My turkey disaster

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.

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Account Closed

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.

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Aly W.
Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
12y

Trial by fire indeed! You're right, it will get better.
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Sharon Tzib
Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
12y
Sure @Chris Clothier I'll do that - should make for an interesting discussion :)

@Marco Santarelli thanks again for the further clarification. While we may not see eye to eye on what transpired here, ultimately it will be up to your existing and future clients if they are comfortable enough with your business practices to work with you. I sincerely wish you much success, and hopefully everyone has some beneficial takeaways from all this.
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Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
12y
@David C. Before this gets 'catty' lets dial it down a notch - no reason to get really annoyed with anything. Maybe you think I was trying to make you look bad, but I never said you misread or misstated anything. My first response may have made it about as clear as mud, so I will try again. Our website is optimized for keywords that people search. In this industry, Turnkey is one of those words. The bold statement you copied from our page is an H3 header, which further improves the optimization of our site for terms in that phrase. For YEARS we have been referred to as a turnkey company both in our own marketing and by others in the industry. I just wrote an article on the subject Turnkey for the BP blog today. While the term Turnkey will continue to be on our website, which receives 10,000 views a month from real estate investors, I will continue to say in public that we are a passive investment company which I feel fits more in line which where we have grown today. I will continue to tell investors that while we may be a TURNKEY company, we prefer to look at our business a little differently as a passive investment company and not just a turnkey solution. What I should have said earlier, is that I do not like the term Turnkey and try not to use the term in public when describing our company instead preferring to be called a passive investment company. How's that?

On that note, I do appreciate you visiting the site and reading it so thoroughly. As you get started buying your first property if I can help in any way I'd be glad to try and offer any advice.
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David C.
Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes
12y
@Chris Clothier

Good clarification Chris, I've only seen and heard good things about you guys and I appreciate that you take your time on this site to share.

Given the heavy use of the term in the business, not using it in your marketing would be a mistake.

If I ever decide that turn-key is the thing for me, you are on the short list.
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Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
@Sharon Tzib : I think we're probably more on the same page than you realize. I agree with your line of thinking, but again, there's more history and behind-the-scenes activity than what has been presented in this thread.

I certainly believe there will be some beneficial takeaways from this post, for example:
1. Asking more questions,
2. Doing deeper due diligence,
3. Setting better expectations up front,
4. Increased communication with property managers,
5. More caution with "new" service providers (ex. property managers),
6. Making sure tenants meet AON's qualification requirements,
7. Having a better understanding of the demographic profile, etc...
Thanks for your input.
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Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
12y
@David C. I appreciate the response as well and David, I would help in any way I could even if you weren't buying Turnkey or buying from me. I have had my share of success and failure in real estate and would have loved a resource like BP to find good advice on when I was starting out. So, for what that was worth, if I can help I will. Same goes to you @Will Spruill . Let me know if I can help you as you continue to navigate your properties and future buys.
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Dev HornPro Member
Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
12y
Dang, this was not at ALL what I thought this thread was about!

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
So the weekly rent collection takes it to a whole different level. I would say in that case you want stronger than the 2% rule.

I sold a large apartment complex for a client years ago that operated that way. They signed year lease or month to month but about 80% were collected weekly. The reason is they were a factory type town where people were paid weekly. If you didn't get it every week the tenants would spend on booze and other things and it would be gone.

You can effectively collect the rent this way but there are extra costs to pays someone to collect and higher PM fees. You will also incur annual higher book keeping costs. The type of tenants that pay weekly have very volatile life circumstances and some will last long term but not most. In a duplex this is harder to pull off then say a 50 unit or 100 unit where you can average out the timing and departure of expenditures and cash flow with incoming versus outgoing tenants. Your breakeven occupancy is much lower as well.

I like clients if they can to get a quad if that's all they can afford over a duplex or tri because of breakeven occupancy servicing the debt. I generally work on really large apartment buildings but some local investors I help out with smaller things time to time.

