He'd replace the bank in real estate transactions using online crowdfunding campaigns, helping developers raise funds faster and democratizing access to real estate investing. Like a Lending Club, but for real estate.
Today, the company he started to test that hypothesis reveals its first validation. Dally's Raleigh startup called GROUNDFLOOR has closed what he believes to be the first two 100 percent crowd-lended real estate transactions in the nation. Investing an average of $1,000 each, 62 people have funded a developer's home renovation project in south Atlanta and another's new townhome development in the city's northern suburbs.
In six months, investors will get their money back, along with 8 percent interest on the home loan and 11 percent on the town homes.
"We've proven that everyday people who are not wealthy, not your typical investors in these types of assets, that they have an appetite for this," says Dally, pictured left.
The much bigger picture, says Groundfloor investor and advisor Jason Widen, is power being taken from the banker and placed in the hands of the individual.
"Brian is cutting out the middleman and putting the developer with the investor on a mass scale," says Widen, HQ Raleigh's executive director and a longtime real estate investor. "There is a lot of blue sky in what he's doing."
And that kind of promise has been enough to oversubscribe a new funding round, twice. Groundfloor closed a $300,000 round last week with new funds from angel investor Bruce Boehm and additional investment from American Underground and Bandwidth Labs. The round was originally set for $150,000.
The funds will help Groundfloor expand nationwide over the next year with a proprietary technology platform that's not contingent on the federal JOBS Act (the SEC has yet to approve crowdfunding rules) or state crowdfunding legislation. Dally calls it "the secret weapon."
How the deals went down
Dally's original plan was to crowd-lend a project in North Carolina, but crowdfunding legislation has yet to pass the state Senate and Groundfloor is still contingent on that today. Instead, his team began networking with real estate developers in Georgia, where a state crowdfunding law passed a year ago.
They used online marketing campaigns, mostly through Facebook, to line up funders in Georgia.
The first developer signed on in December 2013 and subscribed the round in five days. The second held a campaign earlier this year and subscribed in two days. Dally admits to being surprised by the quick response.
The law requires a Georgia-based business raise funds only from Georgia-based individuals. They don't have to be accredited investors, but there is some underwriting and a secured rate of return. That means they have collateral against the loan just like a bank. The minimum investment size for a Groundfloor loan is $100 and maximum $5,000.
The team's goal is not to make the rich richer, but to empower average people to make money through real estate investing, Dally says.
Groundfloor isn't the first to dream up real estate crowdfunding. A dozen or so startups are innovating in the space. A startup called Fundrise in Washington D.C. has a platform that recently helped fund a development alongside a bank. Different from Groundfloor, the funders are investors in that project, versus lenders, and their interest is behind the bank's.
Dally's selling point for his platform is that lenders are paid back quickly, and earn 10 to 20 times what they would in a typical bank certificate of deposit account. Even if a bank is in a deal, the crowd-lenders have the same rights to collateral as the bank.
For developers, the platform allows those who qualify (they must be a business, not a homeowner) to list projects on the site and launch their own campaigns. The developers are required to have equity in the project—Groundfloor's offering makes the most sense for raising the last five or 10 percent of a project's cost, Dally says.
Powerful, he says, is that the types of projects listed on the site—mostly single- or multi-family homes—happen in cities around the nation thousands of times each year. They're much more common than skyscraper or office building construction, the targets of other real estate crowdfunding sites.
More than 30 projects are now listed on Groundfloor. But for now, they're only in states where crowdfunding is permitted. Dally promises news in a couple months about his team's intellectual property for getting around that.
Investors are on board, and impressed.
Helping Dally take this industry-changing bet are a handful of investors who've found it easy to believe in Dally's vision. He's surrounded himself with the right team—co-founder Nick Bhargava (pictured in back) worked at the SEC and FINRA and, as an early crowdfunding pioneer, helped to write the JOBS Act aimed to legalize crowdfunding nationally. Ben Armstrong (far right) and Chris Schmitt (second from left) were his former colleagues at Republic Wireless and have backgrounds in the finance industry.
Bandwidth co-founder and CEO David Morken credits Dally with creating the profitable and disruptive Republic Wireless business model—unlimited data and voice service for $19/month using primarily an Internet connection.
"Brian knows how to adapt and deliver remarkable new value," Morken wrote to me in an email. And about the team, "We know they are winners."
Widen was immediately taken with Dally's plans. Though he'd invested in university rental properties in Indiana through most of the 2000s and met all of his commitments to various banks, the financial collapse of 2008 made banks stop lending, hurting his business.
"I was really beholden to large financial institutions that basically made bad decisions, and I was directly affected by that," Widen says. "His idea struck a chord with me."
In the year since Widen began advising Dally, he's been impressed by Dally's ability to listen to feedback and follow the lean startup model.
"He didn't race into anything," Widen says. "He's built in some great metrics to create a continuous feedback loop from developers and potential investors. He's very in tune to what the customer wants."
He's also done a lot with a little. Groundfloor spent $165,000 in a year to hire staffers and a legal team, build the platform, market it in Georgia and close the first two deals.
"He didn't go out and raise $3 million and put the cart before the horse," Widen says.
Dally attributes lessons learned at Republic Wireless for both his methodical and proactive tactics at Groundfloor. The experience also fueled his desire to tackle something big and important—everyone relates to real estate just like they do mobile phones.
"I like to do the kind of entrepreneurship I got to do at Republic, which is industry shaping," he says."We both (He and Bhargava) felt if we're going to make all these sacrifices—we'd gone without salary for a year—it should be worth it. To make a difference in the world."