Groundfloor: Comprehensive Review and Ranking
What is Groundfloor?
IMPORTANT 2021 COVID-19 UPDATE: The investment repercussions of the global pandemic continue to change and evolve with unusual speed. As such, this review might be dated, no longer accurate, irrelevant and/or missing crucial information necessary to making an effective investment. For the latest and greatest information on analyzing investments in this new era, see the latest article in the series: "How will Covid-19 / Coronavirus Affect my Alternative Investment Portfolio?"
Groundfloor specializes in residential debt investments (also called fix-and-flip loans or hard money loans).
They have high volume, one of the lowest minimums in the industry (just $10) and no investor fees. And they are currently the only site that offers individual note investments to non-accredited investors.
On the other hand, many conservative and/or accredited investors may have issues with the very high uncured default rate (4.7+ times more than best-of-breed accredited offerings), loans in potentially expensive judicial-only states, loans made at high LTVs, and how they allegedly don't accurately report loans as non-performing in some circumstances. And all investors may feel uneasy with none of the typical bankruptcy protection to protect investor money should the platform go out of business. (More on these in the "pros and cons" section).
How Does Groundfloor Work?
Groundfloor loans money to borrowers and then sells pieces of those loans to investors who share in the profit (or loss). Typically the borrower is themselves an investor who wants to flip a home. (Purchase a home that is run down, fix it up, and hopefully sell for a profit).
They make their money by charging the borrower 2% - 4.5% of the principal of the loan. There are no fees for investors, which is a nice feature.
If all goes well, the borrower pays the investor small interest payments each month, and then makes a final, large balloon payment of all the principal at the very end. (Note: some loans do not pay interest and only the balloon at the end).
If the borrower on a loan stops paying, Groundfloor will attempt to negotiate. If that fails, they will manage the foreclosure process, which can get expensive. It also can take months (in nonjudicial states) to years (in judicial states). After that, it over-sees the rehab and selling of the property.
If the net proceeds are more than is owed than the investor gets back their owed principal and interest, and maybe even a boost from penalty fees. On the other hand, if they're insufficient then the investor takes a loss on the investment. During the time all of this is going on, the investor usually receives no interest nor their principal back.
What are Groundfloor Pros and Cons?
Advantages: Volume is good (14 open investments during our survey). Lowest minimums in the industry (just $10). No investor fees. Only site with individual note investments for non-accredited investors.
Disadvantages: Very high uncured default rate (4.7+ times more than best-of-breed accredited options), many loans in judicial-only states, many loans with high LTVs, no bankruptcy protection, ratings system doesn't always reflect uncured default risk, investors say the platform doesn't accurately mark non-performing loans for the first 2 months.
Groundfloor has excellent volume with 14 investments open when we sampled them. Investors with small portfolios will also love their $10 minimum which is the lowest in the industry. Also, unlike other competitors they do not charge any investor fees. So this ends up staying in the investor's pocket and increasing the potential yield.
The site is also currently the only platform that allows nonaccredited investors to invest in individual notes. Traditionally this was only available to accredited investors, so it's nice to see them opening up this option to retail investors.
At the same time, Groundfloor also has some significant issues that may make many accredited and/or conservative investors think twice. They have an extremely high uncured default rate (the percent of notes that had to go through foreclosure) of 4.71% (28 uncured defaults out of 594 loans). This is 4.7+ times higher than best-of-breed accredited offerings (uncured default rate of 1% or less, for those doing acquisition and light rehab similar to Groundfloor). Accredited investors may find it very hard to choose Groundfloor versus other options.
When a foreclosure happens on the platform, it can be expensive. Many of the loans are in judicial-only states where foreclosure can take a year or more (instead of a few months) and is generally very expensive. When coupled with the fact that most of the loans on the site are small (under $400,000) the odds of losing money in foreclosure may be fairly high. (For example, we recently saw a note on a different platform that also was also a small loan in a judicial-only state. The investors ended up losing more than 60%).
