I dont understand the Turnkey game
Real Estate Investor · Louisville, KY · Member since 2017 · 56 posts · 39 votes
I dont understand the Turnkey game
Most Popular Reply
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
9yThe 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.
114 Replies
- Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes9y
Originally posted by @Jay Hinrichs:
@Account Closed as Chris can tell you he probably knows a client or two that would take issue with that statement I know I do.
So the buyers set themselves up they all think to be successful investors they need 10% c on c or higher.. or that's what they want.. where does this happen on paper.. it happens with lower value higher risk asset class's of the mid west .. Very simple math.. you can't get 10% C on C on the coasts.. so they go looking other places.. because appreciation is gambling and cash flow is everything.. then sine they don't want to be left out of the game and they can get started with 20 to 30k in cash they go for the next best thing a mid west rental.. that's why this whole phenom works.
I agree 100%, and beyond this, I've seen many long-distance, and even local buyers who shop only by "statistics", get royally screwed by believing the numbers they were given and ignoring the subjective data of their individual market to justify what they want when they can't find it elsewhere. Ignoring for instance how one block in Chicago can be completely different than another 2 blocks away in the same neighborhood. Then laughing at me that I told them such a deal didn't exist but they found it. "It cash flows $300/unit Matt! 20% CoC return! 30% Cap! The seller has 20 years experience!"
Yea, talk to me in 6 months.
The turnkey industry is wonderful for those who don't want to become part of a syndication but also don't want to invest too much of their own time. The key is engaging the services of an honest turnkey operator, because MANY operate under "wholesaler" standards of throwing out unicorn fantasy numbers just to get you excited enough to buy and trust them.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Matthew Olszak most new rehabbed homes you can only guestimate return as they have no history.. its not like buying an operating apartment block with 3 years tax returns rent rolls and all the data to get a base line.
you could get a great tenant day one of your brand new rehabbed home they stay 10 years and your happy as a lark.. ( I have a couple of those) ... or you can get the tenant that pays for 4 months and skips.. ( I have had many of those ).. so you really can't tell returns until you own this stuff for 3 to 5 years.. then you can put your base line averages together.
but the reality is the better properties generally perform better.. maybe not on paper but in your bank account.
One reason people like notes.. as long as the note payment comes in your KNow exactly what your return is..
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes9y
- Ive bought and held 8 turnkey properties. All appraised by the bank at approximately the buying price, usually about 2K more than my contract price. So I know I bought at market. By now I have held the oldest property for about 5 years and others 3-4. My total cash in of $125K in has now become about $350K + in equity because I pay down on a 10 year schedule plus appreciation. Not a bad ROI by any means. And on top I have generated some positive cash flow. So not all turnkey investments are duds. Nor is the whole model a rip off. But if you pay above market price and see no appreciation and have a bad PM etc it could be a disaster.
- Rental Property Investor · Apopka, FL · Member since 2013 · 155 posts · 62 votes9y
I've been looking at TK for some SDIRA money, while I do think you need to be careful and do you homework not all TK operators are crooks. If you want and have time to find the property, fund the property, manage any rehab, market and lease the property then TK is probably not for you. If you want a company to do most of this for you then that is why you pay a bit more...you should not expect to get all of this AND the property at a 20% discount
As it turns out I am probably going to invest my SDIRA monies myself and without a TK because if I am going to pay near market I can maybe find my own better deal as I can pay cash then have better control over some non-recourse funding after the fact.
- Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes9y
Originally posted by @Jay Hinrichs:
@Matthew Olszak most new rehabbed homes you can only guestimate return as they have no history.. its not like buying an operating apartment block with 3 years tax returns rent rolls and all the data to get a base line.
you could get a great tenant day one of your brand new rehabbed home they stay 10 years and your happy as a lark.. ( I have a couple of those) ... or you can get the tenant that pays for 4 months and skips.. ( I have had many of those ).. so you really can't tell returns until you own this stuff for 3 to 5 years.. then you can put your base line averages together.
but the reality is the better properties generally perform better.. maybe not on paper but in your bank account.
One reason people like notes.. as long as the note payment comes in your KNow exactly what your return is..
