When Online Lending Meets Real Estate: Examining Investment Decisions in Lending-Based Real Estate Crowdfunding

Abstract

In lending-based real estate crowdfunding, borrowers are required to pledge their housing properties as collateral to secure the loans. This nascent practice differs from ordinary peer-to-peer (P2P) lending in that lenders, to make sound decisions, need to evaluate additional information other than basic loan attributes. We examine how lender behavior of investing in P2P loans is shaped by information that is particularly relevant in such an emerging market. We collect and analyze the data from a large lending-based real estate crowdfunding platform, where each loan is secured by either a mortgage (mortgage-secured or MS loans) or a borrower’s own house (house-secured or HS loans). Our analysis reveals that lender decisions of how fast to invest and how much to invest are influenced by both on-platform and off-platform information. For on-platform information, we find that lenders as a whole prefer HS loans to MS loans, as reflected in quicker and larger lending transactions. Experienced lenders tend to invest more aggressively, in both time and amount, but exhibit a weaker preference for HS loans as compared with their inexperienced counterparts. As to off-platform information, our results show that a rise in housing prices is associated with quicker investment decisions, and this association is found to be even stronger on HS loans. Further, when stock market volatility is large, lenders tend to slow down their investment behavior; however, we find such a tendency weaker on MS loans. This research contributes to the literature by establishing relationships between crowdfunding activities, housing prices and stock market performance. Our findings also provide implications for managers and platform designers who desire to stimulate and leverage the fundraising momentum.

Keywords: crowdfunding, P2P lending, real estate, collateral, housing prices, stock market