I dont understand the Turnkey game

Buying & Selling Real Estate
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I dont understand the Turnkey game

Micah Mcarthur
Real Estate Investor · Louisville, KY · Member since 2017 · 56 posts · 39 votes

I am just starting to explore the turnkey option of investing, and right away, I am having serious doubts, because it doesnt make sense.  It sounds too good ....

If a turnkey outfit buys a distressed property at a discount, puts money into it, rents it, and manages the property, exactly how and why are they going to sell it to me at a price that allows me to make a profit?

Why wouldnt they just hold the property, and all the equity and cashflow with it.    What am I missing?   

There was a post a few days ago, and someone was talking about $20K instant equity, because the turnkey company was selling the property below market?   How does that even make sense?   

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David Song
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
9y
The TK provider flip the house to OOS investors, to get a higher profit. They sell the TK at higher prices than on open market to local people. This is a scam targeting OOS, especially CA people. You lose money at the time of buying.
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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    9y
    I would say the advantage for the turnkey provider is that they make profit on the sale, plus get a monthly management fee, and have none of the responsibilities of owning the property. I haven't heard of a turnkey provider selling that far under value, but I guess it's possible if they acquired the property cheap enough.
    3Reply
  • Account Closed
    Investor · Columbus, OH · Member since 2016 · 139 posts · 136 votes
    9y
    It’s because they’re in the business of flipping homes.
    4Reply
  • Micah Mcarthur
    OP
    Real Estate Investor · Louisville, KY · Member since 2017 · 56 posts · 39 votes
    9y

    Okay, but why are they leaving cash on the table?  

    1Reply
  • Matt Ott
    Investor · Tacoma, WA · Member since 2017 · 19 posts · 24 votes
    9y
    Their investment is a shorter cycle and therefore they can reinvest faster and more often. This way they don't have capital tied in individual properties for long durations.
    5Reply
  • David Song
    Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
    9y
    The TK provider flip the house to OOS investors, to get a higher profit. They sell the TK at higher prices than on open market to local people. This is a scam targeting OOS, especially CA people. You lose money at the time of buying.
    15Reply
  • Emily Powell
    Investor · Houston, TX · Member since 2014 · 208 posts · 135 votes
    9y

    @David Song While I think you may be correct in many cases, that turnkey companies sell to investors at or above market prices, I don't think it's fair to make a blanket statement about all turnkey companies.  Based @Micah Mcarthur's initial post, some people are purchasing TK properties below market value, so to call them all scammers I think is unfair.  Some investors are willing to pay for a property at or above market value for the convenience of having the work done for them. That doesn't mean they were scammed.  Hopefully they have done their due diligence to know what they are paying for and are ok with the additional cost, so long as their numbers still make sense.   Food for thought.

    11Reply
  • David Song
    Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
    9y
    Emily Powell The OP was questioning the instant equity portion of the story. There is no way a TK company would provide instant equity to an OOS investor. That is just not true. If you know any TK provider can do that, let me know. I will buy their properties and flip them out to local people. This simply can not happen and is against the rule of economics.
    9Reply
  • Emily Powell
    Investor · Houston, TX · Member since 2014 · 208 posts · 135 votes
    9y

    @David Song I don't follow.  How it is against the rule of economics if a TK provider is purchasing well enough below market value that they can put $ into it and still sell it to an investor with instant equity?

    3Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    9y
    I bought a TK property and you buy it at market value. They won't leave any instant equity in it for you. Now the upside to this is you get a newly renovated house. The downside is you can't really exit before Around the 10 year mark without likely losing money, if you know that going in, you'll probably be okay.
    6Reply
  • Lily R.
    Investor · Saint Louis, MO · Member since 2015 · 37 posts · 14 votes
    9y

    After all the reading on various threads, I'm beginning to think turnkey is a fancy name for multi-level-marketing.  I'm new to this...so what do I know?

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    9y
    Lily R. How is turnkey like multilevel marketing?
    0Reply
  • David Song
    Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
    9y

    @Emily Powell

    It is against the basic rule. Here is the analysis:

    Assuming TK provider sells at 10% below market price. 

    Any investor can simply profit by buy that property and sell immediately for an instant profit.

    There will be infinite demand for this below market price property. No need to market it to OOS investor. A large fund will buy all of it right away.

    The increased demand will push up the price. The TK provider will increase the price to market value.

    So far, it's normal practice.

    What the scam is:

    The TK provider gets greedy and try to sell at above market price to uninformed, OOS newbies with limited funds. No other people will buy at that inflated price level, except those newbies who are brainwashed by the TK marketing people. The storyline is that as long as it cash flows, no matter what price you pay, that is OK.

