What is DiversyFund?
DiversyFund is a real estate crowdfunding platform. The company offers investors a non-traded real estate investment trust (REIT). The DiversyFund Growth REIT is open to non-accredited investors at a low investment minimum. The fund focuses on investing in large value-add multifamily opportunities (100+ units) across U.S. markets, targeting ones that can generate IRRs of 10% to 20% over a five-year investment cycle. Further, the REIT boasts having the lowest direct investor fees in the industry with no management or broker fees.
However, while DiversyFund’s REIT looks good on paper, we have serious concerns about the offering. Here’s why we do not recommend this platform for real estate investors at this time.
Summary: Is DiversyFund a good investment?
The issues with DiversyFund start at the top. We have some serious concerns about the management team. For starters, co-founders Craig Cecilio and Alan Lewis are defendants in three lawsuits arising from real estate transactions. While these aren’t related to any DiversyFund transactions, they’re still a big red flag.
An SEC filing states:
In 2015, before the Sponsor or the Company was formed, Mr. Cecilio raised capital for a project involving ground-up construction located in La Jolla, California. When the project ran into financial difficulty, with the lender threatening to foreclose, Mr. Cecilio and Mr. Lewis both personally guaranteed a loan from a new lender to protect the interests of the equity investors, although they were not obligated to do so. Although the project was completed, it was financially unsuccessful and unable to repay all the guaranteed debt. The lender has brought suit against Mr. Cecilio and Mr. Lewis for the deficient loan balance of approximately $1.9 million.
Mr. Cecilio and Mr. Lewis have asserted counterclaims against the lender. Among other things, they allege that the general contractor hired at the insistence of the lender was responsible for the failure of the project by causing significant delays and budget overruns, and that the lender and the contractor should be viewed as joint-venturers.
In the same project, an individual loaned money to the borrower entity, secured by a second lien and personal guarantees by Mr. Cecilio and Mr. Lewis. When the project ran into financial difficulty it was discovered that the second lien had not been properly recorded, resulting in a significant loss to the lender. The lender sued her lawyer for legal malpractice and the lawyer has made a cross-claim against Mr. Cecilio and Mr. Lewis relating to their personal guaranty. The amount of the cross-claim is approximately $1 million.
An equity investor in the same project has filed a lawsuit alleging that the Sponsor, Mr. Cecilio, and Mr. Lewis failed to provide adequate disclosure, were professionally negligent, and breached their fiduciary duty on several projects, all funded before the Sponsor or the Company were formed. The investor is claiming damages of approximately $774,000 in the aggregate. On a separate project, the same investor is suing on a personal guaranty of approximately $55,000.
Mr. Cecilio and Mr. Lewis are vigorously defending all of these lawsuits and expect them to be settled with no impact on the Company.
The filing further states that "Depending on the size of the judgment, Mr. Cecilio and/or Mr. Lewis could be forced into bankruptcy" and that "in a worst-case scenario, a large judgment could result in a loss or dilution of their control" of DiversyFund. While disputes aren’t uncommon when a real estate deal goes south, this issue does give us pause. Further, it’s also worth noting that Mr. Cecilio was charged by regulators at the state of California Bureau of Real Estate with "failure to supervise" and had his license suspended.
Unfortunately, the caution flags don’t end there. Another issue we have with the DiversyFund Growth REIT is its marketing. While the REIT claims to be low cost since it doesn’t charge investors any up-front fees, the sponsor and manager can charge the REIT some of the highest fees we have seen, making its low-fee claim disingenuous. Sure, the fees aren't charged directly to investors, but they are paid by the REIT, which is funded by investor capital. Just because investors aren't paying the fees directly doesn't mean they don't impact returns.
It’s also a tiny REIT compared to others available on other crowdfunding platforms. For example, as of its last SEC filing, which was for the period ending on June 30, 2020, the REIT had only invested about $10.5 million across eight assets. While the REIT markets itself as an entity focused on large 100+ unit multifamily opportunities, the current portfolio holds only three such properties. The others were a smaller 59-unit mixed-use property, another smaller 54-unit multifamily property, an 8-unit student housing property, and debt investments on two single-family homes. That small size could negatively impact its returns.
Speaking of returns, we don’t have much data since the REIT has a limited track record and hadn’t filed any financial reports with the SEC in over six months at the time of this review. It’s also worth pointing out that while most crowdfunded REITs pay cash dividends at least quarterly, the Growth REIT doesn’t distribute any cash. Instead, it automatically reinvests any dividends back into new shares.
Finally, we have received repeated customer complaints about the company. We’ve also read of similar issues investors on the platform have had with the company, including trouble reaching its customer relations team. We’ve also had issues with the company’s responsiveness, as they didn’t reply to our requests for additional information on the platform.
When you combine these and other issues, we think there are better investment opportunities for investors than DiversyFund.
What are DiversyFund's pros and cons?
- No need to be an accredited investor: DiversyFund's Growth REIT is open to non-accredited investors.
- Low minimum investment: Invest with as little as $500.
- Very high developer fees: DiversyFund touts no investor fees at the fund level, but the fees it charges the REIT itself as the developer/sponsor are very high. Higher fees, even at the REIT level, mean lower returns for investors.
- No liquidity or secondary market: There is no redemption policy as with other crowdfunded REITs, and no guarantee DiversyFund will agree to repurchase your investment. The manager intends to hold properties for five years before liquidation. If you invest, don't use any cash you may need within that period of time.
- No income: While most REITs generate passive income, DiversyFund Growth REIT requires automatic reinvestment.
- Concentrated assets risk: The DiversyFund Growth REIT only owns a small collection of residential real estate properties. This means more concentrated risk.
- Limited track record in this space: The Growth REIT has only reported very limited results to date, making it difficult to measure management's ability to deliver.
Questionable management team: The co-founders are currently defendants in three lawsuits arising from real estate transactions. Further, one of the co-founders was charged by regulators at the state of California Bureau of Real Estate for "failure to supervise" and had his license suspended.