5 turnkey manipulations that will end up costing you thousands

13 Replies

*BP deleted my post earlier today b/c they felt I was promoting something...so I removed all references to our company just to be safe.  Here's the edited post.

Let me start off by saying that I know there are some really great and reputable turnkey companies out there. We know there are those who provide a valuable service to their clients around the country.

This post is not about them.

As a matter of fact, this post isn’t about anyone.

It’s about protecting real estate investors from making some big mistakes in the turnkey market.

And the only reason for the post is because we continue to see people lose their shirts on manipulative turnkey deals.

I’ve got a friend who buys/sells wholesale here in Birmingham and he just told me about an out of state investor who bought a turnkey house for $45,000. A couple of years pass and ‘yada, yada, yada’, she just sold it for $2,000.

You don’t want to be that woman.

Here are the five most common manipulations we see from ‘less than reputable’ turnkey companies.

  1. 1. They rent the house for more than market rate - the problem is twofold:
    • When the good tenant realizes they can get a better house for the same $$, they leave after one year and your chance of getting that rental rate again is slim
      • The tenant is willing to pay more b/c they have less than stellar credit - you end up paying for this mistake in slow pay to no pay and possible eviction...then you have to turn the property
    1. 2. They underestimate repairs and maintenance - There are a lot of factors that go into a reasonable repair and maintenance estimate...things like:
      • Age of the home
      • Quality of tenant
      • Geographic location of the house
      • Quality of rehab
    2. 3. They fail to estimate non homestead taxes - we see this a lot
    3. 4. They fail to account for the fact that tenants will be moving out of the house at some point
      • No allowance...just repairs and maintenance
        • A silly 5% vacancy...it's more like 2-3 months or 6-9% annualized
      1. 5. The rehab of the house is shoddy
      2. This is one we come across a lot when investors come to us with their turnkey properties. There is a big difference between solid a solid rehab and putting lipstick on a pig! 

      The point is to be careful when buying turnkey properties. Do your homework, use a professional and seek objective 3rd party advice.

      Hope that helps!

      Originally posted by @Spencer Sutton :

      1. 3. They fail to estimate non homestead taxes - we see this a lot

       Hi Spencer - Can you elaborate a little more on this point?  Maybe it's because I'm in California with our unique property tax system, but I really have no idea what this means.

      @Brent Seehusen

      Homestead is an exemption that you can file on your primary residence to lower your tax bill. This amount varies from state to state and would not be available to non-owner occupied properties. This is available in California, but from what I recall, the exemption is pretty negligible ($7k or so off appraised value?).

      @Spencer Sutton

      I don't think that Turnkey companies are any better or worse than any 'seller' out there on the market. Every NOI and Cap Rate I've ever gotten from a seller was exaggerated and many of the costs associated with running a property were not factored in. I think the biggest problem most investors face when dealing with Turnkey properties is that they believe what the company tells them and do not do their own due diligence and property inspection. If they did, I have a feeling many of these purchases (which seem to be out of state) would not occur.


      Ok, I see what you're getting at @Christopher Brainard .  Yeah, the exemption in California is $7k so it's pretty easy to forget that it even exists.  I remember hearing that this was a bigger deal with out of state properties awhile ago, but I had since forgotten about it.  Since I'm considering embarking on some out of state investing, what is the best way to determine the non-homestead tax rate? Do you typically call the county assessor?

      This is a great list of manipulations. However I don't understand why it's exclusive to only turnkey companies. My thoughts are that anyone can do these manipulations. Not just turnkey companies. Realtors, wholesalers, property managers, contractors ect. Bottom line is you are going to be the owner and its up to you to do your own calculations and deal analysis.

      @Brent Seehusen

        its common in many other states that eh tax's on owner occ will be about half of what they are for investment properties.

      So I think what @Spencer Sutton

       is alluding do is when you get your prelim title report or check on tax's if the turn key home your buying  was last owned by an owner occ.. then the taxs are going to be about 50% less than your tax's will be going forward.. that's rough it varies but I am close.

      @Account Closed

        Even Spencer can't control rough tenants .. he may say he can but he can't.. and rough tenants are a PM dream they get to ding the heck out of you  LOL... So when your looking at tenants and TK props buy the best you can that's for sure

      Yes @Jay Hinrichs is right about the non homestead taxes.

      However, he's incorrect on the success/failure lies in the PM companies hands. It's not an either/or deal...it's a both/and deal. 

      Buy your turnkey from a reputable company after doing all of your homework and place it with a PM company you trust and have done homework on. And then realize that it's an investment and there are certain risks involved.

      The issues this post brings up are the common manipulations we see (and have documented) turnkey companies promoting during the marketing of their products. Any local investor in our market can look at these so called 'deals' and let you know if they're realistic or not.

      If they bought them and there was PERFECT management by the perfect PM (there is no perfect PM), there would still be massive issues and the buyer would still have been mislead.

      @Spencer Sutton

      Awesome post and i can relate to a couple of items you highlighted in your post.

      I love the midwest, especially KC, MO. I bought a property there through a TK provider and the deal looked great.....long, long story......

      Anyways, now I know better...

      Thanks for sharing!!

      NA Onyido Yeah, it's not a fun lesson to learn. A lot of things look good on paper but most of the performas I see are pretty worthless. 

      Someone should create a video series teaching out of state investors how to evaluate and buy turnkey properties.