Vertically-integrated Turnkey Providers

Charles Worth

Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes

11y

@Jonathan Mednick

From an investors standpoint just another viewpoint on some of your points:

1) You said "Along comes a dispute or misunderstanding in one area and before you know it, it's now affecting all your properties". That is kind of the point because it works both ways. I can't think of a good TK that does not value their reputation and their TK acquisition side to give you a break on the property management side if something comes up and its debatable whose responsibility it is. If you are buying properties at some type of pace I think most TKs are going to take a softer approach in other areas if push comes to shove. Not to say they will just roll over but its much more likely you will have a positive outcome for a problem in one area I think if its all under one roof. That theory has driven numerous businesses not just this one to do things under one roof. Course there is a flip side to that which is if one of those areas is bad it can sour everything esp. if it comes from the acquisition side but than a bad TK was probably picked

2) You said "What if you decide to move to another PM?" Other than maybe @Chris Clothier I can't say I know many TKs that have property management as something they do because that is what they wanted to do. Rather its about control and being able to offer a service (i.e. I will have to be stuck with any problems as the PM). So if I did leave the PM frankly I think they would not be too unhappy about it. I think they would tell me its a mistake but I don't think it would be a big loss considering the margins.

3) you said "We coordinate all our activities to insure the acquisition and renovation services run smoothly in a seamless process." But what happens when down the road something goes wrong because something was missed in the process. If most issues arise in later years and the original team (construction and acquisitions) has moved on from the property what incentive does anyone have to make you whole? What if the parties have a falling out than no party has an incentive to cover for another parties work.

All in all I do agree in theory and if there is a bad TK it is definitely better to have everything under different roofs but for a good one where they stand behind their product I can't see how being moved to a company you don't have the same relationship with is as good.

Birmingham, AL · Member since 2013 · 149 posts · 44 votes

11y

Originally posted by @Chris Clothier:

Jonathan,

I have a counter argument to using a company that wants to just be responsible for one part of the transaction and then affiliate with other companies. I have seen several companies break apart with the same phrasing of being great at finding great deals and letting experts in renovation and management handle those areas. I am sure you do not have the same issues that they have had, but none-the-less here is where that led for investors.

It led to issues with poor renovations and the company they bought from telling the investor to go call the renovation company. It led to issues with poor management and the company the investor bought from telling the investor to go call the management company. It led to items on home inspections and the company they bought the property from telling the investor to go dispute that with the contractor and shrugging their shoulders when it cost the investor more money. After all, they had done their job and found the deal. It was up to the investor to build a relationship and deal with the other companies - even if they were referred by the original company they were buying from.

Companies that decided to hang their hat on just finding properties and using affiliate companies to provide the other services essentially wring their hands of responsibility for those services.

You may very well have an excellent thing going in your city and may never deal with these issues. But many companies and business persons made the conscious decision to go the other way and be responsible for the performance of each of those areas. IMO, that is a much better alternative ESPECIALLY for passive investors who are buying for the purpose of NOT being overly involved. They need to build one very good and very trusting relationship - not multiple relationships to stay on top of the business.

Chris,

You make some very good points and I would suggest there are two types of TKP's. VERTICAL which partners with renovations/property mgmt and HORIZONTAL which is all inclusive.

Unlike the horizontal TKP model which I believe there is really only one, there are essentially two vertical TKP models.

1. A company like mine located in our primary market providing oversight and managing the entire turnkey process in partnership with our renovation and property management teams. We play an active role in seeing the project through the entire process. Even though there is no additional monetary gain, we tell our clients our job is not finished until they get there first rent check. If one of our clients has an issue with the renovation or property management team, I am the first to hear about it and it's our job to resolve it or provide a viable alternative. That is our commitment to our clients.