    That is the biggest lie on this forum. It is unfortunate that so many scammers are on this site now. It is unethical practice to rip off those people that just started in RE, and profit from those people.

    Everyone wants to profit to the greatest extent possible. However, there is a distinction between honest marketing and misleading lies. Praying on those weak newbies are the most disgusting thing I have seen on BP.

    15Reply
  • Emily Powell
    Investor · Houston, TX · Member since 2014 · 208 posts · 135 votes
    9y

    @David Song - In your opinion, is it better for an investor who has no time to research properties, go to auctions, analyze market trends, etc to purchase a property at a potentially slightly inflated price with positive cash flow to hold on to for the long term or to not invest at all?  Honest question.  I'm interested in your view.  

    2Reply
  • Micah Mcarthur
    OP
    Real Estate Investor · Louisville, KY · Member since 2017 · 56 posts · 39 votes
    9y

    I am not looking to bash TK providers, there is obviously a market for the product.  I am just trying to understand if its the product for me.   

    My experience tells me that if you can buy a total packaged "starter kit", and bypass the knowledge and leg work required to put the package together, regardless of the industry or product, then it is going to cost you a lot of money.  A ton more thn if you had done it yourself.  

    I also dont know that I trust some one else contractors.  Do these things come with any type of warranty?  

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Micah Mcarthur:

    I am just starting to explore the turnkey option of investing, and right away, I am having serious doubts, because it doesnt make sense.  It sounds too good ....

    If a turnkey outfit buys a distressed property at a discount, puts money into it, rents it, and manages the property, exactly how and why are they going to sell it to me at a price that allows me to make a profit?

    Why wouldnt they just hold the property, and all the equity and cashflow with it.    What am I missing?   

    There was a post a few days ago, and someone was talking about $20K instant equity, because the turnkey company was selling the property below market?   How does that even make sense?   

     Quick note that no one else caught: 

    Micah, you appear to be in Kentucky. I have family from there. You, and my family, actually know what real estate on the ground in Kentucky is like. Even if you don't know the neighborhoods in some particular town in Kentucky, you've got a buddy that you went to high school with that you can call and ask (or I could call my family out there and ask). You, clearly, aren't the primary target customer of the TK provider. 

    If your facebook knows you're interested in real estate, spoof your IP address so it looks like you're on facebook from California or New York, and change your personal details to indicate that you've never been outside the coastal areas of the country, certainly not Kentucky or Ohio or Nebraska. Change your job to be software engineer or medical doctor, something high income but stereotypically low in "street smarts." Watch all the TK ads suddenly start blowing up your facebook feed. Now we are starting to get an idea of who the target customer is. :)

    14Reply
  • Micah Mcarthur
    OP
    Real Estate Investor · Louisville, KY · Member since 2017 · 56 posts · 39 votes
    9y

    thanks @Chris Mason.     that confirms what I thought.   there is no free lunch...

    1Reply
  • Emily Powell
    Investor · Houston, TX · Member since 2014 · 208 posts · 135 votes
    9y

    @Micah Mcarthur to your question about warranties.  Each company is different and provides varying "perks" with your purchase.  Some do offer warranties on their work, others don't.  Some have in-house management, others have companies they work with or recommend.  Some provide rental guarantees for a certain period of time.  Some offer free maintenance for a period of time.  Each TK company is different and offers different incentives.

    You're certainly right about paying a premium for someone else doing the work for you, but isn't that the point?  If you had the time, resources and interest in doing it yourself, of course you could save $, but for many people, that's not an option.  If you have the time and knowledge to do the research yourself, then I see no reason for you to go through a TK company.  But I imagine you've come to the same conclusion.  :)

    1Reply
  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    9y

    I heard some very honest replies on this thread.   Turn Key often is sometimes a scam.  Something like 80% of the buyers are from California, where very low yields exist for properties.

    The TK provider buys a foreclosure or fixer upper in a lower middle income neighborhood.   They fix it, often a one year rental guarantee,  rent it.  And sell it to you.

    The Chicago area turnkeys that I have seen advertised are at prices that will be tough to sell and recoup your money.   Wealth from real estate has come from both income (rents) and appreciation.   Buying for more than it will sell for in a few years is not creating wealth. 

    Also TK does not adequately estimate the expenses of a longer term hold.   I own single family rentals, and I know that the vacancy turnover and capital improvements on a house add up.

    Now, I want to not completely undercut good developers of rental real estate.   But be careful if you are a California resident buying a property in the midwest.   Some of the smaller cities of the midwest are declining in economic fortune and even population.  So you're buying a mediocre investment.

