BiggerPockets

Turnkey Real Estate Investment And The Art Of Evaluation

Picture this scenario - A seller creates the picture of a wonderful property, perhaps it's a true turnkey and freshly renovated with a tenant just moving in. The cash flow appears reasonable, the renovation looks thorough and the price is acceptable. What the seller didn't present was the skimping on a much needed plumbing upgrade, a roof with 3 years left on it or the fact that the tenant has been in 5 houses in 5 years. These hidden expenses can take you from positive to negative cash flow in a hurry.

Don't risk the stability of your portfolio on just the word of a seller; use some of these tips to develop a solid risk mitigation plan:

Real References: Get more than the references of investors who have purchased from the seller in the past. The easiest way to do so is by using the internet. By entering the name of the seller or the company name, you can quickly find complaints. Use sites like BiggerPockets and LoopNet to see if anyone has heard of the company. Ask competitors, of course keeping in mind there will be a bias.

Proof of Success: Ask for a few real world examples of investor purchases. These examples should span over a year period. They should include vacancy rate, maintenance charges, management expenses, etc. that were outside those expected Asking to see such reports will help to verify that they are selling properties that actually perform as expected… and secondly they actually have the information.

After-Sale Commitment: Turnkey has traditionally followed a pretty straight forward process; sell property to investor and from that point on the investor is the "problem" of the property manager. This design creates many issues as the property manager may not be aware of all the details of the deal. Ask the seller to explain the process of purchasing a property, see if they discuss post-sale processes. If they have a true "account management" program in place, you will know it. You won't have to ask, they will simply demonstrate it in their explanation of what they do. Make sure that they are willing to act as your advocate and monitor your investment by working along with the property manager for the life of your investment.

Knowledge to the Extreme on the Market: Experienced sellers in a market will have a mental library on the market. From demographics to future revitalization, a seller that understands their market can position you perfectly based on your unique goals. Don't get too focused on flashy presentations and marketing materials, these are great and show a group is committed to exhibiting professionalism but if they can't back it by speaking directly with you on the phone about the market they may simply be "copy & paste" experts.

Scope of Work: If the property is a turnkey with a tenant residing in the residence you will have a difficult time visiting the property or getting current interior photos. Ask for a scope of work and the contractors that provided the work. Review the renovations to make sure that you are comfortable with the scope of work. Ask about service life left on HVAC, Roof , Electrical & Plumbing. These are the items that will cost you heavily when repairs are required.

Is this an all encompassing list of vetting tools? Nope. But that's what future articles are for.

Remember, find someone you can trust and stick with them. Using them together can create an excellent risk mitigation tool that shields you from hidden problems. You may not always get that "killer" deal but "killer" deals can sometimes lead to significant blood loss in your bank account.

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