2. Then there is the remote TKP or shall I say re-seller. These out of state groups partner with real estate gurus on the nationwide speaker circuit and purchase attendee leads or partner for a split of the profits. They than partner with local TKP's in certain markets. They double close on the property marketing it up $10K-15K. Once the deal closes and they are paid, they are gone. These are the properties where shoddy repairs, high maintenance costs and usually poor management occur. It's not unusual for them to try and get referral fees from the contractor or a monthly percentage of the management fees. These are the fly-by-night operations. The good news for Birmingham is that most have left because our market has picked up considerably. They can no longer make the spreads like they use while providing a decent yield to their end buyer.

You already mentioned disadvantages related to the vertical model but with the horizontal TKP model, there are several distinct disadvantages: 1.Too much control under one roof. 2. Too much leverage on pricing and management fees on all services. 3. Higher purchase prices than other local TKP's to maintain a horizontal turn key infrastructure. 4. A degradation in the level of services provided across the entire spectrum. 5. A tendency to focus more on the larger repeat volume buyers than the ones who purchase only a handful each year.

I think we can agree there are pros and cons to both but at the end of the day, the investor needs to decide which vertical or horizontal TKP model best fits their investment strategy.

Birmingham, AL · Member since 2013 · 149 posts · 44 votes

11y

Originally posted by @Jay Hinrichs:

@Jonathan Mednick I am going to take @Chris Clothier view point on this... your scenario leads to pass the buck big time.

No doubt your sourcing from multiple persons... ( all buyers do ) your contractor may be good today and may move to Atlanta tomorrow etc etc.

I think the who reason or almost definition of Turn Key is one point of contact or as near as you can get it... And that goes for buying through unaffiliated marketing companies.. that just adds another layer to the cake... LOL...

Jay,

If I have done my job correctly, our renovation partner is going nowhere. He has been in Alabama and Birmingham all his life and has been in this game for 30+ years.

Yes, one point of contact is advantageous but clients can still have that with our vertical model as already outlined in a previous response to Chris.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Jonathan Mednick I do enjoy this thread.

And I can see your point on too much under one roof.. there was a company in Utah operating out of Indy and KC that did this and they got them selves into a pickle and one of the issues was they were able to stave off bad situations by buying there way out to keep up appearance's until it melts down... and a lot of it stemmed from HUGE guarantee's that were just not sustainable in the asset class they were playing in .. they could do it at first with the HUGE mark ups they made.. but its a robbing peter to pay paul effect.. and leads to were the principals and sales manager are at now which is litigation of a very serious nature.

Warranties:

I understand how the public likes them and how a TK company can use them for marketing purposes however many TK companies feel that these can induce folks into buying a certain product over another.. And of course the warranty is only as good as the company see comment above. I do believe most TK operators though can and should be able to go back on the contractor.. Although I know here in Oregon on rehabs there is no state mandated warranty for work done... On new construction there is one year by law.

Double close mark up:

I have seen this show as well... all the Guru's now ( at least most have some product that they sell at events)... And of course given the nature of the events and the captive audience profits can be substantial for those folks... But I submit that to the same extent this happens to any TK provider that rely's on an out of state marketing company to bring them buyers IE your own HomeUnion. If you did not have marketing companies or TK companies did not market out of state and the only buyers you had were your local buyers the market would be in and stay in free fall and that values no matter the home would only be what a local is willing to pay for an asset and a BP trained local investor at that.

So all TK companies and all of these communities across the US benefit from TK companies marketing off shore and in CA and other wealthier areas like the North east.

If you took those sales out of the market place then what ? Like to have you address that .. What do you think these markets would look like with NO out of state buyers and NO coordinated out of state marketing efforts. And if they were able to just find their natural price points based on what local investors like your self would pay

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Ryan C.

OP

Watertown, NY · Member since 2015 · 12 posts · 5 votes

11y

@Chris Clothier and @Jay Hinrichs

Those were my concerns exactly.

