Turn Key demistified

6 Replies

The turn key business has been alive and well for 15 years or so now.. There are very few who survived 07 to 09.. So what you have now is a whole new crop of turnkey companies. And or the turnkey companies moved markets changed who they had selling their properties.

However when I started loaning hard money to I would say 7 to 10 Turn key guys here is how it went.

First I would say 80% of the buyers came out of the LA basin.. Mike Harris's radio show.. Jay and Bill down in San Diego, Nick Vertucci in Irvine, Marshall Reddick, You get the drift. These are the marketing companies. they then reached out to the wholesaler rehabber in the markets they wanted to work in.

Or the wholesaler rehabber reached out to them and said I have product. Many Started in Detroit before the melt down. Memphis had always been a hot bed with Memphis invest the Reedys LCS etc etc. North Carolina had Carolina liquidators , Jackson MS had 5 or six different companies.. One guy that sold a bunch was Demetris Mathis, Bob Lucroy, Walter Woofard, Brad Miller, then in Birmingham you had Justin Harrison, Aaron Adams at Alpine in Indy, And Jerry Cohen and his Son Sean who I loaned money to many times, I see Sean has gone into hard money lending. and the list goes on and on. Now other than Memphis invest and the Reedys I loaned hard money to each and everyone of these turn key operators clients and in many cases to them personally.. The clients came from the Radio shows in LA and San Deigo.. And some from SF there was a Doctor somebody I forget his name... So we loaned the turn Key operator short term money to secure the asset.. usually 3o days or so.. Then when they matched the home up with an LA investor through one of the marketing companies mentioned above we then did the 60% to 65% Hard money loan of ARV to the LA investor.. So now the LA investor is MY client. The loan would pay off the short term loan ( Pay me off and I made a fee there) I would escrow rehab funds and The Turn key provider and the Marketing company be it MIke Harris Jay and Bill Nick Vertucci any of these guys they got their profit as well. So now everyone has made there money. And its now me and the turn key company rehabbing with me controlling draws and I had independent inspectors to do draw requests and confirmations. Then the LA buyer would get a RAte and term refi at 75% LTV sometimes 80 and would very often get cash back at closing. So there you had The RAdio promoters promoting not only no money down but up to 8k cash back per closing and we can do 4 at once.. And with the lier loans and such it was one easy sell. So Refi happens I get cashed out and we do it again.. So at my peak ( not to be confused with Peak in KC) I was doing between 60 and 80 of these each and every month. And you can do the math we made 5 points plus junk fees and 15% interest I had credit line with my local banks at 6 to 7% so we were making not only the points but the spread.. BUT WE TOOK ALL THE RISK IF IT cratered.. And this went on for 4 to 5 years... Life was good right.

Everyone was making money.. Well then the excrement hit the fan.. I had about 700 loans out and everything came to a screeching half AUG of 08.. We were like the titanic and once we went into neutral then reverse we did 3 months of loans and got stuck with them. I was in Europe most of October going OH crap what am I going to do.

Well this is when I learned about PM and how hard it is to manage mid western properties. Some work fine but many have problems and major problems. My two hundred loans went under because the owners in LA were newbies did not know what they were really doing they had been sold a passive turn key program the guys on the ground are now doing something different because they are not making any new sales.. And the La investors failed big time.. this is were most of your 08 to 2011 foreclosure inventory comes from in all these markets , Granted it was a lot of sub prime Owner Occ but it was a crap load of investors who just could not keep properties up and running.. they were undercapitalized to start with. they were sold a program that called for positive cash flow,, they were really getting negative cash flow and of course the 8k per house they took out at closing is sitting in the driveway either on wheels a Jet ski or was that fabulous trip they could never afford. IT was a melt down of epic proportions.. I personally lost about 3 million in this down turn.. I paid all my creditors off never defaulted on my underlying bank loans and learned more than just about any person in the country about how turn key works.. I know I saw all the HUDS. I funded well over 2000 of these.. And after all this call me crazy but I went out and bought 350 homes the last 3 years.. And I just sold them all in Oct.

