Lofty received the following correspondence from a reporter at the Akron Beacon on May 04, 2022.
Hello,
I'm a reporter with the Akron Beacon Journal and the USA Today Network. I'm researching your company's activity in Ohio and, in particular, Akron. I see that about half the $16 million in tokens sold since May have been sold to acquire Ohio properties.
I'm requesting an interview to discuss your crowdsourced cryptocurrency model as what many are saying is the future of real estate. Democratizing the marketplace has a potential upside for small-time investors, I'm told by local real estate investors.
I'm also exploring concerns regarding multiple properties in Akron. Tenants say they don't know who owns or manages their rentals. Rents are going up by 50% of more at some properties (with the additional increase subsidized for the first year). Sellers say Lofty AI is paying well above market rate, and rent increases give investors the impression that the properties are generating more income than the local market would support.
Previous owners and landlords who sold properties to the LLCs created by Lofty AI say they're still being contacted by their former tenants. One landlord, who collected rent from tenants and HUD for May despite selling the property in April, said he's tried to hand over the keys but a new property manager won't pick them up. That new property manager said he hasn't decided if his company will manage the property, which appears to be unmanaged at the moment.
Multiple tenants and former landlords say utility bills in the property owner's name are not being paid or switched over to the LLC Lofty AI used to purchase these properties. One former landlord paid the gas bill in January so his former tenants would have hot water during the winter.
I'm available at [redacted] to discuss these issues. I'm asking that you contact me by the end of business on Friday as I am hoping to have my reporting done this week.
We take the issues addressed seriously and want to provide a detailed and transparent response to both the press and members of our community.
We can state unequivocally that rents have not risen by 50% - our investors have only approved for rents to be increased by 5%, so this number is very far off. We would love to see any supporting evidence of the claimed 50% rent increases.
Regarding the claim that our investors are paying well above the market rate for properties - we utilize a third-party Automated Valuation Model (AVM) service called HouseCanary to determine the fair market value for every potential acquisition. Investors on our platform use these reports to determine whether they believe a deal is effectively priced. We’ve done a cursory review of our Ohio properties and found that our listings are nearly always within the AVM range, however, there are cases where our prices are above (as well as below) these.
We are a marketplace that connects buyers and sellers. We never own any of the properties. The market dynamic dictates which properties sell at what price. If a property is deemed to be overvalued by our community of buyers, it does not get funded and as a result, it doesn’t sell. This has already happened with 4 properties in the past. It’s a healthy free market dynamic, where buyers vote with their money. How Lofty operates and how this marketplace works is written out and disclosed to anyone who visits our website. We started including the HouseCanary reports for new listings because of feedback that our users felt like they could not evaluate the fair market value on some of the properties.
As for the incident regarding the gas bill, we have had issues with the property manager in Cleveland, who also manages one of our Akron listings. Amongst other issues, they failed to adequately onboard the sole property they manage in Akron (428 Cross St) which led to tenants contacting the prior owner when gas service was not properly transferred. This issue was resolved the same day once it was brought to our attention. Here is the email exchange with the PM responsible for the property. The email was sent to us on February 03, 2022.
However, these issues, as well as several others, led some of the owners in these properties to complain and propose that the PM should be replaced. Given the evidence we had on hand, we followed the wishes of these owners and initiated a vote to change the PM. We sent the governance notice and vote to investors on April 18.
We are currently in the process of migrating properties to the new PM, which our investors overwhelmingly voted for (99.8% voted in favor of switching).
Issues like property managers not doing the best work are not uncommon in the industry and are expected. However, through our governance program, buyers always learn of issues as soon as Lofty becomes aware of them and can quickly and easily vote in a fair democratic process to enact change, including but not limited to changing the property managers.
There are also some issues with the statement regarding the Cross St property’s sale. The statement stated that the property was sold to “Lofty AI” for $220k. That is not accurate. Again, we’re not a fund or a REIT. We do not buy properties ourselves to resell to our users. Some other tokenized real estate platforms do that, but we do not. A more accurate statement would be the property sold “on Lofty AI” for $220k. This would be more factual as the property is directly sold to the buyers for that price. This is all verifiable by the title and other documents we’ve released publicly, which is the case for every property that transacts on our marketplace. There was no Cross St House Canary report initially because the policy to include reports during the initial sale was implemented after Cross St had sold and closed already. Reports will be uploaded for all these older properties after their Fair Market Value starts adjusting.
As for why there is also a record of the property selling for $160k previously, here is an explanation from the seller’s team:
Off-market real estate deals often occur with owners who want to move large packages of properties in one deal. We don't have all the details on the entire package involved with 428 Cross, but oftentimes a price is agreed upon for the whole package and then the owner assigns whatever value they would like to each individual property. Typically in a package deal, some properties are sold quickly after the purchase, and some properties are sold much later, especially depending on the level of renovation needed. The profits realized on package deals cannot be viewed through the lens of one property. There are a ton of marketing, evaluation, underwriting, repair, financing, and closing costs involved in the selling process. These costs all come out of the gross profit that is seen by the public on the MLS.
In essence, the seller obtained a bulk discount on a package of properties, which they then split up and listed the turnkey (properties in good condition with existing tenants) one on Lofty. As a marketplace, the seller has the right to dictate the offering price on the properties they list. Buyers have the right to either accept that price by buying into the property or rejecting the price and buying into a different property instead. In this case, the market has decided that they were willing to pay $220k for the property based on the condition, location, type of property, and the potential returns through appreciation and rental income.