My first out-of-state turnkey was a bust (sort of)

Joshua McGinnis · 2014-07-15T15:15:46-07:00

Just thought I'd share a story for any others out there considering buying a multi-family out-of-state, sight-unseen, from another BP member who markets and manages properties.I found a deal on the BP Marketplace in the Cleveland, OH area. It was marketed as turnkey and ready to go. The numbers looked great and the person marketing the property had a positive reviews. Everything appeared peachy so I decided to move on it.I knew early on, that I wanted this first remote sight-unseen investment to go well for a few reasons. One, I didn't want to lose money (who does?) and second, I wanted a positive experience to give me that mental motivation I need to push me to do something that is normally outside of my comfort zone. One of the ways I told myself I'd do this is to make sure to get the property appraised and make sure I get the property inspected.Long story short - I got the property under contract. Once it was under contract, I was told that the owner was still finishing up some carpeting in the unit. I thought to myself, "that's strange - I thought this property was all ready to go." Nevertheless, it's just carpet so I move on to scheduling an inspection. The day of inspection comes around and the BP member who was marketing the deal and managing everything on the ground informs me that the utilities are not on and that the owner is still finishing up some work. Frustrating, because again - I thought the property was already ready to go and I would have expected someone, either my guy or the seller, to anticipate needing the utilities turned on. So we reschedule the inspection.A week goes by and I check in to see how the inspection went, and low-and-behold - one of the units still doesn't have the gas turned and work is still continuing on the unit requiring we yet again delay inspection a week.At the end of the day, I backed out of the deal. None of the issues were that big of a deal, but there was something about running into this many problems just getting to the inspection that rubbed me the wrong way. I don't expect every acquisition to go 100% smoothly, but I was operating under the premise that the property was ready to go. If that wasn't the case, then who knows what else might be hiding for me to deal with in the future. I've purchased several homes in the past and have never needed to reschedule an inspection, let alone more than once.It's a shame - I was really pumped about it and I've already sent a ton of referrals to person who sourced the deal, but it just didn't pan out.I wonder what the community thinks about this situation and if I could have or should have handled it any differently.It was a great learning experience either way. On to the next one!

Steve B.

Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes

12y

If the delay was caused by miscalculation of time rather then being shady I think you may have reacted too strongly. You could have just asked for a free extension or got a minor per diem rebate. Often the turnkey operator or wholesaler cant be expected to babysit all their clients if they are busy. It does seem that the turnkey seller should have proactively told you about the inspection delay before a week went by.

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Joseph Gibbons

Shaker Heights, OH · Member since 2013 · 26 posts · 8 votes

12y

I disagree. Its not turnkey if its not turnkey. If you want to invest soundly in the Cleveland market or any market you need someone on the ground that is not spread to thin and has a firm grasp of their capabilities to deliver.[post edited]

6 Reply

Joshua McGinnis

OP

Rental Property Investor · Beverly Hills, CA · Member since 2014 · 472 posts · 272 votes

12y

@Joseph Gibbons

That's exactly how I feel. The person marketing the property shouldn't market something as turnkey unless it is indeed turnkey. It's one thing if it was disclosed from the beginning that work was still ongoing and would be finished in a few weeks, but that wasn't the case.

Just for the record, the person marketing the property was not the flipper himself, but a realtor / property manager.

Even still, if I'm going on BP and marketing a property as turnkey, knowing good and well someone may want to do an inspection, I make sure the property doesn't need any more work and that the utilities are ready come inspection day. I don't think that is too much to ask.

1 Reply

Stanley H.

Investor · Raleigh, NC · Member since 2014 · 40 posts · 9 votes

12y

Joshua

I am sorry to hear that. I hope this would not deter you from Cleveland. What are the things you expect from a turnkey provider?

1 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

12y

Hey! I was surprised to see your name attached to this post (not sure I remembered you buy out-of-state). Good to see you, bummed to hear about your experience.

A couple thoughts, since I only buy out-of-state turnkeys myself and because I've had properties go bust in the past (irrelevant of the turnkey fact, but more related to REI in general fact). One is in defense of the seller (sort of) and the other is in defense of you.

