My last update on the PeerStreet bankruptcy was about a year and a half ago. PeerStreet marketed high-interest investment loans backed by real estate in $1,000 fractional increments. A few days ago, I received a big, thick envelope with lots of legalese. It appears that actual humans are manually going through each claim and verifying them against their database.

For my part, I have two $1,000 notes that are still outstanding and have been in default for a while, well before PeerStreet declared Chapter 11 bankruptcy in 2023. The bankruptcy administrators mostly agreed, but needed to point out that my notes are not “secured” claims, but instead are “Mortgage Dependent Promissory Notes” (MPDNs). Here are notes specifically responding to my claims:

The Claimant asserted a secured claim for $1,000.00, but attached a copy of a MPDN supporting a MPDN Claim in that amount.

The Debtors’ books and records reflect that the Claimant is entitled to Investment Claims in the amount of $1,000.00, as reflected in the Modified Filed Claim column.

Reclassification Adjustment: The Debtors’ books and records and the MPDN support Investment Claims and reflect that the Claimant is entitled to MPDN Claims, not secured claims. The Claimant asserts that the secured claim is secured by real estate, but provides no support for the assertion. Accordingly, the Plan Administrator requests reclassification of the asserted claim to a MPDN Claim (Class 10, 11) (to the particular MPDN reflected in the Debtors’ books and records) in the amounts reflected in the Debtors’ books and records, as detailed in the Modified Amounts column.

With this adjustment, the Plan Administrator seeks allowance of the Investment Claims in the amount of $1,000.00 against Peer Street Funding LLC, as reflected in the Modified Filed Claim column, which matches the amount of the Investment Claims in the Debtors’ books and records.

The Claimant filed two claims for two distinct MPDNs. The other claim, Claim No. [redacted], is also addressed below.

Now, this is what PeerStreet used to say about their “Mortgage Dependent Promissory Notes” (MPDNs) on their FAQ:

A mortgage-dependent promissory note, or “MDPN,” is a note in which an investor receives stated interest and principal, provided the borrower makes payment on the underlying loans. PeerStreet issues an MDPN to investors, meaning they have a direct interest in the underlying loan and indirect interest in the underlying property.

The following is a partial excerpt of what the bankruptcy documents state about MDPNs:

For avoidance of doubt, although MPDN, RWN 1-Mo., RWN 3-Mo. and PDN Claims are all unsecured, holders of those claims are entitled to their pro rata share of the relevant Underlying Loans. All amounts paid with respect to those Underlying Loans are made available pursuant to the Waterfall in section 2.6 of the Plan even if those payments result in holders receiving recoveries in excess of the principal amount of their notes and accrued interest as of the Petition Date. See McLaren Declaration I 10. Notwithstanding this entitlement, however, the Plan provides that distributions on account of MPDN, RWN 1-Mo., RWN 3-Mo. and PDN Claims are made on a pro rata basis for the claimants’ proportional share of the asset or pool of assets tied to such Investment Claims. See Plan § 4.3. In order to properly calculate each holder’s fractional, pro rata share of a particular class of Investment Claim, each Investment Claims’ pro rata interest in the underlying asset or pool of assets tied to such Investment Claims must be measured as of the same date. As a result, postpetition interest needs to be removed from all Investment Claims.

Back in 2018, this all sounded fine. Andreessen Horowitz and other VC firms invested in over $121.9 million. Famous investor Michael Burry put in $600,000 of his own money. Actual, smart lawyers were saying that this was the only practical way to create these fractional investments for real estate loans. We all were comforted by the creation of “bankruptcy remote entities”.

Even if it was really an unsecured note backed that was contractually linked to another loan to a specific property, we’d still only get that money if it was collected by what was basically a small, risky start-up fintech business that may have nobody around to well, collect anything.

My current opinion is that even if the contracts technically still might be the best workaround available, I feel the practical execution and mismatch in the alignment of interests made everything fall apart. PeerStreet was no good at servicing the loans and getting the deadbeats to pay up. They also didn’t have enough skin in the game to care. They didn’t actually hold any loans themselves, they just took a small commission off the top. They were also incentivized to loosen their underwriting standards to feed the voracious demand for new loans given their early success.

