Due Diligence on a Turnkey Property
Buying a turnkey investment property is a very straight-forward process, but that doesn’t mean you should let any due diligence slide. Or, if you’re like some and leery about turnkey providers, there are simple things you can do to hopefully make yourself feel better about going forward with a purchase.
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I have no idea how long the concept of turnkeys has been around, but I believe it is a concept that has been picking up steam more in the last few years and will most likely continue to be a growing niche. Reason being, people are busy. Not everyone wants to flip a house, or manage a rehab crew, or find motivated sellers, or interview tenants, or take repair calls at midnight. All the while, people do want to move their money out of banks and into something more promising. So what do you do? You buy a turnkey property that you own outright and reap the benefits as you would any other rental property, but yet all the work is done by someone else. The property is fully rehabbed, tenants are already placed, and property managers are standing by waiting to oversee the property once you buy it. Easy. The name says it all- turnkey (or turn-key, or turn key, or any other numerous ways to spell it). The idea is all you have to do is put the key in the door, turn it, and voila! That’s the most work you had to do. I think it is even easier than that though because I’ve yet to have ever even had my hands on a key to any one of my properties.
So as this booming industry keeps booming and more people are getting interested in this concept, how can everyone be sure they aren’t being taken advantage of or getting ripped off or buying a totally bogus investment property? As with anything else, especially real estate investing, education is your biggest safeguard. So allow me to educate you.
One Thing You Need to Understand about Buying a Turnkey
Before I go through the due diligence process of buying a turnkey investment property, you need to understand one simple premise that may seem kind of dumb, but it has meaning. And that is:
You are buying a property. You are not buying into a seller.
Let me explain. All that matters at the end of the day is the property. It doesn't matter who sold it to you and it certainly doesn't matter how much they made on the deal. After you close on the property, it's all you so all that should matter from day one is the returns. You will probably never talk to the seller again (unless you go back to buy another one), so if anything is wrong with the property or there are any problems, the seller will doubtfully be there to pet your head while you cry. Contrary to this idea is that if you don't like the seller, the seller is a jerk and severely lacking customer service, or even if you looked him up online and he has some kind of felonious past, that doesn't matter either because all that matters is the property. I bought a turnkey from a company one time who had this real estate agent I just couldn't stand who not only stunk (like, literally stunk), but he was an outright ass, and often. If I had been in it for the customer service, I would have been out of it without a second blink. I had to remind myself numerous times that I'm not buying into this company or into this agent, I am buying this rockstar rental property and once I close on it, it's all mine and that's all that matters. Since then, I've met some turnkey providers with amazing properties and deals, only then to find out about past real estate convictions on their records. Do I care? Nope. I'll find out what the convictions were for, and as soon as I see they aren't related to their current business I'm usually cool with it. Why? Because all that matters is the property I'm getting.
So now that you know the guy who is about to sell you a turnkey property is a convicted felon and will be nowhere to be found if you need any help after you close, how can you protect yourself against any of this affecting your investment? Simple. Due diligence.
(Okay, way extreme on the worst-case scenario there, and to be totally transparent, most turnkey providers don’t have sketchy backgrounds and even the ones who I know of that do, I love and would still work with any day. I am also referring to no one on BiggerPockets who is associated with turnkeys; the guys I know of who fit this bill have probably never even heard of BiggerPockets. Even better, almost every provider I know will still be in touch after you purchase if you need any help, but understanding that they don’t have to be is important.)
Simple (yet effective) Due Diligence When Buying a Turnkey
There are a few easy things you can do when pursuing a turnkey rental property that will protect you from most worst-case scenarios. Not only are they easy things to do, but they are extremely low-cost to do, if not free. Bonus!
- Home Inspection. Get one. Your inspector is the one and only component of the buying equation that is not associated with the turnkey company. Everyone else, whether it is the seller himself, or the promoter, or the closing attorney, or who knows who, is somehow tied to the provider and who knows, wouldn't it be easy for them to all be working together and totally pull a fast one over you? I think so. But if you hire your own home inspector, he works for you and only you. He could care less about the turnkey provider, so you are bound to get a truthful assessment of the condition of the property. Or if you're like my inspector who hated that smelly agent, you're even better off because he is for sure going to tell you anything bad about that house that he can find because he doesn't like the guy anyway! Seriously though, a home inspection may save you anywhere from thousands to hundreds of thousands of dollars. The property should be fully rehabbed, so make sure that it is. Make sure the roof isn't old, the foundation isn't cracked, no mold, and even more than the basics, have your inspector let you know about the quality of the rehab job. It should be excellent quality. If it's not, ehh, do you want it? Probably not. In my case, I am usually 3,000 miles away when I buy a property and oftentimes I never even see the property before I buy it, so my inspector being my eyes and ears is critical. I've been saved a few times from buying properties that were in less-than-stellar condition and one that was in pretty bad shape and the provider was trying to get away with it.
Remember, any repairs that are done before you close are at the expense of the seller. Any repairs done after you close are on you. Make sure you find everything you can about that house so a) you don’t have to pay to fix an already-existing problem and/or b) you have a chance to bail on the property if a problem is too bad.
- Title Insurance. This will protect you from Mr. Felonious in case he tries to do something quirky with the transfer of title and ownership of the property, whether it is from when he bought it himself or when he sells it to you. Title insurance should come with all the closing paperwork, but make sure you have it. Then if you have any problems later or something sketchy comes up, you are covered and don’t have to come out of pocket to get anything fixed in terms of your ownership of the property.
- Get a Review of the Closing Documents. Some of the turnkey providers will let you use your own closing attorney if you want, but some are seemingly more adamant about using their own. That immediately puts a red flag up for me, but that’s okay because often times it is only because that attorney is so used to dealing with this seller that they are able to expedite the process and do everything much more smoothly than someone who hasn’t done these before or doesn’t do them often. Or maybe you just don’t know a closing attorney so it’s easier to use the seller’s. Regardless the reason, pay the small fee to your own attorney (or a recommended attorney) to just do a review of all the paperwork. They usually won’t find anything major, but it doesn’t hurt to have a second pair of eyes looking over the final documents.
Doing those three things should save you from most catastrophes when buying a property. They won’t help with chronic vacancies or bad tenants down the road (you’re on your own for those and why I recommend going with higher-end properties), but they should prevent you from any unexpected major repairs right out of the gate and avoid any scamming or sketchiness in terms of ownership. The only other things that may help in your turnkey buying experience is finding reputable providers, either by asking around for who other investors have used or recommend (perfect use of the BiggerPockets forums!), and you can also ask providers for references. I’m always leery about references because I assume anyone can have you call their best friend who will pretend to be a buyer and say positive things all day long so long as they are being paid with a case of beer, but I think references can help. More than just asking about the company and their properties, you can ask for references for the property management side as well so you can get a feel for how well your property will be managed.
To Buy a Turnkey or Not to Buy a Turnkey
Totally up to you. They aren’t for everyone, but they are certainly perfect for a lot. However, just because the process is over-simplified does not mean your due diligence should be. On the flip side however, don’t analyze everything so hard that your eyeballs pop out. Analysis by paralysis will make you lose out on a good deal, stress you out, and annoy everyone around you. Remember, the good turnkey providers are moving so fast that they usually won’t do a lot of hand-holding. Some will, and are actually really good about it, but remember this is real estate investing, not Home Buying 101. Things move fast and hard and the good deals go quick. If a company is really reputable, trust that they know what they are doing.
Photo Credit: Darwin Bell