Additionally, some of the LTV (loan to value) are significantly higher than most experienced hard money lenders consider to be ideal for preserving principal in foreclosure. Most recommend going no higher than 65%, but during our sample 10 (out of 14) loans were from 66% to 70.1% LTV. These loans have a thinner equity cushion, and are more likely to lose money if they have to go into foreclosure.
Another potential risk is that Groundfloor doesn't have the same bankruptcy protections that competitors do. Other platforms will set up their investments as bankruptcy remote so they won't get sucked into a bankruptcy hearing (and make sure they aren't used to satisfy other creditors). Groundfloor doesn't. Nor do they set up a backup administrator to take over (or allow investors to vote on a new administrator). Groundfloor doesn't. In my opinion this is a serious shortcoming that I would like to see the site rectify ASAP (especially given the recent events of iFunding and now Realty Shares going bust).
The site rates the riskiness of it's loans with a proprietary rating (from A-G). But the system appears to be off and needs some adjusting, because sometimes "riskier" grades have a lower uncured default rate than "safer". For example, supposedly "lower" risk B and C rated loans have a higher uncured default rate (5.8%, 4.5%) than supposedly "riskier" D grade (4.3%). Here is the current historical data: Defaults broken down by loan grade: A - 1: 1.4%, B - 8: 5.8%, C - 12: 4.5%, D - 5: 4.3% , E - 1: 9%, G - 1: 100%. Total loans made broken down by loan grade: A - 68, B - 136, C - 262, D - 115, E - 11, F - 1, G - 1.
Finally, investors report that Groundfloor doesn't always accurately report when loans are non-performing. Normally a loan becomes nonperforming once the borrower misses a payment. However, Groundfloor has a two-month reserve, so for up to two months, they will still report the loan as "performing" when it's not. If this is true then this lack of transparency makes the loans appear to be performing better than they really are. And my concern is that perhaps it encourages investors to make more follow-up investments than they would if they could see what was actually happening). In my opinion, they need to change this policy and be more transparent with their investors.
For more raw data on the site (including investor and sponsor fees, legal structure etc.), or to easily compare it with the data of competitors, see the feature by feature comparison matrix.
Is Investing In Groundfloor Legal?
Like on many crowdfunding debt platforms, investors do not directly own the notes (i.e. the investment is not directly secured by the note). Instead, they are indirectly secured. What this means is that the note is held in (and is direct security in) a separate LLC. That LLC then pledges the note to the LLC the investor is a co-owner of. This indirect structure helps platforms avoid some legal structural issues, as well as prevents them from having to disclose the name of each investor in UCC filings (since most investors don't want to that information disclosed). (Here's more information from another platform with the same structure, on why this is done, and giving more details).
In most cases, investors would not notice a difference between this and directly secured notes, and investors would receive the same benefits and/or losses as if the investment were directly secured. However, if the administrator of the LLCs (Groundfloor) stopped performing their duties (such as in a bankruptcy) there would be no company to service the linkage between the two. And even if there were, potentially all of the investor money might be held in limbo by the bankruptcy court for a year or more, while they determine if the money should go taken from investors and used to satisfy creditors of Groundfloor or not. Obviously, that's not a good situation for investors to be in.
Other platforms solve these issues using bankruptcy protection. Unfortunately, Groundfloor does not have any such protections and investors seem to be virtually guaranteed to be sucked into bankruptcy-limbo with a bankruptucy.
" In the event of bankruptcy, a court would determine the treatment of the Limited Recourse Obligation Agreements (LROs) in force at that time. Under the terms of the LROs (see attached example), our bankruptcy would itself trigger a default, causing all LROs would be due and payable at that time. Consistent with its interpretation and application of the law and the facts and circumstances of the bankruptcy, a court could decide to pool all LRO holders and underlying notes together, direct administration to facilitate recovery in line with some or no modification to the terms of the LROs, or instead group LRO holders together with other unsecured creditors."
