Lessons from Brandon's Deal Collapse

Ex-BiggerPockets host Brandon Turner's Houston deal goes to zero. $15 million lost. Investors, like $15 million, people just lost 100% of their investment. How did this happen? Why did it happen? As a syndicator in Texas, I have syndicated 3 deals. I've done JVs in Texas. I've done solo deals in Texas. I've owned in the same market. I own in Houston. I own in Abilene, Texas. I own in Stephenville, Texas. I own in the DFW area. As an operator, as a fellow syndicator, as an investor in Texas, I feel like I'm in a relatively unique place to get to speak on this. So I believe I have some pretty valid observations here, but I think Brandon did some things very right and some things pretty wrong on this. What actually happened? How do you avoid this happening? And what does this mean for real estate moving forward? Is this going to be a trend that we keep seeing? I'm going to get into that in today's video. First of all, I just want to point out, if anyone happens to forward this to Brandon, Brandon Turner's book, the book on rental property investing, actually was part of the inspiration of the name of my book, the book on creative real estate. When he Wrote that book. I bought it almost immediately. It got me excited about rentals. It got me into my first two duplexes. He's actually a very instrumental part of why I'm in real estate today. So I want to give credit where credit is due. I really like what he's done in real estate investing. I like most of what he says about real estate investing. Where did this deal go wrong? Well, there is a common saying in syndication, and you're going to see this often, but the bigger the brand, the more popular the influencer, the weaker the deal. This is pretty common. It's not Brandon's fault because of his scale. His ability to raise capital is outsized, which means people will invest in him above investing in the deal. And you see this with Grant Cardone, you see this with other big, big names, is you're not just investing in the operator, you're investing in the brand. And he had a massive brand through BiggerPockets. That's actually a disadvantage to Brandon because If he believes in a deal, there's going to be an outsized amount of people who believe in it too. The scrutiny of the underwriting or the validity of the deal already is secondary to the fact that he's a massive trusted brand. Is it a good thing to have? Absolutely. However, it can work against you much in the same way with Creative Finance. You get what you negotiate. When you have a high amount of personal capital or people believe in you as the operator, the hard thing is they may be a little bit more flexible on how they look at the deal and how they invest. So on this deal, they bought it at a relatively low cap rate. I do want to point this out. So he wrote a letter and I love the way that he wrote his letter. First of all, huge respect to Brandon. He addressed this heads on their operations. They hit for what we can see pretty much all their operational targets as far as top line income, increasing rents, property operations. I don't see any major holes in the game. They took it from one place to a totally different place. They massively increased the net operating income. As far as the top line income, they did a really good job. Where did it go wrong? Well, they bought at exactly the wrong time, and his letter does address that. And it's like, hey, look, interest rates went up a lot, and they had relatively short-term rate locks. I think that's a mistake. I think you should lock your debt on any of these syndicated deals. You're looking for long-term stability. That is how you do not lose people's money. So I think the debt was too short. I think the rate locks were too short, especially when you're playing with this really low interest debt. This is back when rates were like in the 3s. The assumption that rates are going to stay anywhere near the same place when they're historically low doesn't make a lot of sense. And I think they made decisions based on that. I think that is the one major analytical error where the assumptions were wrong from the shotgun. That being said, what else did we see in that time? Insurance skyrocketed well above what you would reasonably anticipate. Property taxes for Houston been above what you'd anticipate. Basically anything that he could have got lucky on, did not happen. The things that they could control though, I just want to, I want to give him full credit for this. It appears that the things that could have been controlled were controlled after the point of purchase. There were mistakes made in the purchase from what I can see in underwriting the deal today. Being able to look back with our knowledge from where the market's at today, looking back in the past, would I have underwritten it differently? Yes. However, Brandon underwrote it where he did. People invested where they did. Here's what I'm really, Here's what means a lot to me as an investor. He points out what happened in the market. He explains why the deal didn't work, and then he points out in his letter, but you invested in me, not just this property, and you trusted me for the timing of the market, and I chose the wrong time to invest in this deal, in this location with these numbers. Taking ownership is something that we do not see a lot, especially from these syndications that go under. I appreciate that deeply, and I really wanted to I actually saved his letter in the event that anyone has a deal that goes wrong. I think that is the template in which you should copy. It accurately explains what happened while still taking accountability. I think his odds of seeing significant lawsuits from this are significantly decreased by the way that he's handling this. It's really hard as an investor to look at this and say like, hey, you did anything unethical. From all appearances, he put in the maximum effort. They tried everything that they could, and on an operational level, they did what they could do. Again, if anyone happens to forward this to Brandon or Brandon sees this, respect for how you operated the deal and a huge amount of respect for how you handled the fact that a terrible thing happened. Feasibly one of the worst things that can happen in real estate is the total loss of capital for your investors. So handling that the way that it was handled, very good. Here's one of the major problems I have. So going the opposite direction, I think where Brandon is going to be feeling some pain is Over the last 3 years, a lot of his ads, a lot of his branding is, I work 1 hour a day. I've created this time freedom. I have the Hawaii house, the cars, the freedom. When you do this through syndication, a lot of it is upfront fees. You make a lot of money buying, and in the first few years, depending on your structure, operating the deal. When you have a total loss of capital for other people, it is really hard for an investor to look at this and say, hey, wait a second, So you're advertising based on, hey, I have all this time freedom and I'm not doing, you