So what you have now is the new turn key guys.. The Cohens are not turn key anymore they are hard money.. Clothier and Memphis invest exploded as there was a huge vacuum in the space.. Atlanta became soup de jour and was hands down on of the best markets.. I bought 50 homes there from 09 to 2010 and sold them last July and made 50% profit. So just getting part of the 3 million I lost when the economy cratered and all the LA turn key investors and owners went pear shaped and turtled up.. NOw you have a whole new crew of turn key. Mike Harris is still on the Radio so is Jay and Bill,,,, Nick Vertucci has rocked it the last few years. Aaron Adams has gone from a great property manager to a great turn key guy in his own right.. Clothiers have such a good reputation as turn key gurus that they have a big following.... then there is me the little engine that "could" that made much of what went on happen I spent 2 years in limbo hell foreclosing on La folks and securing my assets Had to move to the south knocked on doors it was night mare of epic proportions I went from the penthouse on the cruise ship coming into Venice to cruising the Hood in Memphis looking at barred up windows caged Aircondioning units and talking with tenants that knew me to be a lamb to the slaughter.. Everyone paid there rent to someone.. just a night mare... I suspect in certain markets we were defiantly market makers. And the turn key guys that turned and ran and did not help their clients I would not deal with again. Those that stuck it out we are doing things today NOt as big as I was but substantial and fun.... So today I fund not only mezz financing for half a dozen of the guys in the bizz but do 5 year financing for them as well Ala a Peak product. WE fund almost a million a month of that paper and growing. And since I have the outlets and long history with my guys I have this down its me and 2 great gals that run it... I have a new mezz model that just rocks it and makes those deals so streamline its great. And I can tell you I am not by far the cheapest but I am by far the fastest and most reliable once I provide a credit facility for one of my turn key guys.. In addition I have 3 of the best off shore providers in my camp as well.

So there you go no mystery to this.. and other than the big cash out when folks bought the properties the business is really quite simple.. buy a bombed out foreclosure that an investor walked away from because PM was cruddy. And or they tried to do it themselves which is another recipe for disaster in the B and C class of any of these mid western markets... For the first 3 years after the great collapse all the turn key guys went to promoting IRA buyers.. all cash 60 % of all houses are bought with cash.. So other than my mezz financing there was no need for the hard money to put them in title and then do a rate and term refi so that business for now is gone probably for good.

And depending on when and where people are buying there are some really good buys.. BUT it really really comes down to one thing. Anyone can buy a foreclosure and Johnny lunch bucket can do the TIP TOP reno.. its all about PM without it your destined to fail in my Humble opinion and personal experience. further its my sincere belief that C properties are NOT an appropriate investment for anyone who does not live and work in the area. Yes some will work but many are disasters. I just had a lady e mail me from AU a few minutes ago.. She is investing with me in Oregon... And 2 of her 3 rentals are vacant and she paid full pop for them 80k a piece from one of the top Memphis turn key guys.. No matter who's fault it is she is just sick she is sitting over there not knowing what to do.. And for her to come here is 5k plus loss of work time.. Etc etc. Even people from LA or SF its a 1500 round trip if you got to go to one of these markets.. So my point is for arm chair passive and to be very conservative and safe investors need to look at much better properties pay more expect less cash flow but make it up with a true property that can be sold for a profit down the track.. C properties no matter were they are will never sell for more than wholesale value plus rehab plus a few bucks for profit for the rehabber.. Unless you have a highly organized well financed marketing machine that can move them for more than market value.. The turn key guys and marketers can do that YOu as an individual cannot 97% of the time.

Phew that my take on this

That's the most interesting post I have read in a long time. Thanks for taking the time to put it all down.

I've got to agree that the long distance investor needs a great PM and needs to stay in the better neighborhoods.

What is the reason you decided to liquidate last Summer?

Can't make a profit without selling..

I remember talking with Bruce Norris and he sold all his California holdings in 06 and did really well he then invested in Texas ( and did not do so well) but he did not get melted down like many others.

Once a profit is achieved its good to take profit and then look for the next deal. Plus I really wanted out of the rental bizz,, at 350 homes its a bunch of work and it was mainly b and c we did everything we could to keep it cash flow neutral to a little positive. So we got an offer from a hedge fund for our houses in Atlanta.. And my partner bought me out of the rest of them... He continues to grow the brand, I am concentrating on loaning money.. and doing 5 year non recourse as well as my construction bizz in Oregon. I am down to 11 rentals and continue to liquidate.. Better easier money in the Paper bizz in my mind.. That is if you can break into it. There is no leverage to speak of in the paper bizz.. But hey you get the right contact at from an asset manager and tie up a tape good things can happen..

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In my ever it to be Humble opinion C properties are NOT appropriate investments for out of area investors.. Talk with any local commercial bank they have it right in their underwriting policies they will not lend to anyone who lives more than 100 miles from their rentals... I know plently of locals in the communities that borrow from local banks for C class.. But its guys that live there deep roots.. and can stay right on top of these.. the PM issues are just staggering in almost all cases. Again in my Humble opinion and after forclosing and owning about 200 of them.. then buying another 350 ( not all C class but half C class. over the last 3 years.

Jay. That is a great post and it helps explain many things. I started looking at turn keys about a year ago and actually purchased one in Florida. I am interested in purchasing another and you make a very good point about not owning a C class from a distance. Well, I live in Wisconsin and prefer a good property manager over managing the property myself. How can I find out more about how you grade neighborhoods and find ones in A and B class from a distance?

@Jay Hinrichs Thank you for posting this. I am glad I found it, especially as a new investor considering long distance turnkeys as a possibility. I am going to check out your review website as well. 

If you will, please keep me posted on more of your work. Thank you.