It is not uncommon for a turnkey property to not be completely finished by the time it goes under contract. In fact, it's more common than not with the turnkey providers I know of because the properties are so in demand that they go under contract long before construction/rehab is done. Although, it is disclosed to the buyer that the property isn't finished and sometimes the sellers aren't great of keeping the buyer updated of any construction delays, which can happen easily, but it is disclosed. However, any delays or glitches in the rehab can make the buyers uncomfortable regardless. What makes me leery about this seller is that it wasn't disclosed to you that the property wasn't finished, but it's a minor point. So then outside of disclosures or inspection delays, what has to happen is the inspection. Buyers inevitably get antsy about this because the reality is that no property will be perfect at the time of the inspection. It's the whole point of the inspection- to find out what is left to be fixed to make it truly turnkey. Now, if there is a wall falling off or a roof caving in, that's another story as those should have been obvious to the seller/rehabbers. But small things, they will be there no doubt about it. When everything is listed out by an inspection though, it can often look daunting. This can really twist people's britches. But proper procedure at that point is, the buyer should request the seller fix every thing in the inspection report and the seller should provide proof (pics/video/reinspection) that all repairs are completed, prior to closing. A turnkey property, as it's most commonly known, should be fully rehabbed and with paying tenants in it, at the time of closing. Those things are not required before, and often they aren't there. Remember, nothing matters about anything until closing because prior to closing, you aren't on the hook for anything. Whether you buy the property or not should only be contingent on the condition of the property and the situation at the time of closing. Sellers aren't perfect, rehabs aren't perfect, and there is plenty of time to make sure all of those things are correct prior to closing. I can't tell you how many construction delays I know of going on with turnkey buyers right now. One property is waiting on the city to turn the water on, and it's gotten so delayed with the city that the sellers are having to be in contact with the mayor. No joke. Things like that happen.

Now, in your defense. If you ever don't feel comfortable about something in REI, bounce. I've done that before. Technically there wasn't anything majorly wrong or anything that couldn't be dealt with, but I didn't like how it smelled and I bounced. What would have happened had I stayed, who knows, maybe it would've been great. I'll never know. The trick to bouncing based on comfort is directly related, however, to how much education you have. I've seen people bounce on deals for irrelevant/non-issue reasons that they thought were huge issues. So like this case with this property, it may be completely standard and totally a Cleveland thing that has issues with utilities and/or construction times, etc. and if that were the case, you'd have bounced preemptively. But, maybe it's not standard and it is a reflection of a deeper issue. I don't know who the BP member that sourced this is, as I don't work with anything in Cleveland, so I say this completely naively and unbiasedly, but not all turnkey providers are above board. I've recently had a few reach out to me and after digging in and researching their operation, there's a lot of shady going on with them, so I passed on them. So, it's very possible this operation could be bad. Anyone can have good reviews on their website and anyone can be a member of BP (who behaves at least)....but none of that means they are a legit operation. So, you might have made a really smart and sound decision. I could tell you my opinions about the Cleveland market, but I won't here, but I will say I'm glad to know you didn't buy there. Plenty will argue me on that one, and that's fine, but I won't buy there.

So, hopefully that helps with both sides of the coin? I don't think you did anything wrong. Every purchase or potential purchase is a huuuuge learning experience, and you will always learn the most off the faulty ones.

My lasting advice is- always get referrals from other buyers of a company (rather than people promoting the company) and don't ever feel like you need to jump out of a situation really until money needs to be put on the table. In this case, it may have been worth it to stick it out and see what came of the long-anticipated inspection, just out of curiosity because it wouldn't cost you anything. Nothing costs you money until closing.

Hopefully the next post I see from you has good news about a super awesome killer property you bought that you are wayyy more excited about! :)

15 Reply

Joshua McGinnis

OP

Rental Property Investor · Beverly Hills, CA · Member since 2014 · 472 posts · 272 votes

12y

@Ali Boone great, great advice as always.

It's very possible I prematurely bounced. Like I said, there were no significant red flags. When I expressed my concerns; however, I just wasn't offered the reassurance I would have hoped from my guy.

I don't expect to have my hand held, but it is my first investment of this kind. Take 5 mins to explain to me that these kind of delays can happen and just be honest and transparent. I probably would have kept going forward if I knew from the beginning that the property still had some work to be done, that it might cause some delays, but that it would all be good to go once inspection came around. Unfortunately, that just didn't happen. I would get one-liners like "it'll be worth it." I need more reassurance than that.

At least in the future, this process will have educated me enough to look for this scenario as a possibility and ask more questions upfront.

Onward and upward.

2 Reply

Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

12y

Originally posted by @Steve B.:

If the delay was caused by miscalculation of time rather then being shady I think you may have reacted too strongly. You could have just asked for a free extension or got a minor per diem rebate. Often the turnkey operator or wholesaler cant be expected to babysit all their clients if they are busy. It does seem that the turnkey seller should have proactively told you about the inspection delay before a week went by.

