On Due Diligence and Turnkeys

15 Replies

Hi there,

I am soon to visit several markets where a handful of turnkey providers will lead tours of the neighborhoods they operate in, their renovations in progress, and their finished product.

In doing so, I hope to get a feel for the quality and legitimacy of their business and market. While I am primarily approaching it as a precursor to due-diligence on any one specific property,  I will have the chance to survey plenty of them.

With that in mind, where would you recommend my focus be on the visit? Which areas of the renovations should be the most scrutinized?  What about the market as a whole? What are the things that can be seen only while only the ground?

Before proceeding in any manner, I also plan to speak with multiple, unrelated PMs in the area to get a consensus on vacancy rates, maintenance rates, and the likelihood or unlikelihood of appreciation in addition to shopping around for a quality PM. 

Thanks for your time!

Alex,  what markets are you planning to visit?  Do your homework on the providers as well. 

You can get an idea of vacancy rates from multiple property managers but they can not give you any idea of maintenance % be it really depends on how hard a tenant treats the home and the quality of renovations that were completed.  

Here are some of the things you want to pay close attention to when looking at the homes: The age of the roof, Furnace, AC unit, Hot Water Tank,  these are some of your more expensive repairs.  A lot of people prefer brick exterior homes to all wood siding.  Curb Appeal is another thing to consider.  

Good luck

Curt Davis, Real Estate Agent in TN (#00321765)

this from a thread I started last week.

Originally posted by @Cal C.:

I can't overemphasize the importance of knowing what is going on politically, socially and crime-wise in your target markets. Let me give a quick example- Clayton County on the southside of Atlanta, lost its accreditation for its school district in 2008, the first time that has happened anywhere in the United States for 40 years. They came close to losing it again a couple of years ago. Also in 2008, Clayton County elected a very controversial sheriff. In 2010, during the wave election the controversial sheriff was voted out of office. In 2012, the controversial sheriff was indicted on 37 counts for actions he took during his 2009-2011 term in office. But lo and behold, with Obama on the ballot and despite the 37-count indictment the controversial sheriff won another term in November 2012. Although, Georgia has laws preventing current officeholders under indictment from being on the ballot, no one previously imagined an indicted non-office holder would be elected to office.

As you can easily imagine these factors weigh heavily on the real estate market in Clayton County. Do you think most real estate agents will mention these issues? Obviously some will, but the majority? This is not the type of information that is going to turn up in a zillow or MLS search.

Bottomline-it is up to you to figure out what is going on. It is your money.  

If you have time, you might try to set up similar interviews/tours with some property managers who are active in the same area and property type but unaffiliated with the turnkey company. It could be interesting to compare the different viewpoints. Obviously, they'll have some differences of opinion, but if they're basically on the same page about neighborhoods, rents, local issues, then that would give you some more confidence. If they're telling two completely different stories... that would be good to know too

@Alex Heifetz  

Obvious questions are economic trends, jobs reports, real estate trends, rental trends. On a property specific level, big cap ex include roof, HVAC, furnace, foundation, structural, etc.

I'm currently also considering a few turnkey providers and my approach is of course do all the due diligence on the provider themselves as well as on the markets they operate in (plenty of threads on BP with good questions to ask in this regard). 

Concurrent to that, I'm working to build a team of my own on the ground in the same markets they operate in (realtors, property managers, inspectors, etc) to see if I can match or beat the pro formas that I've received. At the end of my due diligence, I'll fly out, see the homes that both approaches have to offer, shake the hands, and see what solution is the best fit for me.

Trying to recreate similarly performing properties seems to me to be the best form of due diligence you can do regardless of your alternative approach (turnkey, wholesaler, or otherwise). It forces you to leave no stone unturned and helps prevent you from simply taking the pro formas you've received as truth. Hope that helps.