@Jonathan Mednick

Your definitions of vertical vs. horizontal are a little confusing to me. It’s been a little while since my business degree, I’m in healthcare now, but from what I remember of vertical vs. horizontal organizational structures… the vertical organization has power deriving from the top. This is the well-defined chain of command, think C-suite folks on down or even a military rank-type structure. The horizontal organization has a less-defined chain of command where employees across lines have similar input in regard to organizational decision making. Employees may work on teams with each member being essentially equal in terms of power, input, etc. Team leaders may report to a team of supervisors, and so on. This is often seen in more creative organizations, many tech organizations, etc. Granted, there are pros and cons to both of these structures in business and most organizations do not fall purely in one camp or the other. Vertical organizations are more efficient and can make decisions more quickly. Each person has a defined role and duties. This can also be seen as stifling creativity, learning, and adaptation in employees, however. Horizontal organizations put more power in the hands of individual employees, often making them feel as though they are more valued members of a team. These organization are also therefore less rigid and tend to have less rules.

My thinking surrounding the definition of a vertical model for a TKP would be a provider that maintains most or all of their provided services under the same roof or umbrella (e.g. they ultimately answer to the head of the same organization). A provider that contracts or partners with other organizations/teams for both renovation and PM services would be more of a horizontal model in my opinion. These contracting parties or partners have much more freedom and power to make decisions and do things as they desire considering that they are autonomous organizations in the end and contracting/partnering as opposed to working directly for a TKP or parent company.

Thanks for the continued discussion, everyone. I am really enjoying this thread as well.

Keith Anderson

Investor · Cambridge, MA · Member since 2014 · 92 posts · 87 votes

11y

I can see now why people get hung up on vocabulary. Ask 10 people what a term means and you'll get 10 answers.

In classic definitions, vertical integration is defined as all (or most) of a supply chain being owned by a single company. In my industry (retail), American Apparel is a good example of a chain that talks about being vertically integrated in this sense. They've integrated manufacturing, distribution, and retail within one company.

Turnkey operators are best thought of as vertically integrated under the classic definition. They own the full "supply chain" of acquiring, rehabbing, and managing the properties. It isn't about management style or culture, it's about which elements of the supply and production chain are under one roof.

Birmingham, AL · Member since 2013 · 149 posts · 44 votes

11y

Originally posted by @Jay Hinrichs:

@Jonathan Mednick I do enjoy this thread.

Double close mark up:

I have seen this show as well... all the Guru's now ( at least most have some product that they sell at events)... And of course given the nature of the events and the captive audience profits can be substantial for those folks... But I submit that to the same extent this happens to any TK provider that rely's on an out of state marketing company to bring them buyers IE your own HomeUnion. If you did not have marketing companies or TK companies did not market out of state and the only buyers you had were your local buyers the market would be in and stay in free fall and that values no matter the home would only be what a local is willing to pay for an asset and a BP trained local investor at that.

So all TK companies and all of these communities across the US benefit from TK companies marketing off shore and in CA and other wealthier areas like the North east.

If you took those sales out of the market place then what ? Like to have you address that .. What do you think these markets would look like with NO out of state buyers and NO coordinated out of state marketing efforts. And if they were able to just find their natural price points based on what local investors like your self would pay

I agree with you all your points. However, HomeUnion is not a marketing/reseller. They never own or take title or double close any property. They are unique as they are a brokerage in each market they serve and invest heavily to provide a local presence and infrastructure. Yes, they market their brokerage to out of state investors but that's no different that myself marketing Real Equity to the same investors.

That's not to say that the marketing companies do not provide a service, they do. My experience is that the great majority of them do not. Most investors I have spoken with or used them have had bad experiences like the one you mentioned on West. If we took them out of the equation completely than companies like myself and all other TKP's would use services like BP and other resources to promote our services. They cut out the middle man, don't pay above market value, get better returns, have hands on local infrastructure and everybody wins.

Birmingham, AL · Member since 2013 · 149 posts · 44 votes

11y

@Ryan C. @Keith Anderson

Both excellent points on these key definitions. I think both can provide control from the top down but I was thinking more that a vertical provides specific services where horizontal is a multi service platform. A an example would be Google. When they only did search, it was a vertical service, now that they are in multiple areas like smart phones, bandwidth connectivity, maps, driver-less cars, etc that is more horizontal across different services. I guess depending on one's industry, the definitions could be used differently. Regardless, I think most understand the different TKP models.