If I ever resold a property after rehab I would tell that investors that due diligence and risk is on THEM. The reason is I do not have time to offer all inclusive with something. I have been thinking of rehabbing duplexes and quads and putting them back on the market but have not played with it yet. I do like what David says about being direct and not puffing. I would venture to guess if TK companies did this they would get less impulse buys to move inventory.
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Shaun Reilly
Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
12y
Generally sounds like Marco is working with Will and trying to get the issue resolved.

It does sound like the management company messed up big time and needs to be held accountable for their actions. If it were my business I would offer to pay what the AON policy would have paid if my negligence has not voided the policy.

People can throw things back to the investor needing to do their own due diligence but if the PM said they screened the tenants and they checked out I think that it is pretty reasonable to take that at face value. That isn't some small thing to miss. If the guy is a felon that should have come up on the most basic of background checks. If Will said he was okay with a felon then it is on him but I am guessing that isn't at all the case.

Note that I think that Property Management company should do this. The fact that Marco gave Will a months worth of lost rent was a very nice gesture on his part but not necessarily needed for this part of the situation. However it is a smart business move to show they are not stepping back on any responsibility for the overall situation.
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Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
Originally posted by @Shaun Reilly:

Generally sounds like Marco is working with Will and trying to get the issue resolved.

It does sound like the management company messed up big time and needs to be held accountable for their actions. If it were my business I would offer to pay what the AON policy would have paid if my negligence has not voided the policy.

People can throw things back to the investor needing to do their own due diligence but if the PM said they screened the tenants and they checked out I think that it is pretty reasonable to take that at face value. That isn't some small thing to miss. If the guy is a felon that should have come up on the most basic of background checks.

Note that I think that Property Management company should do this. The fact that Marco gave Will a months worth of lost rent was a very nice gesture on his part but not necessarily needed for this part of the situation. However it is a smart business move to show they are not stepping back on any responsibility for the overall situation.

The problem was the property manager in charge (at that time) didn't do a complete screening, and let the tenants in under very thin criteria. They've admitted their error to me on two separate, and have since fired that person, and hired a new lead property manager and support office staff. There's hope for this company, but their mistake was made. At this point the focus should be to get the units leased as soon as possible to new and better tenants.
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
12y
Originally posted by @Chris Clothier:
@Joel Owens For an investor buying for a long-distance, anxiety and not-knowing or trusting can eat away at you everyday. A PM company can go a long way by simply picking up the phone and communicating quickly and honestly.

Buying long distance is not for everyone, that's why this is one of the 'great debates' on Bigger Pockets, with some people saying it's okay and other people saying stay away.
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Will Spruill
OP
Seattle, WA · Member since 2013 · 70 posts · 33 votes
12y
Originally posted by @Shaun Reilly:
Generally sounds like Marco is working with Will and trying to get the issue resolved.
It does sound like the management company messed up big time and needs to be held accountable for their actions. If it were my business I would offer to pay what the AON policy would have paid if my negligence has not voided the policy.

This is the kind of resolution I'm hoping for. I'll be sure to update this thread as it progresses.

People can throw things back to the investor needing to do their own due diligence but if the PM said they screened the tenants and they checked out I think that it is pretty reasonable to take that at face value. That isn't some small thing to miss. If the guy is a felon that should have come up on the most basic of background checks. If Will said he was okay with a felon then it is on him but I am guessing that isn't at all the case.

I spoke with the property management company multiple times and was assured that they had strict standards as they praised their background checks. This was all too far from the truth. After the first eviction I looked over the other three background checks and was blown away. This is when I contacted the property manager and asked WTF? This is when I was informed that now all three of the remaining units were in various stages of default. They didn't tell me until I brought it up. About the worst case of lame property non-management I have ever seen.

I'm not new to property management. I grew up helping my grandparents manage an 85 unit apartment complex and manage my own local properties.

Note that I think that Property Management company should do this. The fact that Marco gave Will a months worth of lost rent was a very nice gesture on his part but not necessarily needed for this part of the situation. However it is a smart business move to show they are not stepping back on any responsibility for the overall situation.

Marco gave me a months rent due to not setting up the AON rent protection in time. I bought the first property in May and needed the claim in August , this is when I found out there was no rent protection.

