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DOs and DON’Ts for Buying from Turn-Key Companies: My $31,994 Dollar Mistake

by McKellar Newsom on June 15, 2012 · 21 comments

  
turn-key rentals

One weekend, I went to a guru seminar where the guru gave out his bestselling books and did a nice talk on the basics of real estate investing.  On Sunday, he introduced two guys who gave a PowerPoint presentation explaining their turn-key process.   Their concept seemed wonderful; I’d make better returns than I had been making finding rentals for myself.

The turn-key guys started sending me possible properties and I ran the numbers on a Columbus, Ohio duplex on Carpenter Street. I liked the price, the rehab estimates and rent ranges, and told the turn-key group that I wanted to see the duplex; of course, I scheduled a trip to Ohio.

I liked the neighborhood.  A children’s hospital had just been built nearby and the area was starting to improve. New houses and remodels were surrounding the old Carpenter Street duplex. I had already seen the inspection report from the turn-key company so I had a good idea of what I would find on the house tour.

Exploring the Unknown
When I opened the door to the basement, I couldn’t see anything.  Unfortunately, I had forgotten to bring a flashlight.  I asked myself the same question quite a few times, “why didn’t I go buy a flashlight and come back,” but I believed the turn-key inspection report.   I didn’t need to inspect the basement because the turn-key guys had already completed an inspection. Anything wrong in the basement surely would be covered in the 25K worth of repairs estimated by the turn-key group.

Not having a flashlight cost me a lot of money!

Here were the issues in the basement not reported on their inspection report:

  • A flooded basement
  • 2 missing furnaces
  • A cut sewer line
  • 2 missing hot water heaters

Here were the numbers on how my Carpenter duplex turned out:

  • Price:  $22K
  • Expected Rent:  $1400
  • Actual Rent:  $1100
  • Expected Repairs:  $25K
  • Actual Repairs:  $56,994
  • Mistake: $31,994!

I am grateful for the knowledge I gained from my Carpenter duplex, but I’ll never make the same mistakes again.   I’m not going to tell you not to buy turn-key rentals.  I like turn-key properties; I sell turn-key rentals myself.  What I am going to tell you is to do your research before you buy. 

Here are a few tips for buying turn-key rentals:

  1. Trust but verify. Since big bucks are involved with buying houses, some big frauds are out there. Stay away from the frauds and find some trustworthy companies.  The best way to find trustworthy ones is to do your research. Talk to everyone involved. Visit the company. Confirm  the numbers. Talk to other clients. Check with the Better Business Bureau.
  2. Do your due diligence. Get a professional inspector that you have researched.  Don’t just use the turn-key companies’ inspector. Personally inspect the houses. Mystery shop to double check rent ranges.
  3. Buy one property at a time from turn-key companies. Make sure the first one works before you buy the second.
  4. Listen to your intuition about the people you work with and the properties you choose.  If something is telling you to say “no”; say “no.”

I take full responsibility for my $31,994 mistake.  Ultimately, I was the one who made a decision based on sloppy research.  I reflect back on the situation and ponder: “What have I learned and how can I do better next time?”

Here’s what I do know. The $31,994 could have been put to better use. I could have bought  12,352 Starbucks’ decaf café au laits, 799 sessions with a personal trainer, 581 massages or an awesome cash flowing rental.

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{ 21 comments… read them below or add one }

Nathan June 15, 2012 at 1:44 pm

There was no recourse with the turn-key company omitting the flooding in their inspection report?

Reply

McKellar Newsom June 16, 2012 at 12:22 pm

Hi Nathan,

Good question. I’m not the suing type and I felt I was in the wrong for not doing my due diligence. I ended up getting the turn-key company to send me 8,500 back. It was a tough process. Thanks for your question. mck

Reply

Mike June 15, 2012 at 3:10 pm

I can’t tell you how many times I forgot to bring a flashlight when I was first starting!! Now I just keep an extra tool box (separate from the one I have at home – so I always have it with me) in my truck so I never go without. Sometimes you only get one shot to check out a house and a little detail like a flashlight can make all the difference.

Reply

McKellar Newsom June 16, 2012 at 12:24 pm

Hi Mike,

Great thought! I have a little tool kit in my car now as well. Great idea. I wish I had had a flashlight that day.