@Alex Heifetz  

In addition to the items that @Curt Davis  @Jean Bolger  and @William Yeh  have mentioned for your due diligence, I suggest you also find out how the in house or affiliated PM of the turnkey companies in question screen and treat their tenants.  Finding good tenants is important, and so is establishing good relations with the tenants from day one, because you want to keep good tenants in place as long as possible.  Frequent vacancies are something you want to steer away from.  So find out how long the PM's tenants tend to stay before moving, vacancy rates, and eviction rates, but also what kind of exists in the PM/turnkey company.  You want to avoid those who are don't care about tenants as their very important clients.  For example, I have investments with a turnkey/PM company in Florida that shoots to treats everyone - investors, staff, and tenants as part of their family.  If they don't always live up to this mission, they at least try. They also secure 2 year leases.

Larry Fried, Real Estate Agent in OR (#201211636)

Make note of where the properties they show you are located and then check on the MLS for an idea of what the actual market values are. I don't speak to everybody, but the "wholesalers" and turnkey operators that I have encountered in my market are advertising properties for $5k-$15k or more over listed MLS prices. Be wary of "cash only" deals. From my experience, that means "Won't appraise out for a loan" instead of "Screaming Deal". If you overpay at the beginning and things don't work out, you have to list at a lower price and pay an agent to sell it unless you know how to find another out of area sucker investor on your own.  

Again, I'm not lumping everybody together but it is what I have found in my market so I assume this happens in other markets as well.  Trust but verify.

HI @Alex Heifetz  I'm in a very similar boat that you are in--in fact, I'm planning on visiting a couple of cities in mid-January (Memphis, Birmingham, and Jacksonville, at least for now) to look at turn-key properties.

How about asking the turnkey company for contact info of investors who have bought with them, especially repeat customers? I offer my contact info, as I understand that they want to protect their client's privacy.

Steven

@Steven W.

Let me know when your coming, I would be happy to show you around our city and get you in the neighborhoods so you can see for yourself what is going on as well as see what our operation and product looks like.  

Curt Davis, Real Estate Agent in TN (#00321765)

In Memphis the focus needs to be on location. Many areas that historically were good for investment are degrading significantly so you need to talk to independent PM's about location. I have full time buying staff in Memphis I am happy to connect you with them if you want to run any addresses past us.

Other than this just don't pay too much but LOCATION is the biggie by far

@Steven W.  I own several properties in Jacksonville via a turnkey provider, and also have new contacts in Birmingham, a market I am still learning about.  I would be glad to share with you what I know about both areas and providers, and would also be interested to hear from you what you learn from your visits. I am sending you a colleague request.

Larry Fried, Real Estate Agent in OR (#201211636)
Originally posted by @Alex Heifetz :

Hi there,

I am soon to visit several markets where a handful of turnkey providers will lead tours of the neighborhoods they operate in, their renovations in progress, and their finished product.

In doing so, I hope to get a feel for the quality and legitimacy of their business and market. While I am primarily approaching it as a precursor to due-diligence on any one specific property,  I will have the chance to survey plenty of them.

With that in mind, where would you recommend my focus be on the visit? Which areas of the renovations should be the most scrutinized?  What about the market as a whole? What are the things that can be seen only while only the ground?

Before proceeding in any manner, I also plan to speak with multiple, unrelated PMs in the area to get a consensus on vacancy rates, maintenance rates, and the likelihood or unlikelihood of appreciation in addition to shopping around for a quality PM. 

Thanks for your time!

 Alex,

You are approaching this the right way. My group is the largest provider of turn-key inventory in Birmingham and we have many investors both domestic and internationally who come to Birmingham to see the operation. Most importantly, we rarely will take on a new client unless they do come for a visit.

If you visit with us, we would provide the following:

1. View properties that meet your criteria - This will be a mix of MLS and off market properties (both rent ready and tenant occupied) and will be from 10-20 properties. You will also visit properties currently under renovations (meet project crews) as well as see some properties that are finished. You will be provided with the scopes of work and due diligence for each property.

2. Visit our office to meet our team - You need to make sure that you work with a professional team with a full operation.  Check licenses and insurance.

3. Meet with our renovation team - Manager,, project manager, general contractor, staff. Request license and insurance. Request to see prior estimates and before and after pictures.

4. Meet with property management - You want to insure they are large enough to handle your volume with a full time employed staff. Request license and insurance docs.