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Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
Originally posted by @Will Spruill:

Originally posted by @Shaun Reilly:

Note that I think that Property Management company should do this. The fact that Marco gave Will a months worth of lost rent was a very nice gesture on his part but not necessarily needed for this part of the situation. However it is a smart business move to show they are not stepping back on any responsibility for the overall situation.

Marco gave me a months rent due to not setting up the AON rent protection in time. I bought the first property in May and needed the claim in August , this is when I found out there was no rent protection.

The reason for the delay ordering the AON policy was due to us waiting on the property manager (Linda) to send us the required documents which I requested at least five (5) times by email, and several times by phone. She kept apologizing for the delay, but never did send us those documents. I evenually raised the seriousness of the issue with her but she only deferred the problem to someone else.
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Michael Leffelholz
Lender · Westfield, NJ · Member since 2010 · 85 posts · 23 votes
12y
@Will Spruill

Did you ever think that your original post would generate such passionate responses-both for and against turn key providers and maybe (rightly so) taking @Marco Santarelli and Norada to task.for their lack of oversight. Any way, Marco seems to be very forthcoming and it sounds as though Norada is trying to do the right thing.

@Sharon Tzib I am intrigued by the question that you posed to @Mike D'Arrigo regarding whether a turnkey provider should be marketing D Class properties to its clients. It's an interesting question but at the end of the day as long as the property is not being marketed as something it's not by the turn key company, I say let them offer it. Every investment has risk and high risk investments get marketed/sold everyday.The ultimate responsibility is with the investor to determine what level of risk they can tolerate. Of course, the investor should be adequately compensated in the form of a realistic return for that risk. The Latin phrase Caveat emptor comes to mind. That said, if a turnkey company is deliberately marketing a property as something its not that's unacceptable and they should be taken to task for it. In looking at Norada's web site they have many properties that are indicated to be in A and B neighborhoods. Maybe they are and maybe they aren't. I have yet to see a property marketed as being in a D class neighborhood.

People are easilly blinded by the lure of fantastic returns. This is absolutely not a criticism of anyone who has posted here- it's human nature. Just look at the list of names of those who were swindled by Bernie Madoff. Many very successful and well heeled business people. Also some who sadly couldn't afford it. If something seems too good to be true it usually is.

In the interest of full disclosure, my partner and I have been discussing going the turnkey route for our buy and hold strategy. Neither of us own real estate currently (other than our own homes) but neither of us are real estate novices. These providers serve a niche. They aren't for everyone. Will's experience will give us further food for thought.

Continued success to all.

Michael
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Gerald K.
Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
12y
Originally posted by @Marco Santarelli:
Originally posted by @Will Spruill:

Originally posted by @Shaun Reilly:
Note that I think that Property Management company should do this. The fact that Marco gave Will a months worth of lost rent was a very nice gesture on his part but not necessarily needed for this part of the situation. However it is a smart business move to show they are not stepping back on any responsibility for the overall situation.

Marco gave me a months rent due to not setting up the AON rent protection in time. I bought the first property in May and needed the claim in August , this is when I found out there was no rent protection.

The reason for the delay ordering the AON policy was due to us waiting on the property manager (Linda) to send us the required documents which I requested at least five (5) times by email, and several times by phone. She kept apologizing for the delay, but never did send us those documents. I evenually raised the seriousness of the issue with her but she only deferred the problem to someone else.

Seems like that would have raised some red flags. Marco, not trying to put you on the spot, just trying to understand your operation. Does your turnkey company partner up with property managers versus having management in-house? Do you normally have only one property management company you use at a time in the same area or do you have back ups? Seems to me, if you had others competing for business, it would create some competition and maybe a better result. Any checks in place or boots on the ground to make sure they're doing what you want or do you just contract them out and hope it all works out ~ no news is good news type of thing?
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Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
Originally posted by @Gerald K.:

"Marco, not trying to put you on the spot, just trying to understand your operation. Does your turnkey company partners up with property managers versus having management in-house? Do you normally have only one property management company you use at a time in the same area or do you have back ups? Seems to me, if you had others competing for business, it would create some competition and maybe a better result. Any checks in place or boots on the ground to make sure they're doing what you want or do you just contract them out and hope it all works out ~ no news is good news type of thing?"