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Chris ClothierBusiness Member

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

11y

@Jonathan Mednick - I'll be real direct and just say that I have no idea what point you were trying to make with all of that explanation. I'm no dummy, but too often all of that comes across as gibberish just meant to make us sound smart so i avoid all the horizontal, vertical, integration talk and try to keep it much simpler and well-defined. I'm sure you were trying to be detailed and all, but most of that appears to be an attempt to justify your business model and why you would call it turnkey. If I were in your shoes I would just be much more to the point and say this is how i do business and leave it at that without all the justification and explanation. Just my .02, if it is even worth that.....

@Ryan C. - your original question was that you were interested in hearing about "fully-managed" companies who manage the whole process. You were open to hearing about other models and I think that is where other discussion came in. I think your fully managed term is the easiest for any level of investor to understand and most would call that Turnkey.

Unfortunately, the term Turnkey is way over used and is often borrowed by companies to describe their service even when they do not offer a fully managed product. The term is a great catch phrase and gets many eyeballs and comments. So companies use it to describe their company and then twist up like a pretzel trying to explain how they are not really turnkey but simply a better version of turnkey.

In the end, the really good companies - and there are several in the states that you listed although I am not 100% of the options in the northeast - will have spent time and dollars to build a team, systems and processes meant to provide service to their clients. So much goes into the success of the investment AFTER the purchase is completed. The size of the team, length of time in business, ability to communicate clearly and quickly how you benefit from doing business with them, etc....these are the important factors for you as an investor before you buy.

In my opinion, everything else is just meant as smoke and mirrors. Can the company/person you choose to do business with remain a competent and viable long-term partner of yours who can clearly show you they will be able to stay in business and keep your stress levels low? Forget all the other terminology and just pay attention to the structure and details and you will most likely find that your original feelings were correct. A solid company who fully manages your process (who exhibits positive answers to the questions above) is going to give you a higher level of comfort than one that affiliates.

Again, that is my opinion. Best of luck as you get going. I'm sure you will find several quality companies to review in the areas you listed.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Jonathan Mednick Sounds Like HU is one of the few marketing companies that bothers to get licensed in the state they are working in... I have always been curious how all the other marketing companies deal with licensure in the states they represent. Maybe they are all licensed or affiliate with licensed brokers in each market they work I don't really know. All of my clients buy then resell their own properties like Chris does so licensure is not an issue.

I know Jay and Bill down in San Deigo are remax brokers and ran everything through a local remax agent in the market they referred clients to. I wonder how Norada Maverick real wealth and others handle licensing ? just a curiosity on my part.

I was tracking a closing of mine in KC and the lender for the end buyer wanted a copy of the sellers state mandated disclosure statement ( which I am not sure if the marketing companies or HomeUnion provides those to buyers)... and they wanted a copy of the lease and wanted a lease subordination agreement put in the lease that the tenant signed.. IE allowing lender to invoke the assignment of rents clause it their Deed of Trust with out getting a court order. Its great that long term lending has thawed and its great from a lenders side that they are smarter than last go around.

I know when I was foreclosing on loans I made in the south... perfecting my assignment of rents clause could be tricky. the tenants had no clue what your talking about LOL..

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Birmingham, AL · Member since 2013 · 149 posts · 44 votes

11y

Originally posted by @Jay Hinrichs:

@Jonathan Mednick Sounds Like HU is one of the few marketing companies that bothers to get licensed in the state they are working in... I have always been curious how all the other marketing companies deal with licensure in the states they represent. Maybe they are all licensed or affiliate with licensed brokers in each market they work I don't really know. All of my clients buy then resell their own properties like Chris does so licensure is not an issue.

I know Jay and Bill down in San Deigo are remax brokers and ran everything through a local remax agent in the market they referred clients to. I wonder how Norada Maverick real wealth and others handle licensing ? just a curiosity on my part.

I don't know of any other but perhaps Norada has the same model. Not sure since I am not that familiar with those services. It definitely makes more sends then trying to double close every deal.

@Chris Clothier

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