions, the spread between higher and lower quality loans increased dramatically as the recession deepened and the stress on the loans increase. So I'm concerned to what this spread may increase to if we have a severe recession.
Second, their loan-to-value ratios (again another measure of risk) are higher than best-of-breed options, and also above most professional hard money loan lenders consider prudent for protecting your principal from loss. Most say either 65% or 70% is the maximum to give an adequate equity cushion. (See "Hard money loan Roulette: part 2").
Unfortunately, one recent investor claimed that over 55% of his AlphaFlow loans are above 70% LTV. If this is accurate, and we have a severe recession, a significant part of the AlphaFlow portfolio may be at risk of losing not just interest but significant principal as well. (See "Hard money loan Roulette: part 1").
In comparison, Peer Street and Fund That Flip offer many loans at 65% LTV or lower that an investor can pick and choose from. The limitations of these sites is that they are often volume constrained, so it can be difficult to build up a significant portfolio. However, investors with larger portfolios can also go to numerous funds which do enough volume to take investor capital and who also set explicit limits on risk. For example, BroadMark and Arixa set a maximum LTV of 65% and 70% in their PPMs respectively.
Another issue with AlphaFlow is that they don't limit the purchase of notes to states that have a nonjudicial option. What this means is that if a loan has to go into foreclosure, you have to fight the borrower in court. So instead of taking a few months and a few thousand dollars, it typically takes a year or more is extremely expensive. In the meantime your money is locked up and disappearing into an attorney's pocket. And again in a severe recession this can exacerbate loses.
In comparison, on most crowdfunding platforms an investor can cherry-pick notes from nonjudicial states loans only. And there are also at least 30 or 40 funds that limit themselves to just nonjudicial states (including BroadMark and Arixa). (See more on nonjudicial versus judicial to learn why many experienced hard money loan investors avoid judicial states.).
Another limitation compared to many funds is that AlphaFlow does not put any of their own money into the investment. Investment by principals is considered by many investors to be one of the most important factors in guaranteeing proper alignment. The average "good" fund has a 5 to 10% investment. (In AlphaFlow's defense, they say that they have not been able to overcome the legal issues involved in doing so at this point).
Finally, AlphaFlow does not have an expedited liquidity option like many funds do. Most funds have a lock up period during which you can't redeem (usually a year). But after that, they give you a fast liquidity option where you can redeem your entire portfolio any quarter or month (depending on the fund). This can be handy if an investor is concerned with liquidity, or if they intend to exercise the strategy of yanking their money from hard money loans at the 1st signs of the next downturn, etc.
In comparison, AlphaFlow has no expedited liquidity option and your money is locked up until the borrower pays it back. Typically you can expect 50% of your money back in the 1st 6 months due to people paying off early, but the rest can take up to a year (and some of it perhaps longer if extensions are required).
AlphaFlow has many impressive features and the raw potential to be a future top-ranked and maybe even #1 ranked site. So I hope by the time of the next review, it addresses many of the other serious issues as well, so it can be ranked higher. Several could be resolved if they gave investors the ability to customize what is put into their portfolio (LTV and non-judicial).
When I asked AlphaFlow about when such changes might happen in the future, a spokesperson said:
"In terms of allowing clients to select different risk tolerances: it is a feature we certainly want to add and it’s on our roadmap! Candidly though, it’s not something we can do in the near term without sacrificing quality. We currently reject about 90% of the notes we review. To create bespoke risk/return strategies at this point would require us to take on deals that have a lot of red flags and deals that we’re really not comfortable putting client money into, such as a combination of first time borrowers, higher LTV’s, and lower credit scores. It’s likely coming down the line, but we’ll need to significantly expand our lender relationships before we can do that prudently, and we’re really focused on that expansion now."
This answer didn't make too much sense to me as lower LTV loan would be safer, rather than riskier. This reply perhaps comes across as a boiler-plate pre-written response, rather than a considered and thoughtful answer to the question. But we will see what they do.
Advantages: Diversification into 75-100 notes, Registered Investment Advisor with fiduciary duty to look out after clients, reasonable fees, impressive technical and legal technology, CEO Ray Strum is one of the most personable and transparent in the industry.
Disadvantages: Significantly higher risk benchmarks (uncured defaults, LTVs) than best-of-breed competitors. No ability to choose nonjudicial states only. No expedited liquidity option like funds. Bankruptcy remote protection is not yet fully set up (no backup administrator). No skin in the game.
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Who are Alpha Flow Competitors?
Here are the reviews and rankings for other residential debt sites:
To compare this site directly with competitors, see the
feature by feature comparison matrix.
OR...if you're looking for more volume and/or more conservative LTV's than most crowdfunding sites provide, then a fund might be a better choice for you. If so, here is our Guide to the Top 15 Hard Money Loan Funds (and honors).
Debt Investing Tutorials:
Looking to learn more about debt (hard money loan) investing? Here's our 4-part step-by-step series.
How to pick? Check out our step-by-step guide.
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About Ian Ippolito
Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News, USA Today, Bloomberg News, Realtor.com, CoStar News, Curbed and more.
Ian was impressed by the potential of real estate crowdfunding, but frustrated by the lack of quality site reviews and investment analysis. He created The Real Estate Crowdfunding Review to fill that gap.
Code of Ethics: To maintain objectivity, I do NOT accept any money from any outside sponsor or platform for ANYTHING (including but not limited to affiliate ads, advertising etc.). See code of ethics for more.
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