6 Red Flags Investors Shouldn’t Ignore When Purchasing Turnkey Rentals
It seems these days there are so many turnkey providers popping up left and right, especially in the Midwest markets. The Midwest is a goldmine for these sellers because there is plenty of inventory to go around, very affordable prices and good price/rent ratios. I imagine if you are interested in purchasing turnkey, it’s because you either live in an expensive market or just flat-out don’t have the time to buy distressed, rehab, then rent. Ultimately it does not matter what you choose to do, as each person’s investment strategy will differ. And that’s ok!
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What does matter is knowing how to spot red flags when dealing with these turnkey providers. I’m sure you have read all the horror stories that pop up in the Forums, and if you are a normal human being, it will help put some sense into you and realize that obviously any deal, whether it’s turnkey or not, can go bad. This is why it is super important to be able to spot red flags. Red flags are simply characteristics you may find that could lead to potential problems down the road with your investment.
If you are anything like me — super picky and prone to do crazy amounts of research before you purchase — then being able to find red flags could save you tons of money down the road and prevent future headaches. I have now successfully purchased 4 different turnkey rental properties in the Midwest from 3 different turnkey providers and have spoken to and interviewed over 15 different turnkey companies. I have also backed away from 2 different turnkey houses after signing a purchase agreement because of red flags. I am not afraid to walk away from any deal, and you should not either if it means saving thousands of dollars down the road.
From my experience in purchasing turnkey rental properties, I have built up my own set of red flags that are big time problems for me and will most likely cause me to choose another turnkey provider or flat-out cancel the contract if necessary. It is important for you to come up with your own strict criteria and stick to it if you decide to purchase a turnkey property. There are red flags you can spot before you even go under contract with a turnkey provider, and here are some of them.
4 Red Flags Before Going Under Contract
1. The seller is a marketer.
The turnkey marketers are really good at marketing, and chances are high that these will be the first sellers you come across. In many cases, you may be able to find a good property and a good deal with a marketer; however, be aware that marketers are selling someone else’s inventory with a marked up price.
Hey, you can’t blame them, as they need a piece of the pie as well, but just know that if you go straight to a turnkey provider who actually owns the houses themselves as well as do all the rehab themselves, then you can potentially save thousands of dollars off the purchase price. I mean, is it really necessary to have a middle man?
2. The seller does not accept financing.
They will tell you that their properties sell like hot cakes and the demand is very strong. They only sell to cash buyers because of this and have no need to deal with lengthy financing. Be aware that in some cases, these turnkey providers don’t offer or accept financing because chances are, the properties they are selling will not appraise at what they are trying to sell it to you for.
This obviously will be a huge problem for you and the lender, and it’s a good way for them to avoid this problem. Be wary of this and proceed with caution. If you have the cash to buy one, then great, but please still get an appraisal and an inspection report. I would highly advise against purchasing a turnkey — or any property for the matter — at more than retail price.
3. The seller requires 30 percent or more down payment.
For the turnkey providers that offer their own financing, you will be told that a bigger down payment will make you more cash flow. And that you will have more equity in it. Win, win! Or is it? This could be a ploy for them to make you feel warm and cozy about the purchase AFTER the appraisal comes in at less than what they are selling the property to you for. Ideally, you should be able to find your own third party lender and stick with the traditional lending requirements. Proceed with caution!
4. The seller’s inventory tends to be in high crime areas.
There are providers out there that will try to sell you houses in bad areas, claiming super high returns. It is not hard to check crime statistics in neighborhoods and see what goes on. If you see high crime, find another property! There is no need to risk yourself in a war zone property that will only lead to disaster.
Those are just some of the potential red flags you can come across before you even purchase a turnkey rental property. Not all turnkey providers will have these; some will have one or two, and some will not have any of these potential issues. Be sure to research who you are buying from and what you are buying before going under contract to purchase. There are also potential red flags to spot after going under contract, and if you come across one of these, you may just want to back out of the deal. Do not be afraid to say NO. This is your investment and your future we are talking about.
2 Red Flags After Going Under Contract
1. You receive a very bad inspection report.
Shortly after going under contract, you will want to order an inspection from an independent inspector. The inspector is on your side and is going to tell you what major or minor issues they find in your potential future rental property. If you get back the inspection report and it has pages and pages of issues, then you should absolutely proceed with caution. At this point, you will need to negotiate with the turnkey seller on what repairs they are going to fix out of the inspection report.
If they do not offer to fix all or at least most of the issues, then this is a red flag. I personally would walk away at this point, but it is up to you to make the judgment call. I would also recommend that you order the inspection before the appraisal in case you come across this very problem. If you end up backing out because of the inspection, there is no need to spend money on an appraisal. Trust me, I have learned my lesson before and ordered both inspection and appraisal at the same time only to back out from the deal. Yes, I lost money, and no, it was not pretty!
2. The house appraises at less than purchase price.
If the appraised value comes in at less than what you are purchasing the property for, then I would highly advise you proceed with caution. Do you really want to buy a house at more than what an independent appraiser values it for? It’s bad enough paying retail for turnkey properties; you definitely don’t want to do this. Do not be afraid to walk away at this point. I have yet to have this problem, but I imagine it is only a matter of time before I do come across this.
Everyone will have their own level of risk tolerance, and everyone will come across different problems at different times. There could be many more potential red flags that you come across during the turnkey purchasing process. Having sites like BiggerPockets is great to have in these situations because if you are unsure of anything that comes your way, you can always get the valuable feedback from the experienced investors here. Don’t be afraid to ask questions.
What are some other red flags you can think of when dealing with turnkey properties and turnkey sellers?
Leave your comments below!