Seattle, WA · Member since 2013 · 70 posts · 33 votes
I bought two turnkey rental duplex units in Indianapolis last year that came with a one year rent guarantee. The rent protection was thru AON and was paid for by the advertiser that markets turn key homes.
Out of the four units I own, I’ve had to use the rent protection policy on three of the units; yes 3 out of 4 in less than a year. Two of the claims were processed pretty smooth. The third claim was denied due to the turn key/sellers placing a tenant that was a felon. This voided the policy for that tenant and I’m out quite a large sum of money; no rent since August and court date is not till the end of this month.
The AON policy is great, just make sure your tenants meet all of the criteria. I’m pretty sure that AON will not insure me when the policy expires. I can thank the turn key seller/property managers for this.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
12y
Wow, I just found this thread and feel compelled to comment. I also invest in Indy and have done through @Mike D'Arrigo and Pinnacle investing. I have 6 homes so far and have had one really bad experience. So let me tell you the difference between Will's story and mine. I bought a package of 4 already rented homes through Mike. It was a sale from another investor who also managed those properties through his PM company. The first thing Mike ever told me when I started was 1. No Duplexes, 2. Nothing in Center Township. That kept me away from the D class properties.
In this property set of 4 there were 2 excellent properties and two average properties based on the numbers. I examined the rent rolls and saw that one tenant on the average properties was often late. I asked the current PM about it and they said she always caught up. I was skeptical but thought the worst I would have to do is replace the tenant. Well this tenant didnt pay and when I put an eviction notice she left but totally trashed the place in the meantime. My lesson was learned. But the PM company I used was quick and efficient in the eviction process which was good to know. Of course I told Mike about the issue. Now in no way can I say he was responsible for that particular tenant. It was not him that selected the PM that placed her. But he totally took the problem to heart. He spent countless hours screening contractors and finally found me one that would do it at almost half the price of the other bids. He supervised the contractor, coordinated with the PM company and stayed totally engaged until the property was fixed and a new tenant was in place. That was my definition of good turnkey service.
Yes it cost me several thousands in repair and lost rent. But still over the year I made money on my portfolio. I learned some important lessons in due diligence and I tested the mettle of people I am doing business with. Not a pleasant experience but actually going through it gave me confidence to scale up the investments because I have seen what is most likely the worst case scenario already. And I saw first hand the value of diversification. As a result I will probably add some B class higher end properties to my portfolio to balance the risk. I have implemented a stringent screening criteria for tenants and my due diligence list grows stronger after every purchase. Its a process and some learning is to be expected. It did not turn me off from the business model and in many ways made me more comfortable as an investor.
Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
12y
I'm sorry, but I've got to say that your situation is pretty ridiculous, and I don't mean that as insult to you.
What kind of "turnkey" property is it where you have to use "rent protection" for 3/4 units in the first year? That isn't just an accidental "slip" of property screening, that is flat out abysmal and disgraceful performance. Who did the due diligence on this pm company (I presume the turnkey operator)? I certainly would not accept some ridiculous excuse that the pm let their criteria soften, and I would certainly want to hear more than that the pm is now on a "watchlist" by the turnkey provider.
This is a business (maybe Class D areas excepted) where, if you are screening tenants correctly, you should not even need rental protection.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
I have to say 1,400 rent for 72,000 is a 2% match. The areas given are said to be C- and D areas by the poster.
Critical with these turn key rentals Will is if the rehab was a " skin job " of carpet, paint, water heater and not replacement of all mechanicals A/C, heater, new kitchen and baths, plumbing, roofs, etc.
What I take issue with is many turnkey companies selling completely redone to only find out they did cheap fixes. Not only will you have the rent and damage issues mentioned you will also get crushed when it does finally get going with the big replacements the turn key companies didn't touch and kill your cash flow.
Now was the rent inflated?? Was it gross expected rent or effective rent meaning after waiver of first months rent or half off to get them in the real rent is lower. Were rents quoted top of the market, middle, or bottom of the market for the performance numbers??