I think back on it now and feel that I learned more from this one deal than all of my others combined. Tough way to learn though. mck

Reply

Ziv Magen June 16, 2012 at 9:24 pm

Loved that post, thanks, Mckellar :)
My partner’s looking into turnkey US property atm, and these tips are worth their weight in gold. Much appreciated!

Reply

McKellar Newsom June 19, 2012 at 9:26 am

Hi Ziv,

Thanks for your comments! Good luck to your partner looking at turnkey properties.

By the way, I enjoy reading your posts. mck

Reply

Steven Lipschultz June 17, 2012 at 2:09 pm

McKellar,

It seems the link shown as your website goes to a REI software package link called
Freedom Soft.

Steve

Reply

McKellar Newsom June 19, 2012 at 9:28 am

Hi Steven,

Thanks for the heads up. I’m reworking my website. I hope to have it up by the second week in July. Thanks. mck

Reply

Brian June 17, 2012 at 3:52 pm

I’m a little confused at the term turn-key your contractor/investor used and why you would have been saddled with $31,994.

Of the 400+ properties I’ve sold as turn-key, I have covered everything from soup-to-nuts. Even when the unexpected galvanized to copper water line replacement was require, I covered it, without additional remuneration from the Buyer. Additionally, when we sell properties with expected cash flows, should the rents come in light, we have made up the difference on some discounted cash flow calculation. Turn-key should be just that: turn the key, and start operating.

Reply

McKellar Newsom June 19, 2012 at 9:30 am

Hi Brian,
I wish I had found your company back when… They obviously weren’t truely a turn-key company. Where is your company located? Thanks. mck

Reply

Greg Brister June 17, 2012 at 8:39 pm

Thanks for sharing your tough lesson mck. It shows how much you have learned from the school of hard knocks.

Reply

McKellar Newsom June 19, 2012 at 9:35 am

Hi Greg,
I learned a ton from that one deal! A lot more happened that I didn’t have time to write about in the blog. Thanks. mck

Reply

Keith June 17, 2012 at 9:39 pm

Yeah I agree with what Brian & Steven said!?!?

Reply

McKellar Newsom June 19, 2012 at 9:37 am

Hi Keith,

Thanks! The company definitely wasn’t turn key that is for sure.

I’m reworking my website. I should have it up by the second week in July. Thanks. mck

Reply

Matt Bowles June 18, 2012 at 7:10 am

McKellar,

I agree with Brian. It doesn’t sound like what you bought (or what you thought you were buying) was anything close to turn-key. The premise of a turn-key property is that the SELLER takes all the risk in acquiring, renovating, and renting out the property. When our investor clients close on “turn-key properties” that means the property is performing with a tenant and local property management already in place so it cash-flows from the day you close and you can verify EVERY-thing prior to closing (tenant qualifications, rental amount, appraisal, 3rd party professional inspection, etc)….no surprises.

To emphasize that last point, as an investor, your due diligence should always include getting a 3rd party professional inspection (no matter how good of a flashlight you have, if you are not a professional inspector, you are not much better off poking around with a flashlight than just taking the seller’s word for it). Get it done professionally. This is a due diligence expense that can be extremely expensive to cut.

-Matt

Reply

McKellar Newsom June 19, 2012 at 9:41 am

Hi Matt,

Thanks for your comments. Where is your turn key company? I completely agree. I think I got sucked into the “guru” knows best syndrome.

I always inspect my own properties and hire a professional. I have a couple of flashlights in my car now. Thanks again. mck

Reply

Karen June 18, 2012 at 7:43 pm

Trust but verify!

Here’s to successful investing!

Reply

McKellar Newsom June 19, 2012 at 9:41 am

Hi Karen,

I’m with you on that. Same to you. mck

Reply

Matt Bowles June 19, 2012 at 2:35 pm

Good to hear from you McKellar. To answer your question we provide access to unlisted turn key properties in multiple markets. We focus on markets that provide unique advantages to real estate investors. You can check them out here: http://maverickinvestorgroup.com/
Feel free to give me a call if you want to talk more about it at 310-880-3305. Do you have specific markets you are targeting?

Reply

McKellar Newsom June 26, 2012 at 9:39 am

Hi Matt,

Thanks for you post. I’ll check out your site. mck

Reply

McKellar Newsom June 26, 2012 at 9:40 am

Oops! “your” not “you” mck

Reply

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