I strongly feel that if every PeerStreet executive had to hold a certain slice of every single PeerStreet loan themselves, then things would have turned out differently. Their own net worth would be at risk. They would underwrite better. They would work harder at debt recovery. Just like a certain sub-prime mortgage crisis…

In the end, I put some experimental money into multiple real-estate loans, and thought that PeerStreet was best-in-class. I am fortunate that my overall return is positive, even assuming a complete write-off of my remaining two notes, but I know that many fellow customers were not that lucky. Given these new bankruptcy documents, it seems that there are still people working on the situation and there is a possibility that I will recover some money on my last two loans.

Even today, I still get e-mail pitches for new fractional real estate start-ups. I pass on them all. In the end, the most important promises of fractional real estate are broken:

Your investments are NOT secured by real estate. In every case that I’ve seen, you invest in “notes” that are “linked” to a real mortgage on a real piece of property. The problem is that your name is not on the property, not on the mortgage, and you don’t have any control over the servicing of that mortgage. The legal gymnastics that they did to be able to use the words “direct interest” do not change the fact that you are really just lending money to a tiny, risky start-up to handle everything.

Even if these notes were secured by real estate, I have seen no evidence that PeerStreet had any skill as a servicer able to recover funds from a foreclosure. Let’s take my two Brooklyn loans from 2018 and 2021. I don’t see any possible scenario where if you sold off those properties today in 2025, even in a fire sale, even if the initial appraisal was off, that you would not be able to recover the full value of the notes. It’s not like we had a crash – real estate values have risen so far up since then!

Even if PeerStreet was still fully in business, I wonder if it would have made a difference to my situation. It has been nearly 7 years since my earliest loan was due! Now that they are bankrupt and those same smiling executives have trotted off to their next shiny business, the alignment of interests is even worse. Maybe I’ll eventually get some of this money back, but after waiting for years, my faith in the ability of these real estate fintech companies is shot.

These facts change the risk/return balance on these debt instruments. The upside is maxed out at the interest rate you charge, maybe 7% to 10%. The downside was supposed to be very, very limited because you had a physical piece of real estate to back it up. If that doesn’t hold, then there is no point.

Update October 2023: Peerstreet e-mailed creditors on 10/18/23 that you can get 95% of your “investable cash” back by logging into your account and manually requesting a withdrawal. It will not be done automatically, so be sure to make that request! I successfully received my funds on 10/24/23, about $100 in interest that I didn’t sweep out before their sudden bankruptcy.

On October 17, 2023, the bankruptcy court approved PeerStreet’s motion to allow retail investors to withdraw 95% of their Investable Cash balance held in PeerStreet’s retail customer “FBO” (for the benefit of) account (the “Retail Customer FBO Account”).

[…] The order provides for a three-day grace period for PeerStreet to re-enable the platform to permit the withdrawal of these funds. Starting on Friday, October 20, 2023, PeerStreet investors can log on to their PeerStreet account at peerstreet.com and withdraw 95% of the amount attributable to that investor (“Withdrawable Cash”). The withdrawals will be processed via ACH and investors should receive their funds into their bank accounts within 3-5 business days after their request.

This Business Insider article (paywall) covered the bankruptcy and also included some interesting information. It pointed out how having Michael Burry as an early investor helped their profile, and Andreessen Horowitz was also an investor with their funding totaling over $120 million! Michael Burry is also a creditor to the tune of $600,000:

Burry declined to comment for our story, but bankruptcy filings show that he, too, has a lot to lose. In addition to his investment in the company, he was a user of the site with over $600,000 in investments and about $9,000 in cash in his PeerStreet account.

The article also speculates that Peerstreet was partially a victim of its own success:

According to Ippolito, it’s a common story: A crowdfunding company grows in popularity to the point where deals are fully funded in 30 minutes or less, prompting it to increase the number of deals on the platform. Skyrocketing demand for deals comes with “a temptation to reduce the underwriting,” he said.

Unfortunately, other than this, I haven’t learned any new actionable information from browsing Reddit and other internet forums, other than the process is still moving forward. There is a contingent pushing for the outstanding loans to be transferred to a third-party servicer and have them “run out”.

