If you’re not familiar with crowdfunding, “Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, today often performed via internet-mediated registries, but the concept can also be executed through mail-order subscriptions, benefit events, and other methods. Crowdfunding is a form of alternative finance, which has emerged outside of the traditional financial system.
According to Forbes.com, the crowdfunding market grew by $34 billion – surpassing even the VC industry.
“The crowdfunding model is based on three types of actors: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organization (the “platform”) that brings the parties together to launch the idea.”
Not enough for a down payment?
You’d love the security and all-around good feeling of owning your home but alas, you don’t have enough money for a down payment. Today’s median home price is $188,900 meaning you’d need to put about $5600 down even with an FHA loan. And that doesn’t include closing costs. Fortunately, there is a possible answer. Crowdfunding is now being used to help fund down payments. so this year instead of asking for birthday or Christmas presents you could forgo them in lieu of getting money for that condo or house you have your eye on.
If you think you’d like to use crowdfunding for your down payment here are some tips that could help you.
Use a niche site
It’s possible you could fund your down payment on one of the major, mainstream sites such as GoFundMe or KickStarter. However, there are some specialty sites for real estate crowdfunding that could be a better choice. These are sites that are designed specifically for various housing goals.
For example, there is Hatch My House. This site is designed to let you create a virtual home where guests can then buy parts of it to help you with your down payment, home decor or renovation. Feather The Nest is another site with a platform where you can discuss your plan whether it involves a down payment, furnishing your home or home improvement. Down Payment Dreams is pretty self-explanatory. It’s specifically for funding a down payment. In addition, it offers a feature that will help you find a real estate agent. Honeyfund began life as a honeymoon registry but now has all kinds of different registries such as a down payment fund, home improvements and an any-occasion registry.
Finally, there is BoostUp. It’s different from the other sites as it also includes a savings platform so that your friends and family members can match your savings dollar for dollar. This can be a great way to get the word out that you need help with your down payment and that you’re not just begging for money – you’re asking people to match what you’ve saved.
Have a bank account or create a PayPal account
If you don’t already have a PayPal account you will want to create one. The reason for this is because there are crowdfunding sites that require you to have a link from PayPal to your registry to receive your gifts. Some of the other sites require your bank account number so that the money you raise can be deposited directly into your bank account.
Tell a good story
Regardless of which crowdfunding site you choose you’ll need to do more than just post a pretty picture of a house you’d like to buy. You must explain the details of what your campaign is about and how you will use the funds. This could be a personal story regarding the neighborhood where you want to live (and why), what you’re looking for in your first home and why you’re ready to make the plunge into homeownership. A good story can go a very long way towards motivating friends and family members to give to your crowdfunding cause. Once you’ve composed your personal story, you will need to publish it on the site. You’ll also need to get a personal URL that you can share your story with friends and family members through social media.
Keep people posted
It’s very important to keep your contributors up-to-date as how you are doing in funding your down payment. One good way to do this is to post status updates weekly to show how much money you’ve raised and how near you are to reaching your goal. Some people will even contribute a second or third time when they see how near you are to raising your down payment.
Here are some other great tips for succeeding at crowdfunding as shared by Danae Ringelmann, the co-founder of the world’s most popular crowdfunding site.
One thing you don’t want to do is intentionally mislead people to believe that you will use the money to buy a house when you really plan to use it to pay off multiple debts or to fund a vacation. Of course, it’s also possible that you won’t raise enough money for your down payment. If this happens you don’t want your friends and family members to be gossiping about what you might’ve done with the money. It’s hard to hide the fact that a year or two from now you still haven’t bought a home. If you don’t meet your funding goal be prepared to explain what happened and how you’ll use the money instead. Of course, the best way you could use the money would be to refund it to your donors.
There’s no such thing as a free lunch
You might have heard this old adage many times and it’s definitely true of crowdfunding. These sites do have their benefits such as creating a fun way for people to learn about you and your dreams of homeownership. And they make it very easy for people to donate to you. However, this doesn’t come free. Crowdfunding sites such will be going to go and as Hatch My House and Down Payment Dreams generally take around 5% or 6% of each of the gifts you receive. In comparison, if your friends and family members were to simply give you cash or a check you wouldn’t have to pay a fee to a middleman. In addition, when people give you cash they generally don’t care how you use the money. And do understand that you will probably be taxed on whatever money you raise.
What’s the bottom line here? Is that a crowdfunding registry site can be a good way to fund a down payment but you will need to do the math to make sure you raise enough money for down payment and also to pay the crowdfunding site and to cover your tax liability.