In addition to REIT's and syndications you can also do NNN for hands off but the buy in is much larger and the returns are less for security. I do not care what anyone says there is risk in every investment. The goal is to find out if it fits what you want to do for risk versus return. The problem I have seen with duplex and quad management companies is they tend to be in many cases property managers on the side selling in between. They like the little checks until the big sales happens and then they start slipping on your property. Crappy tenants get put in, inflated repairs, not returning calls in a timely manner, etc. Bigger PM companies who only do managing on larger assets tend to have more systems in place for better management. The problem in D areas is the tenant pool isn't very good. You can take a run down property in a C+ to B area and make it good and you have tenant options to land quality if the rent is right. The D areas there aren't many quality tenants available. I chuckle when I hear these podcast talking about buying cheap houses but they have no history yet. What is real data is owning these types of investment for 2 to 3 years and then talking about have they performed as promised or even close to it. I have seen it work out in some cases but have also seen people call me telling they just want out etc.
I have never been interested in such properties. I think turn key properties are fine as long as full disclosure is given and the companies are not puffing the returns and rehab that was completed. Unfortunately I see that happens about 90% of the time to unsuspecting investors.
Denver, CO · Member since 2013 · 409 posts · 105 votes
12y
I suspect the problem has little to with poor screening, and everything to do with 'creative' placement. The fair market monthly rent for these two duplexes is probably not even close to $1,400 and $1,300. The prior owner probably advertised them at these prices with a heavily discounted first month's rent and a low move in amount knowing very well that the primary applicants were going to be problem tenants.
@Will Spruill I am sorry to hear about your problems. Would be interested to know what kind of due diligence you did prior to investing regarding the property manager and market? Was the management company Norada or a local company recommended by them? What kind of communication was there between you and the property manager when the problems started to arise? You indicated that these were C- and D neighborhoods. Is that what was represented by the turnkey seller. As you go "down market" in terms of neighborhood the expectation regarding the quality of the tenant would need to be adjusted. I guess the fact that you had the AON rent protection is a good thing but find it very disconcerting regarding the installation of a felon by the property manager which voided the coverage on one of the units. That would seem to be something that with minimal screening would have been learned. Any recourse to the manager for their negligence? Also not familiar with the process so I am going to ask a question (that I probably know answer to) but does the manager discuss with you potential tenant candidates prior to leasing?
In your opinion, what is the reason that the rents that you are now getting on turnover so much less than what was in place when you acquired the properties? Did you just rely on reps re rents made by turnkey seller or did you conduct your own investigation? If so, did it support the rents in place at closing.
Again, sorry for your difficulty but for anyone considering a turnkey investment we can learn from your experience.
Good luck going forward.
Michael
My due diligence was done thru Norada real estate and talking with the actual sellers, who in turn were the property managers. They did a great job at the rehab of both buildings that I purchased. I had a respected independent inspection done on both buildings and he gave them praise as well. Where things went bad was with their tenant screening; like I said before, in less than a year 3 of the four units have had or are going thru evictions. Even worse, they charged with $2000 to paint a 600 sq. ft. unit on the rehab; which was completely rehabbed 5 months prior.
The management company was the sellers of both buildings I bought. I bought both of these thru Norada, who recommended them and had their properties listed on his site for Indianapolis.
I’ve had hours and hours of conversations and two trips to Indy to deal with the property managers. They gave every excuse in the books of course. I knew these properties were in C and D neighborhoods and problems come with that. The property managers initially made me feel comfortable with their ability to screen tenants and keep rents on track. This was very far from the truth. They even admitted that their tenant screener was fired for lack of doing the job; basically accepting the first person thru the door. I’m currently working with the property manager to get things resolved.
The rents I’m supposed to be getting are the same that was advertised when I bought.
"The AON policy is great, just make sure your tenants meet all of the criteria. I’m pretty sure that AON will not insure me when the policy expires."
Hi Will -- The AON policy covers the rental unit, not the policy holder. Therefore, they should cover your new tenants under your current policy, and will continue to cover you (i.e. your rental unit) with the purchase of a new policy, provided the new tenants meet their eligibility requirements. It's not like car insurance where they can choose not to cover you because of too many accidents.