Original post:

PeerStreet, a startup that tried to scale up real-estate backed “hard money loans” and was open to “accredited investors”, abruptly filed for Chapter 11 bankruptcy in late June 2023. If you log into your investor account, you’ll see the following notice:

Peer Street, Inc. and its affiliated companies (“PeerStreet”) filed for protection under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware on Monday, June 26, 2023.

Are we creditors? I would point out that there are multiple “investors/customers” in this situation. There are the investors and owners of the company itself, which include big VC names like Andreessen Horowitz, World Innovation Lab, Colchis Capital, and Michael Burry. Then there are vendors and suppliers where PeerStreet owes them money, their employees who are owed paychecks, and finally us customers of PeerStreet that purchased interests in their securitized loans.

This HousingWire article provides some additional context. An interesting paragraph:

According to the court filings, PeerStreet has an estimated 100-199 creditors, and its assets and liabilities are between $50 million and $100 million. However, as of Monday, the group had $4.4 million in cash – in addition to $18.5 million in its mortgage business.

These low numbers may suggest that PeerStreet note-holders are not considered “creditors”, and the notes that we hold are not considered their assets? I’m pretty sure they have way more than 200 accountholders and have originated over a billion dollars of notes since inception. Ideally, the notes that we hold are separate securities, and PeerStreet is just the custodian.

Next steps? First, I would like to stress that I am not a lawyer, and all of the following is just a best guess on my part as a small-time Peerstreet customer who still has fractional ownership of outstanding loans and some uninvested funds. While I have put a decent amount of my “self-directed play money” into PeerStreet in the past, I am relatively fortunate in that currently I only have two outstanding loans with a $1,000 balance each, along with about $100 in interest payments that I did not withdraw in time. The money still in limbo is less than the $5,000+ in interest that I have already earned on the platform. I feel sympathetic to those with six-figure amounts still stuck at PeerStreet.

Critically, I don’t think this money will disappear, but it will take a long time to figure out. That’s really the main lesson of PeerStreet in general, honestly. The headache of illiquidity. Foreclosure proceedings can take forever. I doubt bankruptcy proceeding are much faster.

The borrowers on my loan are certainly benefiting from this fact. The notes are for a tri-plex and a four-plex in Brooklyn NY, and my suspicion is that they are happily collecting rent from their tenants while not paying a single penny toward the mortgage note. These notes matured in 2018 and 2021! The thing is, the property value has gone up, and will eventually still cover the loan balance. But in the meantime, awesome cashflow numbers for them! Not very ethical, but that’s another lesson as well. They have no incentive to hurry things up at all. Who knows when these loans would have been paid back even if PeerStreet stayed in business! As such, it took me a few weeks to get up the energy to read through all these boring bankruptcy documents.

Stretto is the “bankruptcy management solution provider” that is coordinating the process. Here is are pertinent quotes from the Stretto FAQ:

Does this mean Peer Street is going out of business?
While a Chapter 11 case is pending, the debtor may continue to operate its business and remain in possession of its property. Until a sale of its assets, Peer Street will preserve the value of all of its assets for the benefit of its stakeholders, including identifying additional assets that can be monetized. Peer Street’s continued operation after a sale of the business depends on the structure of the sale. While in chapter 11, Peer Street will continue to monitor and service its assets, and customers will continue to have the same access to the Peer Street platform to monitor their investments that they had prior to the Chapter 11 filing. However, withdrawals or returns on investments will be suspended absent further order from the Bankruptcy Court, which would include an order confirming a chapter 11 plan that provides the treatment for all claims against the Peer Street entities.

Have you secured financing during the Chapter 11 cases? How can you be sure you have the financial resources to complete the process successfully?
Peer Street has sufficient cash on hand and from anticipated collection to fund its day-to-day operations during the Chapter 11 process. To support ongoing operations, we have negotiated with our pre-petition secured lenders for the consensual use of cashflows from our business. This will help to ensure we are able to meet our go-forward commitments to employees and vendors.

[Customers] When will I get my investments/money back?
Any investments made through the Peer Street platform, including cash on deposit, funds invested with respect to the ownership of fractional interest in loans, and funds invested in Peer Street’s other investment opportunities, such as Pocket, Portfolio and/or Opportunity Fund, will only be returned pursuant to an appropriate order of the Bankruptcy Court, which may include an order confirming a chapter 11 plan. Peer Street hopes to pursue confirmation of a chapter 11 plan expeditiously.