Steve, this is going to be a strong reaction, but in now way is it meant toward you. I have been in this business now for 10 years (helping investors buy passively or Turnkey or whatever you want to call it) and any Turnkey company should ABSOLUTELY be expected to babysit each and every client on each and every deal.

This is the only reason for someone to use a company that markets as a Turnkey opportunity.

When a company misses a major marketing point by saying a property is ready only to delay and delay and, it sounds like, delay again that is a MAJOR SIGN of trouble not a minor miscalculation. It means they are not in control of the property or of the process. They are selling someone else's project and that is not Turnkey. That is called being an agent and selling someone else's property!

The Turnkey word evokes such negative reactions because of experiences just like this one. It does not mean that the person marketing the property is bad or trying to swindle anyone. It just illustrates the importance of being 100% accurate, up-front and totally transparent from the beginning and it is hard to do that if you are not in control of every part of the transaction.

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14 Reply

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

12y

Hi Joshua, I am interested in hearing the numbers on this one. It sounds like it was close to turnkey. If it was an incredible deal and if the seller could assure the issues with the gas/heat on that one unit were ok I would have had the inspector inspect the rest of the property as is and that particular units gas line etc. I think that near 100% inspection could determain what you need to know. I think the bp member would welcome the opportunity to show how they handle such issues when they see this post.

thanks,

Matt

1 Reply

Ron Hassid

Investor · Los Angeles, CA · Member since 2014 · 9 posts · 8 votes

12y

@Joshua McGinnis

Maybe you jumped the gun, maybe you didn't. If your expectations weren't met, then you made a decision based on your expertise. That is fine.

I do believe you made one mistake though - don't take it personally: turnkey or not, you should have scheduled 1-2 days to fly out to the area. Any buyer in real estate needs to see the property in person before committing to it. There are flights to the Cleveland area several times a day from Los Angeles. Figure flight + rental car + 1 night at a hotel = $1000. Isn't $1000 + 24 hours of your time a good insurance policy when buying something at $50,000 (just a guess on the price of the home)?

Don't get me wrong, I personally bought a few homes sight unseen, but these were exceptions - I knew the area extremely well, my local broker has done multiple deals with me in the past so I could rely on his assessment, and I already budgeted $xxx to fix random things that could show up in buying a home sight unseen.

I invest out of state. I know that I will be in the area of my investment property 3-4 times out of the year, so I just include that in my investment costs. More importantly, I know that if I have to be in area within 24 hours of a major headache, I can schedule accordingly. Out of state investors (even turnkey properties) should keep this in mind.

7 Reply

Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

12y

@Joshua McGinnis - Kudos to you for being so diligent on your first deal and requiring things like inspection and appraisal. It is important for out-of-area buyers to realize how important it is to take control of the process and ask for those things. Make people you do business with earn your trust. If they can't - it does not mean they are bad or even not a good company, it just means that you have your own style and standards and going to only do deals where you are 100% comfortable.

I think your decision was a good one if you were not comfortable and you learned a no-cost lesson in some questions to ask and comments to tell other companies before you go under contract.

It will help you to set really good expectations for whatever company you buy from. They will know exactly how you expect things to go and that, if they cannot deliver, you will walk from the deal.

Best of luck going forward -

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5 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

12y

Onward and upward! Lol. I love it, and agree. I've gone with that theory more than once. The good news is always pans out as far as being more educated and better-off for better purchases.

I hear you. One of the big reasons I even got into REI is because the guys I accidentally met were huge on customer service and never gave me only one-liners. They were very candid, explained things well, and I was left with no concerns. On the flip side, I've run into some real jerks of turnkey sellers. Remember, turnkey sellers are notoriously really good at finding properties, rehabbing properties, etc. Customer service isn't always their strong suit, except for @Chris Clothier who is amazing at all facets of the biz :) But, a lot of them aren't good at customer service. The nicest turnkey property I ever bought, that was the only turnkey in history that I've seen literally with only two small items found in the inspection (I mean, we're talking outlet cover level items here), I bought from the biggest turnkey jerk on the planet. Very cool guy, I've had drinks with him and hung out, but man is he gruff with buyers. He can be so bad with buyers, at one point we made a rule that he was not allowed to interact directly with buyers because he was scaring the you know what out of them regularly. It was so bad, and still is when I really want to suggest his properties to someone. But they are the nicest turnkeys I've ever seen in my life.

So remember, you have to really have the education to know the fine line between jerks who sell excellent properties (because technically who sells you the property is completely irrelevant to you owning the property later) versus nice guys trying to sell you bad investments. It's hard to tell. The good news is- there is nothing about a turnkey property that you can't verify on your own. The seller's customer service skills are irrelevant of the buy, however they could be signs of bad things or a good customer service guy just makes the process easier.