I've left AON a message this weekend to verify and confirm the above, and I will post their reply here once they get back to me.
I’ve spoke with AON and they confirmed it will continue and the policy will not lapse or get cancelled from too many claims. This makes me feel much better and comes with their great customer service.
On the other hand, I shouldn’t need to have 3 claims out of 4 units in less than a year.
"The main problem, was initial screening of tenants and poor property management. I will say that the first property purchased is now producing rent, but still can’t dig me out from the no rent and unit turn that I’ll be facing with the other. The new property manager has done a much better process of screening tenants and collecting rent.
What I seen was a quick turn over of the unit and taking anyone with a pulse and down payment as a tenant."
Hi Will -- You've hit the nail on the head regarding the "initial screening and poor management". Both principals of the property management company have told me over the phone, and on separate occasions, that their tenant qualification criteria and screening process was far too "soft", and their plans going forward (2014) were to make them much more stringent.
Their other problem/challenge was they were simply over their head with work and always behind the proverbial eight-ball. That's the reason they hired a new property manager and new office lady last year.
I've had this company on my "watch list" for the last four to six months, and although they've made progress in getting themselves better organized and improving their screening process, they still need time to get fully caught up. So, I remain cautiously optimistic.
I wouldn’t even call them property managers from what they did. This was an absolute disaster and at the end of the day my investments suffer. Them having poor screening or being over their head should not be my problem, but who would list this when trying to turn properties.
I will agree the new property manager is much better and it can only get better. Not a fun process for my initial “turnkey” investment.
As is said in the pocasts repeatedly is "what sets apart those that succeed from those that fail...persistence". Don't give up on that goal to buy 10.
Indeed, I am very persistent and don't give up. Just a bump in the road and lesson learned. It just may be a bit longer for the other 8 purchases till the dust settles from this mess.
I'm sorry, but I've got to say that your situation is pretty ridiculous, and I don't mean that as insult to you.
What kind of "turnkey" property is it where you have to use "rent protection" for 3/4 units in the first year? That isn't just an accidental "slip" of property screening, that is flat out abysmal and disgraceful performance. Who did the due diligence on this pm company (I presume the turnkey operator)? I certainly would not accept some ridiculous excuse that the pm let their criteria soften, and I would certainly want to hear more than that the pm is now on a "watchlist" by the turnkey provider.
This is a business (maybe Class D areas excepted) where, if you are screening tenants correctly, you should not even need rental protection.
What kind of "turnkey" property is it where you have to use "rent protection" for 3/4 units in the first year? Agreed
That isn't just an accidental "slip" of property screening, that is flat out abysmal and disgraceful performance. Agreed again
Who did the due diligence on this pm company (I presume the turnkey operator)? I hoped this was the case. I would have thought, again lesson learned.
I certainly would not accept some ridiculous excuse that the pm let their criteria soften, and I would certainly want to hear more than that the pm is now on a "watchlist" by the turnkey provider. I’m hoping to hear more as well.
Hope I didn't come off as rude, it's just hearing about your situation infuriates me. When I read the turnkey's response in this forum, he took no responsibility for what's happened to you. He just blamed it on the property management that he selected.
If this was a straight arms length transaction, then that would be one thing. But the turnkey's website specifically says that he "provides the initial due diligence on the property managers, as well as ongoing oversight and diligence on their performance." In other words, you were relying on him to help select a property manager. I seriously doubt you would have been interested in buying a property out of state and having to interview and find your own pm.
Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
12y
I'm with you @John Chapman - I'm absolutely infuriated by the turnkey's responses on this thread as well. It is quite clear they are not accepting any responsibility for their part in this, that Will is on his own, and they have basically washed their hand of it.
Saying that the PM is on a watchlist implies that they are still considering them as a viable vendor in the future. They'd be in my circular file after this kind of performance, and I'd have no interest in monitoring them to see if they somehow miracously "improve."