You will periodically receive notices from the Bankruptcy Court, including emails sent by Stretto, the Court approved noticing agent in the Chapter 11 Cases. It is important that you review and take appropriate action in response to any notice you receive related to the Bankruptcy Cases.

Peer Street and its advisors cannot give you personal legal advice so you may want to consult your own
counsel.

Do I need to file a proof of claim in the bankruptcy to withdraw my investments?
Yes. If you believe you have a claim against Peer Street, please follow the instructions for filing a proof of claim.

Now, you may recall that PeerStreet told us that they would put the loans in a “bankruptcy-remote vehicle”. So we’re good, right?

What investor protections does PeerStreet have in place?
Investments in loans are held in a bankruptcy-remote entity that is separate from our primary corporate entity. In the unlikely event PeerStreet no longer remains in business, a third-party “special member” will step in to manage pending loan investments and ensure that investors continue to receive interest and principal payments. Additionally, from the time funds are received in an investor account until an investment closes (but not while funds are invested), investor funds are held in an Investors Trust Account with Wells Fargo and FDIC insurance of up to $250,000.

Well, the problem is the part where is says “In the unlikely event PeerStreet no longer remains in business”. Technically, PeerStreet is still in business. Therefore, Peerstreet and the lawyers still have control over the loans and any cash payments. These loans are still backed by real-estate, and real-estate prices have still risen significantly in general over the past few years, so I am still hopeful that most of the money will still be returned.

In the meantime, do we file a claim? My take is that it should not hurt to file a claim, and at least do so before any deadline occurs. Here is the link to file a claim. I don’t see any deadline at this time.

I decided to file a claim electronically to the best of my ability now (mostly so I don’t forget about this entire thing). Again, not a lawyer and I’m not going to hire one for this small amount. I downloaded and saved all of the promissory notes and background information for each of my outstanding loans from the PeerStreet website, and attached them to the claim form as supporting documentation. The debtor for my notes was Peer Street Funding, LLC, EIN 47-1789485 (may not be the same as yours).

There is a newly-formed subreddit called r/Peerstreet_Creditors and Bogleheads thread that may offer more useful information (but know that it may be speculative as well). Please let me know if you know of any other active discussion forums on the topic.

A surprising takeaway from peer-to-peer lending through Prosper and LendingClub was that the borrowers who most strongly promised to pay you back (e.g. “I promise I will pay you back, so help me God, thank you so much”) turned out to also be the most likely to default. If you extend that to crowdsourced real estate investing, this is probably the analogous statement:

“We exclusively work with leading sponsors on commercial real estate offerings that meet our strict marketplace requirements.”

Reading this WSJ article Missing Millions and a Rabbinical Arbitrator: Real-Estate Deal Gone Bad Hits Popular Crowd Funder (gift article, should bypass paywall) about CrowdStreet, you get more of a peek behind the curtain. The strange title? Apparently one of their sour deals has resulted in $63 million of “missing” investor funds while also stipulating that any disputes be settled by a rabbinical court rather than the US legal system. Now that’s a new thing to look for in the fine print.

There is much more information in the full article, but here are a few quotes on Crowdstreet returns:

The Journal analyzed data on expected and realized returns of 104 completed deals from the sale of property or investor redemptions, which the company posted from 2013 to August 2022.

The Journal analysis found that more than half of those investments promoted on CrowdStreet’s platform failed to meet their target returns. Hundreds of CrowdStreet users lost some $34 million on 19 deals that underperformed as of this July, according to the Journal’s analysis. A dozen of those deals lost nearly 100% of investor funds.

CrowdStreet also hosted successful deals. More than 20 deals outperformed projected return rates by at least 10 percentage points. Hundreds of others are still outstanding. It often takes at least three years before investors can realize a return on their investments.

Some of the deals did well, some did awful. You can see their completed deals here. Many of their complete losses were hotel-related (“The 100% loss shown simply represents absolute total loss of capital incurred by investors”, ouch). Houston Red Lion Hotel. Cloverleaf Suites Overland Park. Intellistay Courtyard Tulsa. Four Points Sheraton Little Rock, Arkansas. That sounds like some poor deal structuring if your downside is so extreme.

