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How to Perform Due Diligence on Turn Key Real Estate Providers

by Neal Frankle on October 19, 2012 · 20 comments

  
turnkey real estate deals

You might be really excited about the idea of buying rental property.  But what do you do if you aren’t fully able to do so and manage the property and its management?  Maybe you have limited knowledge or expertise when it comes to real estate.  Perhaps you want to invest outside your local neighborhood.  People in that situation often turn to turnkey investing deals.  If so, the question becomes how to make sure your potential turnkey real estate partner is kosher.

I’ve considered (and accepted) a few opportunities like these over the last few years while rejecting others. Here’s what I suggest you do to separate the wheat from the chaff:

1.Warm Up

Before you even begin your search for a third-party turnkey real estate partner, be clear on your goals and your parameters. Do you own research on which market you want to invest in and why.  What are the vacancy rates in this market?  What is the unemployment rate?  What about crime?  Schools?  How expensive is property relative to rents?  Ask the turn key manager to explain why the particular market is attractive and then confirm the information yourself.

Also, do some soul searching to make sure you are going to be comfortable with this arrangement and working with a partner.  Is your goal to generate income or appreciation (or both)?  Will this particular opportunity provide the benefits you are looking for?  And if you’ve never hired someone else to manage an investment for you, are you sure you’ll be comfortable relinquishing that control now?

2.The Deal

When you do business with a turnkey partner you’re going to have to pay them. That’s fine but make sure you understand all the ways these people make money.

  • Do they earn a commission on the purchase, sale or refinance of the property?
  • Do they get paid for arranging financing?
  • Do they get paid for finding new tenants?
  • Do they get a markup on repairs and/or rehab?
  • Do they participate in net income or gross rents?
  • Do they get a slice of the gains if the property is sold at a profit?
  • Are they doing the property management or is it outsourced?

All these questions need answers.  But above all, the issue of property management is key. There is nothing wrong with paying for management – if you get it. The reason you are hiring a third-party property manager is so you don’t have to worry about getting those terrible phone calls about the leaky faucet in the middle of the night.

But talk is cheap.  Make sure your property manager is professional and strong.  Talk to existing investors and find out what their experiences have been.  Contact the Better Business Bureau and the State Real Estate Department and find out if there are any complaints against this company.

I strongly recommend you do a lien search on a few properties managed by the company.  This report will tell you if all the bills have been paid or if there are any recorded or unrecorded liens against the real estate.   This will set you back a few hundred bucks but it will tell you a great deal about how the property manager does business.

3. The Deal Maker

You want to make sure you understand the deal, of course, but you also want to make sure the deal maker is on the up and up.  I mentioned that one way to do this is to run a lien search on a property or two.  But you should also ask to see a credit report for your potential partner.  If this person is asking for your trust (and a big pile of dough), the least they can do is show you their credit history.

Get a sense of who you are dealing with. Besides asking for a current credit report, ask if the person has ever declared bankruptcy or walked away from a mortgage obligation. If someone has a checkered financial past, it doesn’t necessarily mean you shouldn’t do business with them.  What you are looking for is someone who is straight forward and honest about their own past. Don’t do business with anyone who tries to cover up their past or misdirect you. And don’t feel funny about asking these questions or asking for proof. You have a lot at stake here.

Finally, make sure that you take title to the property in your name only. Some deals allow the turnkey manager to participate in profits on the sale of the rental.  There is nothing inherently wrong with that.  But you don’t want to give up control of your property by putting someone else’s name on the deed if you can help it.

Turnkey real estate can be extremely rewarding – at least that’s been my experience.  But it can also turn out to be a disaster.  If you take these few extra steps to check into your potential partner before you write that check, you’re chances of having a great experience go up exponentially.

Have you invested in turnkey opportunities? How did you check out your partner? What would you do differently today?

Photo: Todd Baker

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{ 20 comments… read them below or add one }

Dale Osborn October 19, 2012 at 12:52 pm

For those without the time or energy to devote to managing their own properties a turn-key investment allows them to have a pretty passive income stream. It is a trickle compared to self-managing the properties, but what works for one may not work for another. Each investor has an option on which rout they want to take.

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Neal October 21, 2012 at 7:56 am

Agreed. I think those who are prone to doing yourself are not the same as those who would consider this. And those (like me) who would never manage their own property know it from the get go. Still, it makes sense to take these steps to make you know how you are doing business with. Thanks.

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Brandon McBride October 19, 2012 at 2:26 pm

Great article, thank you. You have a great list of questions that I hadn’t considered under item 2: The Deal.

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Jeff Brown October 20, 2012 at 12:24 pm

Hey Neal — Welcome to BiggerPockets!

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Joshua Dorkin October 20, 2012 at 12:32 pm

The two of you need to link up, Jeff. Seriously. Neil is relatively local and is also one of the sharper guys out there.

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Neal October 20, 2012 at 1:27 pm

Thanks Brandon….Jeff and Josh. Great to be part of this fine blog!

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Marco Santarelli October 22, 2012 at 12:49 am

Good article Neal, but I would make two comments:

Point 2: You mentioned that you’d have to pay the turnkey provider, but that’s not always true. We are a turnkey provider in 13 different U.S. markets and we never charge our investor clients a fee. Our services come at no cost over the list price of the rental properties we sell, so I simply caution the reader that this is not always true.

