How to Perform Due Diligence on Turn Key Real Estate Providers
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.
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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:
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?
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