3 Ways to Vet a Turnkey Provider
Let’s talk about three ways to vet a turnkey provider.
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The number one stigma in real estate is probably that which is attached to turnkey providers. Unfortunately, it is their fault. They have created a bad name for themselves, and many folks hate them. They consider them the devil, and it’s like 666—stay away.
“I don’t want to buy turnkey, and I don’t want to buy from anyone that is a turnkey provider,” they think.
For the minority out there who are looking to buy through a turnkey provider, I’m happy to share some unconventional tips with you on what you should look out for. So, here we go.
3 Things to Look for in a Solid Turnkey Provider
The first thing you need to do is make sure that they are not selling you the property for more than what it is worth. Now, this is really hard to do because a lot of turnkey providers have a sustainable business because of the volume they deliver. When they buy volume, they can’t be diligent in the acquisition process. So, sometimes they have to pay more for the property than what they would.
They still tend to renovate it to a decent standard, but then they have to make their margin to continue to have a growing business. They have to do this, because if you’re not growing, you’re dying. So, they tend to oversell properties.
Personally, I don’t see anything wrong with this. If you are getting a good return on investment and if you’re buying from a reputable provider that’s been around the block and has great property management in place, I don’t see any issues with paying more than market value for a property if it’s going to deliver.
I see issues with paying more than market value when you are getting scammed—you’re buying a crappy C-class property and paying more than what it’s worth. There’s a lot of volatility with that. And then you’re getting passed on to a third-party property manager that will absolutely nickel and dime you to death. That is a recipe for disaster and why turnkey real estate has such a huge stigma surrounding it.
In my opinion, I think you should do your best to try to buy properties for fair market value. If you’re looking at using leverage, a lot of the turnkey providers will only allow you to go through a preferred lender where the appraisals are controlled. So, you might think that you are buying it for fair market value, but I can promise you right now you’re probably not.
Also, a lot of turnkey providers have a monopoly in a particular market. They record their sales on the MLS so a lot of those sales are manipulated and inflated. At the end of the day, if someone is going to screw you, they are going to screw you. What you need to be very diligent on and focus on is finding the right people, finding the right provider, and not investing until you find the right provider.
So, the first vetting tip would be to ensure you are buying a property for fair market value (or a little bit more). If you’re not, please make sure that property management is sound and that the provider has a proven track record.
2. In-House Property Management
I think in-house property management is vital. Over the years, I have wanted to sell my property management company so many times, because I absolutely hated it. It’s just a very thankless job. You can’t win with tenants and toilets, but I knew if I did get rid of it that I wouldn’t be able to offer the ongoing service that I believe our investors needed.
I also believe that another way to vet a turnkey provider is to ask the question, “If property management isn’t in-house, why?”
I say this because anyone can find, fix, and sell a property these days. It’s easy, right? Well, it’s easier than managing successfully for an extended period of time. It’s a very thankless job, as I mentioned, and it’s a crappy part of the business—not many people want to do it. So in my opinion, if you want ongoing success, if you want long-term success, you should partner up with a turnkey provider that has in-house property management. That way, they are vested in your long-term success.
Guys, getting to where you need to be is not going to happen overnight. Real estate is a long-term play. It’s going to take five, 10, or 15 years. So, all those one-night-stand providers that just want to fling you the property and move on, that is not how you’re going to get to where you need to be. You need a great bunch of people. You need a great company on board that will stand the test of time and will be there for you many years into the future.
Now, if they don’t have in-house property management, they have to be very well correlated and be in sync. And I think you should conduct more due diligence if they do not have in-house property management. It’s not necessarily a bad thing, but it does raise a few red flags that you definitely need to keep your eyes open for.
Last but not least, anyone who is pushing you to buy a product, influencing you, or shoving it down your throat, watch out. Don’t be swayed by turnkey providers who are saying things like, “If you don’t buy now, you’re going to miss out! The market is going to go up in value! This is a once-in-a-lifetime opportunity, and we don’t get deals like this that often.”
If you start feeling uncomfortable at your core, turnaround and run. I hate sales. In fact, I like talking myself out of business. I truly believe that if you’re not comfortable, if you’re not ready, if you don’t know what you want, you shouldn’t have someone else telling you what you want.
You need to be the one who has conducted their due diligence on the market, on the properties, and on the provider. You need to know what your long-term end goals are and when you want to take that next step. So, anyone who’s pushing you or influencing you, run and don’t buy.
The fact it, where one door closes, another one will open. I strongly believe that there are so many opportunities to make money, and there are so many markets—so don’t succumb to the pressure. Take your time.
So, those are my three tips for you guys on how to vet a turnkey provider. A bit unconventional, a little different from what you’re used to hearing from the others.
Do you think I’m right or wrong?
I’d love to hear from you in the comment section below.