The stated aim of all these real estate start-ups is to make commercial real estate investing more accessible to individual investors. Unfortunately, in my opinion it has been shown that individual investors simply aren’t given enough information to judge whether the deals are good or not. I would look up property addresses, learn about neighborhoods, try to look up the history of the borrowing groups, read through the comparables, appraisals, and contracts, but in the end, you are trusting the platform to perform most of the due diligence. There are no audited financial reports for me to read. There are no ratings agencies. How can one tell the difference between skill and luck? I have managed positive overall returns with my specific investments with PeerStreet, RealtyShares, Fundrise, Patch of Land, and others, but I had the most faith in PeerStreet’s model and they are likely to end up my worst performer.

The problem is the platform is strongly incentivized to do what is necessarily to maintain a high rate of deal flow and transactions, so they can make fees. When you are “exclusive” and “strict”, you don’t get deal flow now that the boom times have ended. Once the deal flow stops, they are dead in the water. This adds pressure to allow marginal borrowers and questionable deal terms.

I’ve only put relatively small amounts of “play account” funds into these sites, but as I don’t feel I can properly judge the individual deals nor properly judge the deal brokers, it’s probably time for me to avoid this asset class altogether.

Final update July 2023, with full cashout. It has now been nearly 6 years for my experiment comparing a Fundrise Real Estate portfolio and the Vanguard Real Estate ETF. In Fundrise, we have a start-up with “crowdfunding” beginnings that offers users a share of a concentrated basket of properties actively chosen from the private market. In Vanguard, we have a one of the largest real estate ETFs in the world – users own a tiny passive slice of ~165 public-traded REITs. I invested $1,000 into both in October 2017 and cashed out in July 2023, for a holding period of 5 years and 9 months.

Fundrise Starter Portfolio background. When I bought in, the Fundrise Starter Portfolio was a simple 50/50 mix of two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT*. Since these are finite baskets of entire properties, over time they will close one fund and start another similar basket. What new investors are buying today will be different apartment complexes and office buildings than what I bought in 2017. Here were my holding as of the end of June 2023:

Each private eREIT works within recent crowdfunding legislation that allows all investors to own a basket of individual real estate properties (not just accredited investors with high net worth). The minimum deposit is now just $10. You must buy shares directly from Fundrise, and there are only limited quarterly liquidity windows as this is meant to be a long-term investment. There are also additional options available with higher investments:

Vanguard REIT ETF background. The Vanguard REIT ETF (VNQ) is the ETF share class of a $60+ billion index fund that invests in publicly-traded real estate investment trusts (REITs). You can purchase it via any brokerage account. You have the liquidity of being to sell on any day the stock market is open. A single share currently costs about $100, but many brokers offer fractional dollar-based trades if you want. All shareholders are holding the same ratio of (tens of?) thousands of office buildings, hotels, storage centers, nursing homes, shopping centers, apartment complexes, timber REITs, mortgage REITs, and so on. Here is a recent breakdown:

Expenses. The Fundrise Starter Portfolio has an 0.85% annual asset management fee and a 0.15% annual investment advisory fee (1% “all-in” total). The Vanguard REIT ETF has an expense ratio of 0.12% on top, but each public REIT also has their own internal costs like employee salaries to manage their properties. In each case, investors are paying for real estate management, office space and salaries for those employees, etc. REITs may also use debt to increase their real estate exposure (leverage). Is the technology offered by Fundrise a more efficient way to invest in real estate?

Final performance numbers. Based on an initial $1,000 investment in October 2017 and immediately reinvestment of all dividends, here are the monthly balances of my Fundrise portfolio vs. the Vanguard REIT ETF.

Again, there are quarterly redemption windows, and I initiated my request for a full withdrawal May 26, 2023 in preparation for the end of the second quarter on June 30th. On July 4th, I was notified that my request was approved, and I received the funds into my bank account on July 7th.

While the balances have much closer at times, the final balance was $1,931 (12.2% annualized return) for Fundrise, compared to only $1,272 (4.3% annualized return) for the Vanguard REIT ETF. The final endpoint is probably the widest margin during the entire experiment.