Hi Gerald -- not a problem, it's a good question. Our company does not do any property management. We typically work with 2 or 3 local property management companies in each market. We rarely hear or see issues from the management companies we refer, but on occasion something comes up and we need to look into it. As with any service provider we work with or refer, if their issue is ongoing and does not or cannot be resolved then we stop doing business with them. This is the 'agnostic' concept I referred to earlier. Our decisions are performance based.
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Gerald K.
Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
12y
Originally posted by @Marco Santarelli:

Originally posted by @Gerald K.:

"Marco, not trying to put you on the spot, just trying to understand your operation. Does your turnkey company partners up with property managers versus having management in-house? Do you normally have only one property management company you use at a time in the same area or do you have back ups? Seems to me, if you had others competing for business, it would create some competition and maybe a better result. Any checks in place or boots on the ground to make sure they're doing what you want or do you just contract them out and hope it all works out ~ no news is good news type of thing?"

Hi Gerald -- not a problem, it's a good question. Our company does not do any property management. We typically work with 2 or 3 local property management companies in each market. We rarely hear or see issues from the management companies we refer, but on occasion something comes up and we need to look into it. As with any service provider we work with or refer, if their issue is ongoing and does not or cannot be resolved then we stop doing business with them. This is the 'agnostic' concept I referred to earlier. Our decisions are performance based.

OK, thanks Marco. I'm glad you didn't take my question the wrong way and I do appreciate your thoughtful response.
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Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
Originally posted by @Michael Leffelholz:

"In looking at Norada's web site they have many properties that are indicated to be in A and B neighborhoods. Maybe they are and maybe they aren't. I have yet to see a property marketed as being in a D class neighborhood."

Hi Micheal -- I just posted this in another thread, and it appears to address your observation quite well:

The percentage of owner-occupied home in an area or neighborhood plays heavily in how a neighborhood is graded.

Thanks for your comments.
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Shaun Reilly
Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
12y
Originally posted by @Marco Santarelli:
Originally posted by @Will Spruill:

Originally posted by @Shaun Reilly:
Note that I think that Property Management company should do this. The fact that Marco gave Will a months worth of lost rent was a very nice gesture on his part but not necessarily needed for this part of the situation. However it is a smart business move to show they are not stepping back on any responsibility for the overall situation.

Marco gave me a months rent due to not setting up the AON rent protection in time. I bought the first property in May and needed the claim in August , this is when I found out there was no rent protection.

The reason for the delay ordering the AON policy was due to us waiting on the property manager (Linda) to send us the required documents which I requested at least five (5) times by email, and several times by phone. She kept apologizing for the delay, but never did send us those documents. I evenually raised the seriousness of the issue with her but she only deferred the problem to someone else.

As @Gerald K. mentioned I would have thought that this would have been a pretty big red flag to start off things. If these guys were still new I might have gone over her head to the principles and given them the WTF? email/call.

As for the previous comment that stated the PM has since fired the bad screener/manager and realizes that was a problem, that is great. Very vital step in them recovering respectability and being able to function effectively in the future. However IMO they should still make Will whole since he
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Shaun Reilly
Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
12y
Originally posted by @Marco Santarelli:

Originally posted by @Shaun Reilly:

Generally sounds like Marco is working with Will and trying to get the issue resolved.
It does sound like the management company messed up big time and needs to be held accountable for their actions. If it were my business I would offer to pay what the AON policy would have paid if my negligence has not voided the policy.

People can throw things back to the investor needing to do their own due diligence but if the PM said they screened the tenants and they checked out I think that it is pretty reasonable to take that at face value. That isn't some small thing to miss. If the guy is a felon that should have come up on the most basic of background checks.

Note that I think that Property Management company should do this. The fact that Marco gave Will a months worth of lost rent was a very nice gesture on his part but not necessarily needed for this part of the situation. However it is a smart business move to show they are not stepping back on any responsibility for the overall situation.

The problem was the property manager in charge (at that time) didn't do a complete screening, and let the tenants in under very thin criteria. They've admitted their error to me on two separate, and have since fired that person, and hired a new lead property manager and support office staff. There's hope for this company, but their mistake was made. At this point the focus should be to get the units leased as soon as possible to new and better tenants.