In my opinion, this is a major risk of using Groundfloor. I hope to see them change this in the future to be more inline with competitors.
What does a Groundfloor deal look like?
Here is my step-by-step due-diligence on a random Groundfloor investment. So it may or may not be a typical investment. Also I'm a very conservative investor, so something that's way too risky for me might be the perfect fit for someone else who is more aggressive. Finally, I'm not a financial advisor, attorney or accountant. So this is just my personal opinion and always consult your own financial professionals before making any financial decisions.
This investment is in a fix and flip residential loan in Titusville Florida. (Which isn't far away from where I grew up in Merritt Island, Florida, coincidentally). The deal says that the borrower intends to use the loan to pay off existing loan and complete some renovations to the property.The loan is for a short 6 months at a rate of 10%. The loan to value is 70%. As of this moment, 283 investors have funded about $80,000 and about $200,000 remains to be funded. Groundfloor gives this loan a rating of C (on a scale of A-G).
The first step is to make sure that the asset class and strategy even make sense for my portfolio. (If you don't know how to do this, please see The Conservative Investor's Guide to Due Diligence). Let's say it makes sense for my portfolio and dive in.
Like all loans in Groundfloor, this is a first position loan, meaning that if there is a problem I will be the first to get paid back. As a conservative investor, that's a huge plus to me.
This loan is at 70% LTV (loan-to-value), which means it is lending 70% of the after repair value of house. Many experienced hard money lenders feel that it's too risky to go above 65%. If something goes wrong with the loan and there's a severe downturn, there's a higher chance I won't get my principal back. (See the Guide on Hard Money Loan Investing). So this is an immediate red flag for me and I would move on to the next deal. But this might be fine for someone who's more aggressive.
The loan is being made in Florida. Florida is a judicial-only state, meaning that if something goes wrong, the foreclosure has to go through the court system. This can be extremely expensive which increases my chance of losing principal. And it might take a year or more to get my money back, which I don't personally want any part of. I would much rather be in a nonjudicial state, where I can foreclose very cheaply and in just a couple of months. So for me this is another deal breaker, but again might be fine for someone else less conservative.
Had the investment passed my initial checks, I normally would dive in further to check out the sponsor, the rehab plan, the property itself, the projections, etc..
Unfortunately, I couldn't find much of this important information on Groundfloor. For instance, on competing sites, investors can find a detailed plan of exactly what the proposed renovation entails and how much it will cost (and judge for themselves if they feel the plan is good or not). And they also give a detailed description of the borrower's previous experience (which many people feel is one of the best ways to gauge the risk). All of this seems to be missing-in-action on Groundfloor. If it's true that the platform doesn't provide this, then in my opinion they are withholding crucial information necessary for an investor to fully understand the risk they are taking. And I hope they choose to change this in the future.
If I were still interested in the deal at this point, I would dive in further with my due diligence. To learn how I do those things, check out The Conservative Investors Guide to Due Diligence.
Where can I discuss other Groundfloor deals?
You can do this with thousands of other investors in the private investor club. While the club is free, membership is restricted to investors who have no business connections to sponsors or platforms. Also, all members must agree to keep all club info confidential by signing a nondisclosure agreement. Click here to join or get more info.
Who are Groundfloor 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).
If you're looking for other non-accredited investments, here are those reviews…
How do I invest in debt?
Looking to learn more about investing in debt (hard money loan investing)? Here's our 4-part step-by-step series.
How to pick? Check out our step-by-step guide.
Top 100+ accredited investor sites (ranked and reviewed)
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.
Have you used the above site before? What was your experience?
This site has been ranked and reviewed as part of our in-depth, 100+ site industry review. All data is believed to be correct, but may have mistakes. Please contact us if you notice one. All non-data (including rankings, investor comment summaries, etc.) are my opinion only. I'm just an investor and not an attorney, accountant, or certified financial advisor. To maintain neutrality: I do not own a portion of any of the companies reviewed.