One reason turnkey promoters exist...the ones who don't sell the properties themselves but connect you with the providers, is they can act as a 'customer service buffer'. Trust me, it's needed a lot.

2 Reply

Nick Fitzpatrick

Property Manager · Santa Rosa, CA · Member since 2014 · 56 posts · 16 votes

12y

@Joshua McGinnis This could very well still be a great deal or not. But I don't blame you for walking away, if you didn't feel comfortable with the process now during your due diligence period, with the disclosures or how this "turn key" provider was able to answer your concerns if likely would taint the rest of your long relationship with this company.

1 Reply

Account Closed

Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes

12y

"Turnkey" as youve discovered...is a relative term. i don't trust any of these people. You were right to roll out, just the tip of the iceberg. I would never buy a property sight unseen, nor should you. Why risk it? Hop on a plane before being willing to drop thousands....and p.s...cleveland is a dump

1 Reply

Adam Gerig

Investor · Fort Wayne, IN · Member since 2012 · 276 posts · 77 votes

12y

@Joshua McGinnis sorry to hear about your experience. I guess I can see it from both sides although the multiple delays should have been at least communicated and as the potential buyer you should always be kept in the loop.

I recently had a BP back out of a deal I had put together turn-key, but I think it was more because this was their first deal then the snag we ran into. Hope you don't feel like I'm side tracking your post, but just thought sharing my story from the opposite side might also be helpful.

Had a 3 package deal of which 2 of the 3 were rented and I told him that I would highly suggest having inspections done just for his assurance. Got to the inspection on the one that wasn't rented and over the weekend someone had thrown a rock through a window and stole about 16 inches of copper. To someone who hasn't dealt with that before it can be scary and I had no problem in him backing out, but sometimes things do come up. If he would have based the decisions strictly off the numbers I think he or anyone else would have felt pretty comfortable moving forward, but in REI you've always gotta go with your gut.

He backed out I kept all 3 of them in my portfolio and they are bringing me in $1740/month for a package I was going to sell to him for less than $83k which would have been over a 13 cap rate based off 50% rule.

All in all I'm sorry you had a bad experience, but I think you made the right choice in my opinion. Gotta go with your gut!

0 Reply

Joshua McGinnis

OP

Rental Property Investor · Beverly Hills, CA · Member since 2014 · 472 posts · 272 votes

12y

@Adam Gerig The fact that you recommended an inspection says something. When I asked my guy if he recommended I get an inspection (knowing I would be doing it anyway), he said, "It's up to you. Some people do it and some don't." Again, not too reassuring. Nothing wrong what he said, it's true - but it's not what I would have said to someone in my position.

Can't blame your buyer for backing out. I'd probably have done the same. That's kind of why I feel like this first out-of-state investment is so important. I expect there to be problems, but it would take some serious time and education before I become comfortable with something like a break-in before I've even acquired the property.

1 Reply

Adam Gerig

Investor · Fort Wayne, IN · Member since 2012 · 276 posts · 77 votes

12y

@Joshua McGinnis 100% agree with ya. I've got 2 different buyers out of Boston this month and my "pitch" to them if you can call it that was if I were an out of towner and coming in I'd spend more money and invest in a more conservative location then gave them zip codes to start doing some research on their own. They then came out and we probably went through 20 properties in those neighborhoods so they got an understanding of what I meant.

Me, personally, I can stand much more risk and invest in what some people would probably classify as the "hood" because I've got experience, the team in place, and obviously management skills that allow me to do this, but if I were someone just starting out, especially all the way across the county, I'd be looking for lower returns and a more conservative area to first start out.

The thing that kills me about the whole "turn-key" operation is that there are a lot of shady companies doing it and ripping off investors. I ran into two situations within 3 months of each other that a company out of Utah who shall remain nameless, (unless you directly inbox me for their name)that bought 2 properties for about $28k/piece that already had tenant in place. I managed them for them and within 6 months of purchasing sold them for roughly $22k more per property to an investor out of Canada and Texas.

Nothing was upgraded and I don't know what the investors were basing their decision off purchasing the properties on, but needless to say I was like you've got to be kidding me. Those properties are $30k at most properties all day and they paid $20k more than they are worth every single day of the week. This stuff happens and I guess you live and you learn, but to me I couldn't sleep at night selling something to someone else for $20k more than they purchased it at and literally doing nothing to it. So i guess that's my buyer's beware story. Hope I didn't scare everyone off lol..

