All Forum Posts by: Sam B.

@Russell Brazil I think you understand what I am about to say already. I am NOT suggesting Open door or any other syndication is a scam. However it is obvious statistically some syndications are.  There is a big difference between a scam and incompetence and simple bad luck. I think many are quick to use bad luck as an excuse when lack of skill and inexperience were strong factors.  on very predictable changes in the market. 

I agree with your point about the low level required to be an accredited investor. It should be raised. 

 I don't think it's a get out of jail card. But it does mean an investment is high risk. 

We all know the fundamentals to real estate...a property is worth what a seller is willing to sell at and a buyer is willing to pay. So if everyone in the market was willing to pay $5 million for a mobile home park, but underwriting it with a planned interest rate jump to 10%, (with all the other factors) says it should be purchased for $3.5 million...then the seller doesn't sell to them. They sell it to the person willing to pay $5 million.

Property values go up, and they go down. If you're running a business that buys these properties you can only buy them for whatever everyone else is willing to pay. Does that make it a scam? No. It makes it a high risk investment. 

You and I didn't invest in syndication like this, because we are more conservative investors. We weren't willing to take on that kind of risk, even if we were personal friends with many in that space. Our experience in real estate dated back to before the last housing bubble, so we understood simple things like rising interest rates would lead to cap rate decompression, forcing values down on those assets.

Syndicators are in the business of selling these investments, hedge funds sell their investments, insurance companies sell theirs. I don't think anyone of them are scams, (well some people in those spaces are)...they're just businesses selling products...in these cases investment products. 

Ill sell 100 properties this year, give or take. Im sure some percent of those sales the buyers will lose money on. Because 100% of properties in 100% of locations dont pan out. That doesnt mean I scammed those clients. I give them the best information I can. If its a location or property I wouldn't buy, I tell them why. But people do have to ultimately be responsible for their investment decisions. They need to properly assess the risk and distribute their capital based on their personal risk tolerance.

Frankly I think the accredited investor levels shouls be raised by 50%-100%. Because I think the people who are accredited, are meeting that too easily these days, and they are in fact not actually sophisticated investors.

Is Open Door Capital a scam? Absolutely not.

Is Brandon Turner truthful? Absolutely yes.

The reality is investing comes with risk, and yes part of that risk is you can lose your entire investment. Syndications are particularly risky, and thats why they offer such high returns. That high return is consummate with the risk being high. Because that risk is so high, and these syndications are not filing financial reports with the SEC, the government will only allow accredited investors to invest in them. ie, individuals the government believes are either sophisticated enough to understand the risk, or have the fiancial capability of losing the entirety of their investment.

What's happening to ODC is happening to numerous syndicators in this space the last 2 years. The reality is they only stress tested their underwriting for interest rates to rise 200 basis points, say handling 3% rise to 5%, but many of their debt service rose 600-800 basis points up to 9-11%.  Throw in that most of them underwrote for rent growth to be 3-5%, but instead have had negative rent growth instead.  Combine falling rents, with higher vacancies, and higher rates and it was a recipe for disaster. 

And every syndicator really any choice but to underwrite that way. If they underwrote the deals more conservatively, then they would have had to pay substantially less for the properties. But others were willing to buy at the same prices they bought at, so acquiring them cheaper wasnt possible. Additionally they wouldnt have been able to raise investment capital...because who is throwing capital at an investment with promised 2% returns if the other guys are promising 18% returns?  So in both cases, the market determined what they could pay, the market determined how they underwrote, and the market determined what promised return they had to offer. Unfortunately it panned out very poorly.

It's important for investors to understand their risk tolerance. Most dont consider that.  An S&P 500 index fund, incredibly unlikely to ever go to zero. A US Treasury Bond, incredibly unlikely to go to zero.  Low risk investments with low/average returns. But a syndication, very high risk and thus a much much greater probability of the investment going to zero.