Point 3: You do not, and should not, take title in “your name”. It is generally better to take title in the name of your entity such as an LLC or corporation. Taking title in your name exposes your property (asset) to potential lawsuits.

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Neal October 22, 2012 at 9:30 am

Marco,

I assume you manage the assets? If you do, you do this for free? Great deal. If you do not manage the asset I would not consider your firm turn key.

When I say “take it your name” I mean as opposed to doing so as an LLC with the turnkey company. But you are right. The investor should seek legal advice in order to learn how to take title – as long as it’s not a partial ownership with the turnkey company as co-owner.

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Marco Santarelli October 22, 2012 at 9:52 am

Hi Neal,

We leave the property management to professional local management companies in the 13 markets we offer. We consider that one of many pieces of the turnkey “package” we provide investors. We’ve defined our business model as ‘turnkey’ since we launched in on January 1, 2004, and our clients consider us turnkey as well. I guess ‘turnkey’ can be defined more than one way. :-)

Continued success!

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Neal October 22, 2012 at 11:04 am

Agreed. Thanks Marco. All the best as well sir!

Ziv Magen October 24, 2012 at 6:33 pm

Great article, Neal, spot-on. We’re a buyers’ agent and proxy who represent others in purchase, sale and ongoing management (although we never actually own the property ourselves, nor any share in it), which I suppose makes us a sort of turn key operator – and have also contacted turnkey operators in other countries to where we operate (Japan), when we wanted to capitalize on other markets – everything you’ve written above is exactly what we had to so, and what other do to us. I find the most important point you made is honesty – it’s perfectly worded and very true. I don’t mind doing business with small companies, nor do I mind a checkered financial past – as long as no misrepresentation is made. As soon as someone tries to paint a false image of either themselves or their market (and it’s normally quite easy to discover this during DD), I steer as clear of them as possible.
Welcome aboard! :)

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Neal October 24, 2012 at 11:19 pm

Thanks Ziv!

While you and I agree on this issue, unfortunately many clients do worry about the size of the firm and immediately dismiss opportunities if there has been a problem in the past. That is a shame for the investor as they forgo great opportunities sometimes.

I think they do this because they don’t have any other barometer to judge. Hopefully, the steps I’ve laid out can help solve that problem for some folks. Thanks again!

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Karen Rittenhouse October 25, 2012 at 8:33 am

As with any purchase, success depends upon due diligence.

Buyer beware. A good deal is always the responsibility of the buyer.

Thanks, Neal, for the post.

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Neal October 25, 2012 at 9:31 am

Karen – agreed. Thanks for the kind words. Neal

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Ali October 29, 2012 at 8:08 pm

Ooh, ooh, a topic I can finally comment on and I really know what I’m talking about :) I’ve been knee-deep in turnkeys for the past two years for my own portfolio, and I’ve learned all the ins and outs of them. I work with several turnkey operations in some of the best markets (rental property markets) around right now. I’ve seen the good, the bad, and the ugly.

Obviously the quality of the properties, the rehabs, the price points, and the providers are important, but if those things are in line and you have a bad property manager at the end of it, that is the worst. I heard someone say once, and I absolutely agree, is “I’d rather have an average property with an excellent property manager than an excellent property with an average property manager.” I absolutely agree. Property managers can make or break your investment. Aside from making or breaking your cash flow, they can make or break your sanity.

If anyone is interested in turnkeys, I am definitely willing to share my good ones. I have a couple providers that have just crazy awesome properties available in great markets with great cash flows. And they are awesome and trustworthy! Most important.

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Jonathan MacMillan August 7, 2014 at 9:20 pm

Hey Ali,

Obviously this post is coming up on two years old, but if you still have some good turnkey providers I would love to get their info. As Neal suggested, some people just know when they don’t want to self-manage and I am one of those people. Thanks so much in advance!

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Marco Santarelli August 8, 2014 at 1:19 am

Hey Jonathan,

What are you looking for in terms of a turnkey provider, and/or market? Maybe I can help point you in the right direction. There are certainly many items to consider.

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Jonathan MacMillan August 8, 2014 at 9:26 am

Hey Marco,

I don’t have enough experience yet to know what to expect from a turnkey provider or what is the norm in terms of the service they provide. I am however interested in investing and being about as hands-off as possible. With that said I’m looking to acquire two properties under 100k each in one of a dozen generally well regarded markets. Cash flow is most important, but of course a possibility for appreciation over about 10 years is also very important. Other than that, I’m open to ideas, suggestions, etc.

Ali Boone August 8, 2014 at 11:31 am

Hey Jonathan, no problem! Send me a message either on BP or to my email address and I can give you some names and information.

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Marco Santarelli August 9, 2014 at 12:05 pm

Hey Jonathan,

Given your comments and what you’re looking for, we could discuss that for 30-60 minutes. It’s more than can be covered efficiently in a comment box.

Feel free to send me a message or email and I will be happy to give you a view of the market landscape with pros and cons in each.

Continued success!

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