The point of my article was to show that doing right thing does not always have to cost you money. This company may soon realize negative publicity for doing the wrong thing will cost them much more money in the long run. Now anyone searching for this company may frind this thread and stay far away!
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y
Great points and my point was not to make an attack at Norada or IndyPM. I just wanted to put my experience out there and help others in a new buying situation.
Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
12y
@Will Spruill I can assure you that nothing you said in this thread came off as attacking Norada at all. In fact, you appear to be a very understanding and perhaps too generous of a guy. If they did to me what they did to you, I assure you the tone would be quite different ;)
Good luck to you and I hope it gets resolved fairly.
Investor · Long Island, NY · Member since 2010 · 99 posts · 23 votes
12y
@Will Spruill While I'm sorry to hear about what you are going through, I wanted to thank you for sharing your experience. I am in the market for Turnkey properties and have been researching markets as well as turnkey sellers. Its not always easy to do proper due diligence on these companies so its great to hear about some of these experiences because most turnkey sellers paint a very nice picture about their services.
Real Estate Investor, Flipper, PM, vacation rental, Wholesaler · Athens, GA · Member since 2013 · 260 posts · 210 votes
12y
So this is another "Turnkey-bashing" post...
Let me start by saying that this particular company has definitely done you wrong... I WILL say that the prices paid versus the market rents seem attractive. I'd suggest that there is "space" to drop the rents to get better quality candidates and eliminate turn-overs. Then your turnkey property will do exactly what it should be doing - sending you a check with decent cashflow for years to come.
[post edited]
Sorry again for your bad experience, but please understand there are some of us that run legit operations and value our customers. Do your diligence. Turnkey investing is a form of partnering.
The problem that I'm finding is that there are so many bad apples in this sector, it is hard to establish trust. Customers that are used to reading stories about shysters automatically write off these features as "too good to be true".
While I agree completely with the above (and your entire post), I think that your perception of the average investor looking to buy turn-key properties may be off. I think that most investors who avidly follow BP will be somewhat jaded; this type of investor is almost certainly the minority imo. I think flashy powerpoint presentations and a convincing sales pitch is more than enough to establish "trust" for many people. How do you think they get their customers in the first place?
Edit: Btw, not insinuating anything about the OP, just wanted to make that clear...
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
At the end of the day, it doesn't matter who sells (or promotes) a property that an investor buys. Will, in absolutely no way do I say this to knock you or your purchase because if you haven't been in the space for very long or without a lot of experience, there's no way you could know certain things. Trust me, I've bought my fair share of rental properties that went a little crazy myself.
(in general, and not to Will) Ultimately, for an investor buying any kind of property, it is up to that investor to do the due diligence in full. No one else's. That includes property inspections, looking over the tenant applications for who is living there (if tenants live there, which is the case for turnkeys), etc. You have to check all of those things before you agree to buy. It is awfully helpful if the seller or promoter helps coach you on these things, but they don't always. It is, unfortunately, up to you. No one can really blame anyone else for a bunk property because everything is easy to check up on yourself. The unfortunate part of this comes in when it's almost impossible to know what to look for when you just get started and you almost always have to have a fall to learn what kinds of things can go wrong. The good news Will is your fall on these isn't the worst fall on the planet :) You can still make them work and make up your losses with proper property management and good tenants.
I am a huge advocate of higher-priced properties, and higher quality, for exactly this reason. Duplexes that only cost $70k can only be so nice. They won't be in the best areas, they won't bring in amazing rents, and they won't attract high-quality tenants. And Will's story is exactly the story I try to avoid by buying higher-end stuff. Won't always avoid it, but better chances.
I think the only two factors that led to this, no question, are 1. lower-end properties and their associated risks and 2. bad property management putting in low-quality tenants. I don't think this is a reflection of turnkeys or Norada for a second. People need to be careful where they place blame. (not you Will, everyone else. You were very objective.)
