Starting out with Turnkey investment - questions

7 Replies

Hi,

I was referred to a turnkey provider in a certain market, by another company called a "turnkey promoter".  I was disclosed that the turnkey promoter would be getting a fee, if they successfully sold me a home there.

I am curious if this "fee" is the same as a "buyer's agent commission".  My question is - Is the fee the promoter is getting, the same as a "buyer's agent commission"? Is there any difference between the "promoters fee" and the "buyer's agent commission" as far as the paper work goes?

One more question, Is it common to not have a tenant placed at the time of signing a contract for a turnkey property? I am told by them that - it is common not to have a tenant already, since the houses are in demand, so by the time they finish construction / rehab, people are already trying to buy the property. Is this true?  I really want a property that is already generating cash flow.  I am also told that since the mortgage payment is at the end of the first month (basically you don't pay for the first month), there is not really an impact - what do you think about that?

The turnkey promoter sounds like a real estate broker who will get a fee.  I am not sure this is even a legal fee, because they will need to be licensed in the state they are getting that fee.  If the turnkey company pays that fee, I wouldn't worry about it too much.

A turnkey property does or should have the tenant in place.

Please be careful with turnkey properties.  Some are legitimate.  Others are houses bought cheaply in declining areas.  Here are two thoughts:  Make sure you get your own independent appraisal of the property.  And talk to an independent realtor in that market.  Be weary if they control the appraisal and lending process for you - you might end up buying a property that is worth less than you paid for.

What can go wrong with these investments?  The number one thing is vacancy turnover costs.  When the property goes vacant, often the turnover costs and repairs are high for single family houses, compared to apartment units.  Good luck.

@Joel Fernandes you are not buying a "turnkey" property, you are buying a property from a "turnkey" provider. These are two very different things. You can buy properties with tenants in place (there are pros and cons to this) but that is not what a "turnkey" provider does. They buy a distressed property, sell that property to you for a profit, and then manage the renovations, and become, or refer you to, a property manager to find you tenants. Make sure you know what you're getting into before making any commitments.

Hi Joel,

There are both good and bad turnkey providers and good and bad reasons to use a turnkey provider. The worst outcome is that you over pay for a property through a combination of  multiple layers of fees and a valuation based on absolute best case rental income and vacancy and are then left with little equity, a poor asset and bad tenants. You can succeed with turnkey providers but recognize that you will need to do a lot of due diligence on the market, the property, the turnkey provider and whomever the property manager will be. DM me if you would like me to share my personal experience. Ronan

Thanks a lot for the answers, guys. I really appreciate it.

Brian, About the " independent appraisal of the property".  Are you suggesting for me to do this before signing the contract? Or is this the appraisal that happens as a part of the closing process *after* signing contract? I agree this is a great idea. Since I am not going to be visiting the property, I'd really like to have someone independent go check it out (before signing contract). Do confirm this is what you meant.

Also when you say the property has to have a tenant already, is this realistic to expect? Isn't it true that if the home is in high demand, then by the time the home is rehabbed, it would have already been sold to an investor BEFORE a tenant is placed?  And if it wasn't already sold to an investor, and has a tenant, then that means the property sat on the market for a while and nobody bought it, in which case the property is probably not that great/hot?

Jason, yes I am "buying a property from a turnkey provider". What could possibly be the cons of having a tenant in place already?   Also could you clarify what you mean by a "turnkey property" ?

Ronan, thanks. The property in question is a high growth property. So I am trying my best to get a good deal and not get a negative cash flow while at the same time being conservative about rent/vacancy etc. 

I also forgot to mention, the property I am looking into is new construction.

The con of a tenant in place is that you are relying on the opinion of someone else on whether they are a good tenant. Sometimes sellers will fill vacancies with the sole purpose of adding value, knowing that they will not have to deal with the consequences. Another con is that you have to abide by the existing lease in place. If the previous landlord allowed the tenant do do drugs and house prostitutes, you would not be able to change the lease. Of course there are pros as well, knowing the current lease and screening method used would just be part of the due diligence needed.

Originally posted by @Joel Fernandes :

Hi,

I was referred to a turnkey provider in a certain market, by another company called a "turnkey promoter".  I was disclosed that the turnkey promoter would be getting a fee, if they successfully sold me a home there.

I am curious if this "fee" is the same as a "buyer's agent commission".  My question is - Is the fee the promoter is getting, the same as a "buyer's agent commission"? Is there any difference between the "promoters fee" and the "buyer's agent commission" as far as the paper work goes?

One more question, Is it common to not have a tenant placed at the time of signing a contract for a turnkey property? I am told by them that - it is common not to have a tenant already, since the houses are in demand, so by the time they finish construction / rehab, people are already trying to buy the property. Is this true?  I really want a property that is already generating cash flow.  I am also told that since the mortgage payment is at the end of the first month (basically you don't pay for the first month), there is not really an impact - what do you think about that?

 If it's done legally it's more or less the same thing as a referral agreement you'd see when an agent refers a client to another agent who would be better served working with them. For example you are an agent who's familiar with Cleveland & have a client who wants to buy a house in Columbus. So you sent him over to an Agent in Columbus & he agreed to pay you 25% of the gross commission he gets on the deal. A lot of the turnkey promoters do a similar thing & there is usually a flat fee involved. I believe the going rate is about $5k right now.

You definitely want to get an inspection after signing the contract.  The turnkey providers typically tenant the property when they're done with the rehab even if it's not sold.  Most turnkey providers want repeat business so its best to find one with in house property management.  The turnkey promoter adds their fee on top of the turnkey providers price so it's best to go direct if possible.  Good luck!

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