know, I'm working an hour a day and I'm here relaxing here on my podcast while everyone else is losing all their money. I think that's a really hard thing to overcome. It's something that I personally try to do very hard on my channel is real estate is not easy. It is a job. Every business is difficult. You should give it more than an hour a day. Your business should be your business. You should treat all business like a business. There will never be a point where my investors see social media of me relaxing or saying, hey, I have all this time freedom. While we have active deals, everything that we have has my full attention. I am out in the field at these properties. I moved to Texas because that is where the momentum of my portfolio went. As I'm raising capital, I am here on the ground working my butt off. I own and control the PM company and I am the active CEO. It's not delegated, it's not this structure where, oh, you know, I have all this time freedom. I can teach anyone on planet Earth how to build $10,000 a month of relatively passive income through real estate. You can do it. It takes about 2.5 to 3 years for most people. If you get into multifamily and you understand how to do this, again, using creative real estate strategies, but the average person can get there. You can get that time freedom. If you want to build a big business, which is what Brandon did, I mean, we're talking large, large syndication. It's an unbelievable amount of attention and work and responsibility. I don't doubt that Brandon put in the work. I don't doubt that he put in the effort. I really, I don't, have an ethical issue with how Brandon ran this deal from anything that I can see or anything that I've heard. Where I have the problem is when you brand off, this is easy and the time's free. That's not business, especially not big business. It takes time. It takes dedication. If real estate was that easy, everyone would be financially free through real estate. It is like any other business. This is what I love about real estate. The money works like money in any other business. If you scale correctly and you manage your pieces correctly, you can have a big business, but you have to outcompete. Do you believe that you will be able to outcompete people in a business with 1 hour a day when other people who are also roughly as intelligent as you will just assume the average person is roughly, you know, roughly even playing field? I know intelligence levels vary, but do you think that people roughly your intelligence will not outcompete you on a 1 hour a day? I just think the branding had a massive problem. And I think it, as an investor, that would hurt me personally the most, seeing that content, knowing that all the money is gone. That would, I would never want to see that. So that's the one thing that I really think was done particularly wrong is that it should have been on longer-term fixed-rate debt. There should have been more protections on the actual debt because the rate is really what smacked this thing. But there's a certain amount of, you can only control what you can control and you're going to play the game where the goalposts are. So I don't want to hit him harder than I see some people really slamming online. I think the mistakes were made in the branding and especially on the personal brand side. I think that's where the mistakes were made. If you're looking at the actual operations of the deal, you had a deal that operated well. What do I think is going to happen in the future here? Well, Brandon is not the only syndicator, especially in the Houston market, who got slammed with deals. The insurance, the tax, the rates, all of these things got hit. And this was in a time where everyone and their sister was under the impression that, hey, I can just syndicate, crowdsource, bring in a bunch of people. You need to be very conservative on every deal you do, and it has to work day one. You do not buy a piece of real estate ever based on the future upside. If it does not work today, it's not a deal. I've done this on smaller deals. You carry the negative longer. It costs more to get from A to B. I've done this with the Robinhood. I've done this in a hotel conversion. You think you know everything and you go in and then the market changes. And so the things that you thought you knew might not be true at the time that it matters. Buy based on cash flow day one. In the syndications that we have, and this is not in any way an ad for syndications. In fact, I have no active capital raises right now, so you couldn't invest with me if you wanted to. But our 76-unit, our 144-unit, our 80-unit deal, any of these, we bought them where they cashflow day one. We bought them for excellent prices. We bought them at a point where if nothing went our way, if our business plan did not work, no one would've lost a single cent. We've never missed a distribution. And it's not just because we're amazing operators, though I believe we are. It's because we bought right from the beginning. We take the risk profile. I prefer an ultra-low risk, moderately high return. I don't need a home run. Hey, everyone who invests with me is going to get rich. And I don't invest on, hey, we believe the upside's going to be here. So if this deal does this, then you'll make money. I go, hey, look it, day one, every deal we've closed, distributions start in month one. There's no lag period. There's no stabilization period. We buy deals where they cash flow, and if you have the discipline to do that, it's very, very hard to lose real estate. That has been something that I adopted early, and I had the advantage of, I started a lot of my investing right before these interest rates started skyrocketing. It was like 5 years ago. So the bulk of my investing, I started in 2016, but the bulk of my investing was 2020, 2021. We bought on long-term cash flowing fixed rate debt. Even the deals where we bought with really low interest, we still have a long time left on the debt. I'm just getting paid to wait for the market to continue to improve. And all of those deals have paid us every single month going through. That principle will save you as an investor, but I wanted to fully address the situation. It's a real syndicator as another Houston syndicator, or not syndicator in Houston, but as a Texas syndicator and a Houston investor, I understand what happened. I think Brandon handled it well on the back end. You can't go back in the past and fix anything, but I hope that he learns from what they did incorrectly on this one and continues to grow and I believe that he will survive this. That is my educated guess. I believe that he has handled it well enough and has a long enough track record where he will overcome this and will continue to survive as a brand. Hopefully the branding changes a little bit from this is easy, you can do this 1 hour a day, but that's up to him. I hope this was helpful. Again, if you guys want to check out my book, The Book on Creative Real Estate, it's available on Amazon. Link is in the description and I'll talk to y'all soon.