Syndication deals from Brad Sumrok group - Do they really know what they are doing?

Question

An investor I know invested in a syndication deal with GPs from Brad Sumrok group. In fact, one of the GPs is a Brad Sumrok coach, and Brad Sumrok was listed as an advisor and mentor for the project in the OM. The apartment complex was bought in 2022, with a variable loan. I asked why they used a variable loan, since the rate would go up 100% for certain. The answer was that it was the only way to get financed, due to the fixed rate loan required a larger down payment. In the stress test part of the document, it was stated that at 40% vacancy, it would still break even!? That investor asked me since the project is showing trouble. Anyone have experience to share in the deals from Brad Sumrok?

Dan Rowley · Answer

@Lin Qian I think with these coaching programs you will find some of the participants may be weak and some may be strong. There is no blanket statement.. And sure, the coach has probably vetted/reviewed the deal and 'endorsed' it but they are incentivized to have their students do as many deals as possible because they can benefit on the upside (as co-GPs). I am always wary of these types of deals and stay away from them I'd rather invest with established GPs with more experience and know-how.

Evan Polaski · Answer

@Lin Qian, personally, I am a bit skeptical of any guru whose main focus is educating versus actually doing what they are teaching. But that is another can of worms. I will say, you don't see many hugely successful real estate operators selling courses, since their energies are better served on the real estate. But specific to your comments: the first rule of syndication investing is feeling confident in the operator/sponsor. I agree that in early 2022, prices were so high that fannie/freddie loans required such large down payments that the return projections to use those products was likely not sellable to investors. And if you use bridge debt, you can likely get to a projected return that would bring people in, but then you are taking on significant interest rate risk. I have not done any deals with Brad Sumrok, or his clients. I have seen a fair number of deals that come through students of many of the common education groups, and have yet to pull the trigger on any of them. The models most students use are rudimentary at best, but the assumptions and perception of risk is simply not there for me to feel comfortable putting my money with them.

Chris Seveney · Answer

@Lin QianI recommend joining a group like left fieldInvestors where there are lots of discussions on sponsors.

Justin Moy · Answer

I agree, but I think saying we used this loan because of their terms instead of the only way to get it done is a better way to phrase that haha.

Paul B. · Answer

The 40% vacancy stress test sounds good, but they might not have taken into account a significant increase in mortgage payments in those calculations (due to higher interest rates and expiration of the rate cap). They might have just reduced income by 40% but kept everything else the same, when in reality a major expense (debt service) skyrocketed.

Chris Seveney · Answer

@Lin QianGet an attorney involved and see the rights of the operating agreement to vote out the manager. Typically each operating agreement allows for you to “fire” the manager - usually needs a majority or super majority vote.

Lin Qian · Answer

@Chris Seveney The lender did require the sponsors to purchase a rate cap but it was only for a year, and the project was for five years. The GPs are beyond inexperience, they lack common sense, in my opinion. Someone here said Brad would look at every deal. I was kind of interested in the Brad Sumok program but if his coaches doesn't even know what they are doing, I do question the quality of the program. I wonder if there is a list anywhere that shows the deals any sponsor involved and how they performed, to help protect investors.

Paul B. · Answer

They could have underwritten with a Fannie or Freddie loan, but then they wouldn't have been competitive in their offer (due to the lower leverage being offered). Since I am strictly an investor, that isn't my problem. I'll wait until I see a deal I like. But the folks who have made syndication a full time job, they need to keep doing deals to stay in business. Not with my money though.

Paul B. · Answer

I am a student of the program and have invested in a number of deals with Brad's students. Most have performed well, but just because Brad's coaches have reviewed the deal, it doesn't mean it's necessarily good. You still need to do your own due diligence. I was not comfortable with the way everyone started using bridge loans and floating rate debt in the last 2-3 years, so I avoided those type of deals. I haven't lost money yet, or even had any deals put out a capital call, but it is still a risk. As others have suggested, it may be possible to replace the GP if enough investors vote on it. Just keep in mind that if the deal is really screwed, I doubt anyone competent will want to touch it. So don't vote out a GP unless you have a suitable replacement lined up. What you can do is demand the financials as another commenter has suggested and at least try to understand what is going wrong. Hopefully the GP has still maintained communication to the investors on a monthly basis. Quarterly might be acceptable if the deal is performing well, but I still think monthly is better.

Justin Moy · Answer

If you're already in the deal then I'd look at the operating agreement to see what it takes to 'fire' the GP team. Typically it requires gross negligence so it would be rare and you'd have to prove they outright neglected or purposefully did something unethical. It is pretty rare to be able to prove something like this but if the deal is going that poorly it's worth exploring