5. Meet with closing attorney who will handle your closings.

6. Tour of the city and dinner with our principals.

You will want to plan on 2 days here in Birmingham to cover the above points. Matter of fact, one person I met here on Bigger Pockets from San Francisco came here a month ago, went through our itinerary and we are closing on his first three properties today. Once we have closed and turnkeyed the properties, I will request that he post up here his experience with us.

If I can be of further assistance, please feel free to contact me.

@Alex Heifetz  

You have some good advice on here and a few advertisements (which, I guess is to be expected) but, here is the question that you asked:

"With that in mind, where would you recommend my focus be on the visit? Which areas of the renovations should be the most scrutinized? What about the market as a whole? What are the things that can be seen only while only the ground?"

You need to pay attention to the details.  They are the differentiator for you as a passive investor buying away from home.  You need to keenly listen to how they are selling you and does it feel congruent with what you are seeing.  Here are a few places I would look to really understand who you are doing business with:

 1.   Make sure they have offices and that you are taken there to meet them.  How do they look?  Are the desks and offices messy or clean?  Is there a separate building for property management?  Same thing - is the tenant waiting room comfortable, clean, inviting?  Are their people friendly, talkative, service oriented and outgoing?

It will be important to you because they are providing service to both you and tenants and neither can be provided if the company is under-staffed or under-trained or trained that this is just some regular investment.  They need to understand that the owner lives far away and relies exclusively on their professionalism and service to provide their return on investment.

2.  At the houses look at details.  @Curt Davis  said pay attention to curb appeal.  That is very true.  Is there trash in front of rehabs?  Are the laborers cars parked in the yard?  Are there cigarette butts in the yard or worse - in the house?  When a company takes you to look at a finished renovation.  Do not be afraid to look at details.  Open the furnace closet or the water heater closet.  How does it look?  IS there dirt and trash in there?  If a company replaces those units, but does not take the time to clean the space then what other details do they miss?  Look under sinks for water damage unfixed or painted over.  Pay attention to blinds, ceiling fans, hardware, systems.   What is new what is refurbished?  Make no judgements about good or bad - is it congruent with the message you receive.

3.  Ask lots of financial and numbers oriented questions from the property management company.  How long have they been in business?  How many properties under management?  How many clients?  Average length of occupancy?  Average length of vacancy?  Average cost to bring to market after move-out?  Average rental rate and deposit rate?  Number of properties rented each month?  Number of properties that go vacant each month?  Average % of rents collected on-time?  Average % of rents collected by 10th, 20th and last day of the month?  How many evictions are filed each month and how many are performed?  How many days does it take to bring a move-out back to market and occupied?  

These are all important questions and as an investor you want to ask all of these questions of the property management company and make special note of each answer.  Ask the questions multiple times and to multiple team members.  If you get different or varying answers, then they may just tell you what you want to hear instead of actual hard, factual data that they track each month.

Details, details, details.  In the neighborhoods, look around from the front door and make note of what you see.  Do you see boarded up houses?  Do you see unkept yards, gang graffiti on sides of fences?  Just be aware and ask questions.  You will find that you may have good connections with one or even more company and you will get a feel for the answers and the team that you like.  

Don't just be impressed by the prettiest company or the best answers.  It all has to fit together where the answers, the team, the culture (@Larry Fried   that is a great point that is so important), the neighborhoods (like @Dean Letfus  pointed out), the properties themselves all have to be congruent.  It is very, very easy to advertise and market ideals to prospective clients.  It is much, much harder to actually develop a company that meets the expectations of out of town investors.

Best of luck with your visits and research and congrats on taking those steps.  It is important that you take these steps first!

@Alex Heifetz  - I want to agree with @Steven W.  on one point he made as well.  Talking to current clients for a referral is very important, but ask to talk to more referrals than just the first few that are offered.  Dig a little deeper than that and do not be afraid to ask hard questions.

Ask a client what happens when things go wrong?  How does the company handle it?  If they tell you that they have never had a problem, they are either lying (this is real estate investing after all!) or they have not been a client long enough.  Problems happens.  The real proof of a great turnkey company is how do they handle problems for you as an owner.

Lastly, ask for some referrals who have had issues.  If the company has been around long enough and is willing to be open and honest, they will be able to point you in the direction of someone who has had issues and can tell you how they were handled.  Do not just accept their referrals.  Ask for more....

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