That is great the PM has since fired the bad screener/manager and realizes that was a problem. Very vital step in them recovering respectability and being able to function effectively in the future. However IMO they should still make Will whole since he got screwed by that employee even if they didn't realize they were doing it and have taken this corrective action.

They probably aren't obligated to, by the letter of the law (but maybe they are?), but I think it is a good business move and ethically the right thing to do. And really if 5 months of ~$600 rent (Since Marco paid 1 and it read like that was what the policy would cover in a previous comment) will make of break the PM then they are working way to close to the edge anyway.
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Marco Santarelli
Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
12y
Originally posted by @Shaun Reilly:
As @Gerald K mentioned I would have thought that this would have been a pretty big red flag to start off things. If these guys were still new I might have gone over her head to the principles and given them the WTF? email/call.

Actually, she WAS one of the principals. After my patience ran out I gave them both a WTF call. That only added more pressure to their already stressful situation. :-\
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
@Chris Clothier a few pages back gave some good tips on separating the wheat from the chaff when it comes to turnkey promoters.

Here's an idea used in automobile sales: no lemons. Lemon laws came to be because people bought cars that turned out to be "defective" in some way. To the point where lemon cars are purchased back by the seller.

Why not something similar for the turnkey industry? No turkeys - seller will buy it back if it fails to perform as advertised.
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David C.
Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes
12y
@Steve Babiak

the problem with guarantees in this business is how hard it is to measure it, and how to assess blame. Can the owner reject tenants. If he does, does he still have his guarantee? It works with cars because they are commodities and its easy to document when they are broken.

If an investment fails to perform who's fault is it: owner? property manager? Obama? sudden crime spike? etc... I just think it would end up being very costly insurance that would erode much of the return.

However, maybe we can convince AIG that Real Estate only goes up and tenants always pay on time and they will sell us cheap real estate investment performance. Remember, they fell for the 'houses only go up' argument and sold all that insurance on mortgage derivatives :)
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Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
12y
@Steve Babiak and @David C.

There are a few Turnkey companies out there, actually I can only think of two of us, who have bought back properties before without offering any written guarantee. It all comes down to looking yourself in the mirror at night. You have to do the right thing. In each instance with us, it has been an investor who either had a change of mind and realized they were not cut out for long-distance investing - they really, really wanted and needed to be in control - so it made them uncomfortable or another time where the buyer had a tax issue arise almost immediately and even though it was out of our control, the right thing to do was to buy it back. When an investor buys and later shows remorse because they were not ready, that is absolutely a mistake on our part where we clearly did not take that buyer through the right purchasing process. We missed something and it is much easier to buy that property back than to try and convince someone that they made a good investment decision. It is easier to buy that property back and review the process and improve as a company. Plus it earns you a lot of credibility if you are willing to stand behind your clients.

In order to do that it takes confidence that you know what you are doing and capital so you can perform for a client that needs you to help. Both of those things are the main reason TK companies will most likely never write a written no lemon guarantee. Most simply don't have the experience and capital to guarantee a performance. That is why you hear horror stories about TK companies. But I do network with a lot of companies who do step up and try to help as much as possible when something like this happens and sometimes that means paying multiple months of uncollected rent or covering mortgage payments, etc. It is just really hard to justify telling someone "you had your chance for DD and oh well, things happen!" You just cannot do that and expect to have a good reputation or to remain in business.
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David C.
Real Estate Professional · Mechanicsburg, PA · Member since 2012 · 319 posts · 167 votes
12y
@Chris Clothier if I were to go 'turnkey' - part of turnkey means to me that I'd be outsourcing the DD on the property to you.

Its like when I send money to Vanguard. I don't dig into each fund's holdings, I my confidence is in Vanguard, not in each company they invest in.

Of course, this comes back around to: what is turnkey? Is it a tool for a confident experienced RE investor to diversify geographically? or is it a tool for a non-RE investor like me to outsource all the RE ugliness, and get some of the return, and the tax benefits, while sharing some of the return with you, as compensation for your expertise and work dealing with the property.
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