Good news Will! Every investor has to have some failures, and the sooner you get them under your belt the sooner you can have more successes! :)
For the sake of clarity and transparency, I want to address a few comments made in this thread so it doesn't go off on a bigger tangent:
1. First, at no point did we "blame" the property managers. They openly admitted their mistake and took blame themselves. They knew what they did wrong, fired the person responsible, hired new staff and implemented new and tighter policies.
2. Second, Will's properties were already under management by this (new) management company. They were vetted as far as a new company could be, and Will was aware of their relationship with the property and the rehabber. As @Ali Boone correctly mentioned above it's "bad property management putting in low-quality tenants.".
3. Third, regarding the "not accepting any responsibility" comment, we have spent a good deal of time with Will and the property manager trying to understand the situation, answering questions, looking for solutions, and trying to help wherever possible. In fact, I wanted to avoid mentioning it, but we went as far as compensating Will for a month's rent just to help him a little.
4. Fourth, my comment about being on a "watch list" was misunderstood. There are many other investors who are happy and having success working with this property manager, so Will's case has not been a wide-spread issue. I've had several serious conversations telling them that they need to resolve their problems before we have a comfort level recommending them going forward. They have not been "kicked to the side of the road", nor have they been recommended any further at this time. It is important to note that we take an agnostic approach to all service providers.
5. Last, but not least, we provide the AON rent protect product to all our clients regardless of what they invest in, including our A+ new-construction properties. We pay for it at our expense simply as a value-add; nothing more.
...
Clearly, it's important to know the facts before making assumptions or drawing conclusions.
P.S. I enjoyed your article Mark Ferguson -- I agree 100%.
Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
12y
@Marco Santarelli I think that is the response most people were hoping to hear. Not that it solves all the issues, but you are at least working with Will.
I have had many turnkey companies approach me. For the most part they present properties rented and most "guarantee" rental rates and occupancy. Without knowing the exact detail of your agreement it's hard to know what Will should have expected.
One thing I have yet to see, unless I missed it was what the properties rented for with the new tenants. It sounded lower than what they were first rented for.
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
As promised, here is AON's reply to Will's policy question:
"Within the 12-month policy term, the 6 months of reimbursement and $1000 in legal fees that the policy holder is eligible for is independent of the number of claims filed.
For example, if tenant 'A' defaults but didn’t meet the qualification requirements, then tenant 'B' moves in and they do meet the requirements, claims will still be honored should tenant 'B' default."
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
I wish Chris Clothier would come in here to comment on situations like this. He has one of the biggest turnkey operations I have ever seen in Memphis Invest.
I am sure he has had plenty of nightmares to deal with. Situations will happen but it is how they are dealt with that matters. I think any turn key should stay away from guaranteeing everything and words like "no risk" or "nothing can go wrong etc.". Companies need to stop all around overpromising and under delivering.
I think the comment of charging 2,000 to paint 600 sq ft is horrible. That is the most crazy thing I have ever heard. You have to watch PM companies that charge a low to med managing fee and then hit you up with very inflated repairs and maintenance charges. They also churn tenants to keep getting first months rent as a fee versus the low ongoing rent fees with re-tenant costs.
Lot's of really crappy PM companies out there. A turnkey seller really can't guarantee anything when they are partnering with third party affiliates and not running things in house. Even then problems will happen and not ever PM hired or used will be a ball of fire.
Multi-family Investor · Boonville, CA · Member since 2014 · 2 posts · 0 votes
12y
I won't buy a rental that is more than fifteen minutes from my home. You have to watch and have some kind of a relationship with the tenants. Section 8 is bad too. You get people with too many problems.
Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
12y
@Ali Boone , I generally agree with your statement about buying in better areas, but I don't understand how you can say this does not reflect badly on turnkey providers or Norada. Those results are awful and they speak for themselves. If the results are due to (1) bad management or (2) bad properties, then the properties should never have been sold as turnkey properties. If you're truly on your own and cannot rely on turnkey providers to do the due diligence to avoid buying "bunk properties," then I'm not sure what value they add.
@Marco Santarelli I agree your response is encouraging. Maybe this is an exceptionally rare event, and I really don't know your arrangement with Tim. I hope it works out for you both.