Commentary. One issue with this comparison is that this chart uses two different types of NAVs (net asset values). Vanguard updates the NAV daily based on the combined agreement of millions of investors. Every trading day, there is a price where you can liquidate your VNQ shares. Meanwhile, Fundrise NAVs are only estimates as there is no daily market value available since they hold entire apartment complexes, office buildings, and so on (similar to your house, but with even fewer comps). Your liquidity from Fundrise is limited to quarterly windows that are not guaranteed. That is why I wanted to finish this experiment will a full cash-out, so we can at least somewhat test if the NAVs are realistic. I was honestly a bit skeptical that the Fundrise NAVs could keep going up while the VNQ NAVs were struggling, but they did cash me out at the NAVs they posted. I have to give them credit for that. In the end, perhaps Fundrise is closer to owning a basket of pieces of real apartment complexes and buildings, in that the rising interest rates really didn’t hurt residential housing prices so far either.

The potential drawbacks still remain. In a more stressful bear market, the liquidity is not guaranteed and neither is the NAV if you were forced to liquidate the entire thing as opposed to trading existing shares to new investors. I made my withdrawal request before the sudden PeerStreet bankruptcy filing, but Fundrise is also a young company without a long history of profitability. (Fundrise does benefit from earning ongoing management fees on the assets under management, while PeerStreet earned a cut of the loan proceeds. Without a steady stream of new loans, PeerStreet quickly stopped making as much money.)

Bottom line. I have finally concluded a nearly 6-year experiment (5 years was the initial goal) where I compared investing $1,000 each into real estate via Fundrise direct active investment and the passive REIT index ETF from Vanguard. Based on actual cash-out numbers, Fundrise final balance was $1,931 (12.2% annualized return), while the Vanguard REIT ETF final balance was $1,272 (4.3% annualized return).

You can learn more about all Fundrise Real Estate options here. Anyone can invest with Fundrise; you don’t need to be an accredited investor.

There are many ways to access real estate as an asset class – publicly-traded REITs like Realty Income, diversified REIT ETFs, private funds that hold baskets of individual properties, and many new fintech varieties. This Institutional Investor article discusses a new research article comparing public REITs and closed-end private equity real estate (PERE) funds:

In a new study published in the Journal of Portfolio Management’s real estate issue, authors Thomas Arnold, David Ling, and Andy Naranjo found that, when compared side-by-side, real estate investment trusts outperformed U.S. closed-end private equity real estate, or PERE, funds by 165 basis points annually.

Here is another Nareit article about the study, where I noticed that the research was actually sponsored by Nareit. Here is a direct link to the study itself.

This other Institutional Investor article points out one of the “benefits” of private real estate funds – namely the fact that they don’t offer accurate daily pricing. You should also consider this a “benefit” of personal homeownership – when things are scary, houses simply don’t sell (instead of giving you a shockingly low price at that moment).

REITs, like any public security, are priced in real time. At the depth of the economic shutdown in March and early April, REIT investors imagined doomsday scenarios as commercial property and hotels sat empty and analysts forecasted that individuals would be unable to make rent payments for the foreseeable future. The price of REITs fell in line with that outlook.

In contrast, private real estate funds use other valuation methods, including appraisals — which depend on property transactions. Back in March and April, no real estate was changing hands to inform these valuations. As a result, the net asset values of private portfolios didn’t reflect the carnage.

Real estate continues to intrigue me, but I’ve always stopped short of directly investing in a rental property because I want to avoid any management responsibility (or even the responsibility hiring a good property manager). To me, rentals are best considered a potentially-lucrative part-time self-employed business opportunity, with the greater upside and downside involved. I also love that I can completely ignore my portfolio for months at a time, and the dividends and interest payments still keep coming in.

I’ve experimented with other options like PeerStreet, Fundrise and others, but the vast majority of my real estate investments are still in the low-cost index ETF VNQ (Vanguard Real Estate ETF). As long as you are good at ignoring the price drops during the scary times, it has been a solid long-term holding. Per Morningstar, here is the growth of $10,000 invested in VNQ since inception 25 years ago (with dividends reinvested!):