1 Reply

Brie SchmidtBusiness Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

12y

I almost bought from a turn key company and found out during inspections that they were not really turn key. Luckily for me, my out of state market was only 90 minutes away.

If I were buying in a market I could not access easily, I would network on BP and find a local investor who is not involved in my deal and pay them to attend the inspection on my behalf and give their opinion as a disinterested third party.

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16 Reply

Stanley H.

Investor · Raleigh, NC · Member since 2014 · 40 posts · 9 votes

12y

of all the turnkey people on BP I have talked to ,none have the property done and sitting there to sell. All have some setup time. It's perfectly fine to walk out of a deal you feel uncomfortable with. this would have been the best deal of your life or this would have been the worst deal who knows.

Keep looking!!!!

0 Reply

Account Closed

Real Estate Investor · Marysville, OH · Member since 2014 · 242 posts · 196 votes

12y

Originally posted by @Brie Schmidt:

If I were buying in a market I could not access easily, I would network on BP and find a local investor who is not involved in my deal and pay them to attend the inspection on my behalf and give their opinion as a disinterested third party.

This is a really good idea.

1 Reply

Gautam Venkatesan

Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes

12y

Sounds like they were pre-marketing the property while the rehab was ongoing. Nothing wrong with that but they should have been upfront with you on the rehab progress so that you could perform an inspection once the rehab was completed. You should also expect to perform a second inspection once the turnkey operator fixes any items found on the initial inspection (everything is negotiable). I also agree with the others that you should visit the area, meet the team on the ground, etc. especially for your first purchase. It sounds like the units are currently vacant so I would also strongly suggest you do not close till all units are rented (assuming you have vetted the tenant applications with the PM team) or get something in writing from the turnkey operator stating they will pay you market rent for X months while they get it leased out should you close prior to the units being fully occupied.

0 Reply

Account Closed

Homeowner · Pittsburgh, PA · Member since 2014 · 854 posts · 511 votes

12y

I would have bounced as well.

0 Reply

Sharad M.Pro Member

Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes

12y

@Joshua McGinnis Sorry to hear that you had bad experience.

IMO, it's not turnkey, if you can't really turn a key and move in. I also sell some turnkey properties and I wouldn't market a property unless it's absolutely ready. I sell properties only after they have been rented out.

I disagree with this. In fact, the opposite is true. Turnkey buyers are spending lot of money to purchase these properties and good customer service is absolutely must for them.

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2 Reply

Mike McKinzie

Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes

12y

I buy turnkey all the time and have great success. I own 26 houses and have NEVER seen 23 of them. The last thing I want to see is another house! But having systems in place is vitally important. On one turnkey contract I was in this year, with a BP member, the apraissal came in $7,000 under contract price so I backed out. On another turnkey, one that actually closed TODAY. in Texas, the apraissal came in $9.000 higher than my purchase price. So don't get discouraged. You were right to back out, incorrect information, aka LIES, is reason enough to back out of any deal. You want to deal with honest people. It may take a while to find the honest turnkey companies but they are out there.

Many investors like to see a property before they buy it, and that is fine. But in my experience, an apraissal, home inspection, internet research on that market and my personal parameters are all I need to make my decision.

Good luck on your next out of area deal!

7 Reply

Rob Cee

Lebanon, NH · Member since 2012 · 258 posts · 87 votes

12y

Originally posted by @Brie Schmidt:

local investor who is not involved in my deal and pay them to attend the inspection on my behalf and give their opinion as a disinterested third party.

This is a really good point. I would add to this, find a "real" experienced, old pro local landlord in the area you want to buy that has been doing it a long, long time. Maybe you can find someone at that areas local investor club that meets monthly. And ask them if they would buy this deal as a rental. Do not ask advice from the turnkey salesmen, they are not a disinterested 3rd party. The key to Brie's comment is get a experienced disinterested 3rd party to give you their advice. It is you and you alone that has to live with this deal once the deed is transferred into your name.

0 Reply

Mike D'ArrigoPro Member

Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes

12y

@Joshua McGinnis

I don't know who the turn-key company was but I'm not sure it was because they were hiding anything. In the hottest markets, properties are selling before the renovation is complete. However, you should have been informed that it wasn't done. What we do in this case is make the closing subject to completion of rehab, inspection and a tenant being in place. The key is communication. I wouldn't wait for renovation to be done if it's a good property and you have confidence in you're working with. The best properties sell quickly so it's good to lock them up while the rehab is being done.

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My first out-of-state turnkey was a bust (sort of)

My first out-of-state turnkey was a bust (sort of)

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