As a company that operates on two fronts - as a hard money lender as well as a real estate crowdfunding investment platform - we often get questions from customers about how the two sides of our business come together. In light of this, we thought it would be useful to go through how a GROUNDFLOOR loan ends up on our platform, from the moment the loan is originated with one of our residential real estate entrepreneurs to when it is fully funded by our individual investors.
GROUNDFLOOR Loans: A Borrower’s Perspective
The life of a GROUNDFLOOR loan, as seen from a borrower's perspective
A GROUNDFLOOR loan first begins its life once it is originated. The loan covers funding for the entirety of the project - in other words, for the purchase and renovation of the home. At closing, the borrower receives an initial disbursement of funds from GROUNDFLOOR (what we refer to as “pre-funding” the loan) to begin the project. Typically, this initial payment is used to help the borrower purchase the property, while the remaining portion of the loan goes into an escrow account for the renovation.
The borrower then begins work on the property. Funds are disbursed on a draw schedule as the renovation work progresses. As the borrower completes various parts of the project, he submits draw requests to reimburse him for expenses incurred to do the work. The work progress is verified by third party home inspectors hired by GROUNDFLOOR. Funds are released as each phase is executed.
Once the renovation work is completed, the home is either put on the market to sell or our loan is refinanced to longer-term financing. The borrower uses funds from the sale or refinancing to repay our loan in full. If he has chosen to defer interest payments, he will also repay those at this time. GROUNDFLOOR then repays all investors who own a portion of that project’s LRO.
GROUNDFLOOR Loans: An Investor’s Perspective
The lifecycle of a GROUNDFLOOR loan, as seen from the perspective of an investor
For investors, the loan process is slightly different, starting with what happens once it’s originated. In order for GROUNDFLOOR to offer loans for funding on our platform, we first must transform the loan into an investment security (an LRO, or limited recourse obligation) by amending it into our overall securities offering, and then qualifying that amendment with the US Securities & Exchange Commission.
Once qualified, the loan then becomes available for funding on the GROUNDFLOOR investment platform. After investing, GROUNDFLOOR provides regular project updates that are accessible through the the investor dashboard. Some loans pay monthly interest along the way, while others pay all accrued interest only at the end.
Finally, once the work is completed and the home is either sold on the market or refinanced, the final distribution of any remaining interest due and the investor’s share of principal is paid out. All payments of interest and principal are paid out into GROUNDFLOOR Investor Accounts. Investors can withdraw the cash balance from their investor account or reinvest it in a new LRO at any time, with no restrictions or fees for doing so.
It’s important to understand that while both of these perspectives are part of the same loan lifecycle, they do not necessarily happen at the exact same time. A loan’s origination happens long before any investor has the opportunity to invest, and not every investor invests at the same time. This is a key point to make as investors earn interest only while their money is active in the loan.
We hope this has given you a better understanding of the GROUNDFLOOR loan process from origination to repayment. As always, feel free to comment below with any questions, or reach out to us directly at firstname.lastname@example.org.