Due Diligence with Turnkey

13 Replies

I am a hopeful first time investor looking to make my first investment this year.  I have been doing a ton of research and listening to podcasts, but I am still a bit at a loss in terms of due diligence.  I am potentially looking to go the turnkey route, but don't really even know what type of questions to ask or data to look at to determine the right areas, if a house is worthwhile, etc.  

Any advice on the right questions I should be asking or what data to be analyzing?  

I have personally talked with turnkey rentals, And I believe that at the core the model which their business operates is directly opposed to an investor. I have still not come up with good answers for turnkey providers which is was I stay away:

- If the properties a turnkey provider is selling me are so awesome, why aren't they investing in it for the long term?

- What's the advantage of a TK to give you a property manager? Many issues with PMs don't happen for years down the road. As discussed a turnkey provide is a short term business plan.

- Speaking of PMs, property managers, I don't understand the business model, do you? I run a business and I don't understand how they make a profit, take care of an asset, and run a business for $100 dollars a month. If you can't answer that, than you know they're hiding fees, or going out of business.

@Michael Sedillo  

1. Many turn key operators own many units to hundreds I know first hand as I have funded them for the last 20 years.  But the basic answer to your question is they want to make a profit on the sale to create cash so they can buy and hold.  Just like anyone in America.. they may create cash so they can buy and hold by working in another job.. Or you see it all over BP..  " hey I am a new wholesaler I want to wholesale to make cash so I can buy and hold"  no different for the turn key companies.

Me personally I am in the finanice business and don't really care for cash flow properties of any type.  and simply because I am old and tired and don't need cash flow homes.. I had 350 of them at one time.. lots of work owning rentals...

2. this happens with any rental regardless if you buy it from a fix and flipper who specialize's in selling rentals ( turnkey company) or a fix and flipper who just puts them on MLS.. bottom line someone buys a home fix's it up and resells it no mystery there.

3. PM  is a tough business and many turn key companies engage in it for on going customer satisfaction as a big part of their after care.. and I agree with you unless you can scale PM I would not do it personally for 100 a month.. but they do make more than that they get a lease fee and mark up on repairs  Just like all PM companies get.

@Jay Hinrichs , thanks for the thorough response. I understand that they want to create a larger buy and hold portfolio, so that's why want cash. 

But if I'm hiring a TK, I want to be part of the houses that are so awesome the TK providers keep. Ya know what I'm saying? I don't want a TK provider who's trying to get cash from me to buy his own deals he's pocketed with the better returns, in the nicer returns.

That's why I like partnering. I only buy houses for my investors that I want in my portfolio, because since we're partners, it's my house too.

I agree that I like most PM and TK providers that I meet. They're not bad people, I just think the business model is flawed. My 2 cents

@Michael Sedillo   no argument there aligned interest are always good.. however partnerships are still partnerships and most people just prefer to be the only one's on title and control their own deals.

I don't really see my guys and gals cherry picking and or in the price points your talking about in most mid west markets its just not big enough dollars to worry about it.

Unless the consumer wants to get set up find the deals get them rehabbed etc etc.. there is a cost for this .. regardless even if they partner with you .. you still have cost and they are giving up equity for you to be their partner..

There are many here on BP that I know that do it the way your talking about though.. and by and large I think it works just find all around.. at least I have no heard of any major blow ups.

@Josh Anisfeld I have several suggestions for you when it comes to vetting a turn key operation (works for contractors and PMs as well):

  1. Search for company reviews on line.  At a minimum check the following: BBB, Yelp, Google+, Facebook, Angie's List, and of course, don't forget Bigger Pockets! 
  2. Ask for the names of the owners of the company and then do the same searches above on their names.  You are looking to see if the owners have been involved in any shady businesses prior (or concurrent) to this one.
  3. Ask for at least 3 client references.  Follow up with all of them.  Ask what they most liked and least liked about the company.  Ask if they would do it all again.
  4. Verify that they are properly licensed and insured.  There is no excuse for a turnkey company to not have a brokerage license unless they are doing shady activities.  Most states require a broker's license to do this kind of activity.  Every company should at a minimum have some type of liability insurance.  Any company doing property management should also have E&O insurance.  Ask to see their insurance.

Hope this helps!  Good luck!

@Chris Dawson   good list... and agree on brokers license if they are engaged in PM.. however if they sub out PM.. and they own all the assets they sell then brokers licenses are not required.

I have many folks I fund that are smaller boutique type TK sellers and they do not need licesnes to sell their own inventory..  PM in virtually all states requires a Brokers license.. PM handles the money.. So PM is critical.. larger PM's can and do have hundreds of thousands to millions of dollars flowing through their accounts so you want to make sure they are fully licensed and vetted as you said.

@Josh Anisfeld I talk about what to look for in a turn key company and what to watch out for on one of my Pinnacle Perspective podcasts. Just look for episode 12-7-2015 on my website. You might also want to check out the 10-7-2015 episode. I think you'll find both helpful. Turn key can be a good way to go for those that have busy lives, work regular jobs and don't have time to dedicate to finding properties, putting teams together, managing rehabs and everything else that goes in to acquiring an income property. There are good ones and bad one like with anything else, so be sure to your due diligence and know how to recognize the difference. The biggest complaints people have with some turn key companies is that they pay over market price, returns are overstated  and that the turn key company does not accurately represent the class of property and neighborhood. Those should be red flags for you. Be sure to check out the podcasts I mentioned.

Originally posted by @Michael Sedillo :

I have personally talked with turnkey rentals, And I believe that at the core the model which their business operates is directly opposed to an investor. I have still not come up with good answers for turnkey providers which is was I stay away:

- If the properties a turnkey provider is selling me are so awesome, why aren't they investing in it for the long term?

- What's the advantage of a TK to give you a property manager? Many issues with PMs don't happen for years down the road. As discussed a turnkey provide is a short term business plan.

- Speaking of PMs, property managers, I don't understand the business model, do you? I run a business and I don't understand how they make a profit, take care of an asset, and run a business for $100 dollars a month. If you can't answer that, than you know they're hiding fees, or going out of business. As @Jay Hinrichs correctly points out, most turn key operators do own properties for long term hold in their markets. It's no different than those who do retail flips.

There are a lot of things you can ask, and should ask. But before that, and maybe you have done this already, I would just research a lot of different companies. By comparing and contrasting, you will probably formulate questions to start asking. They may not be the exact due diligence questions, but they will be a start on educating yourself on the turnkeys.

I wrote this article a long time ago but it may help at least get your mind going on them... (I've grown a lot with turnkeys since this article so I probably would write it differently now but it's still a start)...

https://www.biggerpockets.com/renewsblog/2013/04/2...

Otherwise I would suggest working with experts. Let the 'experts' give you different information and see how you feel about it all. I can tell you what I look for in turnkeys and what I ask about, and then maybe hear from some other turnkey investors. We've all worked with different people, some in different capacities (like some work just with direct turnkey providers while I've worked more directly with experts who vet turnkey providers and then make recommendations on who to work with), so lots of good stuff out there.

@Ali Boone Hi Ali, who were you talking about when you mentioned "experts who vet turnkey providers"?

@Josh Anisfeld , I think that Ali brings up a good point. You'll hear a lot of different opinions, and hear a lot of different information, but when it comes down to it you have to see how you feel. I believe that if you don't believe in the product with your gut, and with your heart, then you've learned something at some point in your life that your subconscious is trying to warn you about.

Good luck, all!

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