    1Reply
  • Hank Keller
    Rental Property Investor · Mansfield, OH · Member since 2017 · 151 posts · 117 votes
    9y

    Having purchased several turnkeys that have equity in them, doing well and generating enough rental income from 8 to purchase 1 a year i can say that the model works. Blanket statements are an indication of people who either have no or little experience.  There's plenty of reputable vendors, just do your due diligence...

    9Reply
  • Hank Keller
    Rental Property Investor · Mansfield, OH · Member since 2017 · 151 posts · 117 votes
    9y

    Having purchased several turnkeys that have equity in them, doing well and generating enough rental income from 8 to purchase 1 a year i can say that the model works. Blanket statements are an indication of people who either have no or little experience.  People buy from out of state for several reasons mostly because the market they are in doesn't create the cashflow they need or they dont have the skills to do it themselves. I have local rentals that dont perform as good as my turnkey's.

    There's plenty of reputable vendors, just do your due diligence and dont let people who havent scare you from taking the first step...

    5Reply
  • Sabrina Brown
    Real Estate Consultant · Memphis, TN · Member since 2015 · 70 posts · 82 votes
    9y

    @Micah Mcarthur

    Glad to see someone like you listening to your gut feeling! The model for an out of state investor will NOT work (unless you have family near the property you can 100% trust). If there is a profit for TK providers to sell, they will just do so on the MLS. Why need an OOS investor? Because they can then make another 30%+ on the deal and other transactions that they can get their hands on, including management, repairs, evictions, rent ready expenses, and so on...

    If you want to make it work, buy from a distressed owner in YOUR area, fix up with your contractors/handymen, sell or rent out to verified tenants, then check on your tenants as many times as you can, and so on...

    You may want to check out my long thread at https://www.biggerpockets.com/forums/311-buying-se...

    I hope this thread helps you get some more info about the concept.  As an OOS investor from CA (among so many others), I lost a huge chunk of money.  I have gone through the pains, tried multiple "trusted" companies, and still got screwed over.  Now that I live here in Memphis, I am getting the real scoop!  I have learned from my mistakes and the trust I put into people that I signed contracts with (that had no meaning by law if you can't collect from them to recoup your lost funds).  

    Keep up your mindset and keep questioning EVERYTHING like you did here!

    5Reply
  • Andrey Y.
    Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    Hey Hank can you give us some numbers.  Give us some recommendations, im thinking of going with Clayton Morris.

     Can't say I was surprised to see a contact for yet another (his own) turnkey company in his signature. No conflict there at all :P

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Account Closed got caught up with the companies she worked with.. and if you buy top of the market.. and use just an ounce of over sight and don't get caught up and greedy on the numbers and buy quality in those markets they can work as well as most other west coast rentals.. not quite as well as the renter base still is not as good as west coast but better than the hood.

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    8Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y
    Originally posted by @Hank Keller:

    Having purchased several turnkeys that have equity in them, doing well and generating enough rental income from 8 to purchase 1 a year i can say that the model works. Blanket statements are an indication of people who either have no or little experience.  People buy from out of state for several reasons mostly because the market they are in doesn't create the cashflow they need or they dont have the skills to do it themselves. I have local rentals that dont perform as good as my turnkey's.

    There's plenty of reputable vendors, just do your due diligence and dont let people who havent scare you from taking the first step...

     Hank cut and pasting the same reply on every turnkey thread is going to blow your cover and your credibility .. you may want to change it up a little.. Just sayin.. folks on BP are pretty sharp and tend to tune out this type of responses.. it sounds like you have some experience with your rentals.. and I know Aaron very well he runs a good company and I bet you could expound a little bit and change up to help folks who are looking to understand the whys of this type of investing... 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Micah Mcarthur  one other point I know I can be a little long winded  LOL

    but many of my clients will have in a market  60k homes  80k homes 100k homes 120k homes.

    60k homes on paper will make 12%  the 80ks on paper 10%  the 100k homes on paper 9%  the 120ks 8%.

    the provider will tell the client the risk is obviously higher in the lower end.. the BUYERS don't hear that part and what do they do.. they simply gravitate to the higher return.. because they think they need the 1% rule or the 2% rule or just because they want the highest return possible.

    I know when I was doing HML and providing loan opps for investors.. ( I had a book of about 50 million ) we would put up 3 new loans.. 10% 12% 15% they were risk adjusted... did not matter 15% were subscribed in 30 minutes.. But if there was a problem loan guess where it came from... ???

    investing is Risk / reward... there is a reason cap rates are 3 to 5% in our market.. Risk is next to nothing..

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