Understandable. My comment comes from seeing folks buying properties they though were "turnkey" @ extremely exaggerated rents that will never hold over the long term and waaaay underestimated expenses. For example, a unit with a 1-year lease in a C/D neighborhood rented for $1400 when the FMR in the area is $800. I could probably get a lease going for $1600 if that's what they wanted, but it won't last more than a few months until the excuses begin to flow on why the tenant is late/can't pay.
On the flip-side, turnkey is great for those who don't have the connections to find distressed properties, don't have those connections to get the work done at low rates, and don't know fair market ARV, and don't already have an established relationship with an area property manager, or don't have the time for any of that. In that case, the % profit someone pays to an honest turnkey operator is WELL worth it.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Originally posted by @Account Closed:
Im starting to doubt Sabrinas claim of losing lots and lots of money. Theres quite a few happie clams with their t.. keys. Sabs could be the outlier.
Im also beginning to doubt my ananlysis, maybe i should get my butt on a plane to memphis. I could visit the Elvis Museum at least.
I've never personally bought out of state, but yup that would be my first gut instinct too. Find a hotel in the neighborhood where the house I'm considering is, and book a weekend. Elvis Museum on Sunday afternoon, sure, but also go wander around the home's neighborhood at 11 pm on a Saturday.
Real estate is a people game. People form communities. Is this a community I'd like to invest in? Maybe. Who knows. A good wandering at 11 pm on a Saturday is the price of an answer. For me, at least.
- Dallas, TX · Member since 2016 · 1k+ posts · 745 votes9y
Originally posted by @Emily Powell:
@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?
I think a TK provider is for the most part going to sell you their property at market value. IF that market value allows you to cash flow a newly renovated house, then why not? You wont knock it out of the park, but a solid earnings stream might be had.
The other side of the coin is a poor TK provider might sell you a property that has hidden issues and a poor tenant in a sub optimal neighborhood.
I don't think its one or the other, I think the vast majority comes down to the integrity and market conditions at the time you buy.
- 9yTracy StreichPro MemberReal Estate Broker · Tulsa- OKC Oklahoma · Member since 2017 · 868 posts · 801 votes
Wow, it seems like either you love or hate turn key providers. I am not sure if I consider myself a turnkey provider. I do not typically sell to out of state investors. However, I do sell properties to my local investors. I typically sell them below market value. When I am looking to purchase I factor this into my numbers. When selling to one of my investors I want to make sure they are also getting a good deal. My difference is that we have the property management vertically integrated into the process. The goal is find a good property that we want to manage long term. We then find the investor partner to purchase the house from us after rehab and once the property is occupied. We then help our investor into a deal that works for them (Which may not work for you) and we maintain the management. They can drive by the property anytime they want or walk into our office. There is no scam involved. They know up front we want to work with investors that continue to work with us on the management side. I can sell 10% below market value to an investor easily if I factor this in when I purchase. I have no marketing time, no sales commission and very little closing cost. If I sell a home retail it typically cost 8-12% after factoring in closing cost and commissions. I just pass that savings to the buyer. They win with a good deal and I win with another property under management. I still have to perform as the PM. They can always fire me hire someone else if I don't do a good job
- Rental Property Investor · Mansfield, OH · Member since 2017 · 151 posts · 117 votes9y
@Account Closed - Last year returns were 7.2% across 6 properties. I've purchased two more this year. Appreciation was 16% driven by two of the 6 houses being well over 30%, the others were in the 3-5% range.
Since I've had good returns and a great relationship with my TK company, i havent looked anywhere else. As i said before, whoever you go with, go see them, talk with them and their customers and run a thorough analysis.
- Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes9y
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?
I'm probably not going to say something new in here, but Turnkey is very unique. The providers make money from the sale itself. It helps increase profit to sell the property and not just hold it. Since you will be putting in money and then making money every month you also will receive an income. It is a win-win for everyone. It is a strategy. With that same thought, you could ask why would anyone flip a home and not just keep it for a rental? There is money to be made in a sale of course.
There are many different kinds of companies who use the word "Turnkey." Make sure you speak with a true provider and not some agent using it to describe a property on the MLS! Good luck to you!
- Rental Property Investor · Mansfield, OH · Member since 2017 · 151 posts · 117 votes9y
@Jay Hinrichs - thanks for the reminder Jay. I see plenty of good companies and simply want to state some facts for those with no experience. Point well taken.
- Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes9y
It's a little silly to see all the advocates and haters of turnkey. It's just like any other piece of RE. Are there bad actors? Absolutely! Does this happen every-freaking where else? Yup. How many contractors do you have to get through to find a great one? Ever work with wholesalers? Ever buy any house at all? I bet they were hoping you wouldn't notice x, y, or z wrong with it.
Buying turnkey isn't bad or good. It's a different strategy that requires different diligence. Some investors don't feel like finding the off-market deal. Some don't have time or knowledge to manage a flip. Some do not have time or knowledge of whatever mid-West market they're looking at. Do people stop buying properties because of it? No, they find people that have that knowledge and then vet the people. Just like you may pay more to save the time of marketing or renovating, you may pay a little more to leverage someone else's knowledge of an area and the systems to bring everything else together.
From the provider side, who wouldn't prefer to be turnkey than a flipper if you can get the volume? If I flipped houses I would hate the retail buyer because they don't like the counter top color, or the way the toilet flushes, or whatever. If I could sell to an investor that cares more about how it will operate, and do it much faster than to an owner-occupant, I would be happy to.
FWIW, I own a number of local properties and an out of state turnkey from a couple of years ago. Guess what my best performer is? On top of that, guess which one is closer to being a real investment vs. being an investment + a job? I don't work with any providers or provide anything myself, it's just frustrating to see all the division (and usually ignorance).
- Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes9y
Originally posted by @Micah Mcarthur:
Okay, but why are they leaving cash on the table?
"Market value" is a concept not a specific number. There is always a range of market value so it is easy to skew the numbers to claim something is under market or over market....sometimes you can claim that at the same time.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes9y
If the Inflated price is properly disclosed to the OOS buyer, there will be no buyers. If anyone still wants to buy at above market price, that is their own problem. The issue here is that many marketers of TK target uninformed new investors, without fully disclose the negative info. This is a typical case of scam.
The reason that scammers target OOS newbies:
1. Easy pray, they normally just started REI, and have little experience. Tends to trust people too much.
2. They do not know the local neighborhood and market condition, easy to pray
3. They tend to have some initial capital, hard earned money saved
4. Once on the hook, it's easier to manipulate since they are OOS. No need to worry they come knock on the door.
5. Local market is too expansive to get in.
Buyer and seller naturally have conflict of interest. TK providers pretend that they are helping buyers. That is simply not true. TK providers are sellers. They want the maximum profit and highest price possible. Buyers want minimum price.
There is no licensed 3rd party agent involved. Sell by owner type of deal. No disclosure requirement.
There are a lot of BP posters are marketers of TK. They get financial benefit by lying to new investors. They do not disclose that when posting. This is a typical case of SCAM.
I learned a lot from BP. Therefore, I truly hate it when BP gets screwed up by a bunch of unethical liars posting with disguised identity. The only forums that is exempt from those liars are the DIY forum.
- Investor · Houston, TX · Member since 2014 · 208 posts · 135 votes9y
@David Song I think @Bryan O. made my point better than I was able to, so I will just refer to his post above. There will always be people who prey on the uninformed, in real estate and every other industry. That's why it's so important to do your due diligence on the company itself. There wouldn't be so many TK companies if they didn't serve a purpose. And I don't see that purpose as scamming ignorant prey (as you call them). It's a different kind of investment strategy that isn't right for everyone, but is right for many.
I credit the TK industry for getting me into real estate. It was a more comfortable route to ease in to investing without having to learn everything all at once. Did I make mistakes? Certainly. Did I learn from them? No doubt. Would I have done more/different due diligence had I known what I know now? No question. But like anything in life, there's a learning curve and TK helped me navigate it. I have purchased additional (non-TK) properties since those first investments which I probably never would have purchased had it not been for those companies. Do I think I was scammed? No. Do I make better purchases now? Absolutely. But I am grateful to them for what they are.
- Investor · TX · Member since 2015 · 393 posts · 290 votes9y
Are you a little biased in your opinion? I only ask because of your email address and website.
- Denver, CO · Member since 2017 · 1 post · 0 votes9y
Hey Guys, I'm new here and have also just started looking into TK. I have the same doubts as @Micah Mcarthur.
Seems as though one of the biggest risks is purchasing a completely renovated property for retail/market price and getting hit when you try to sell, @Sabrina Brown addressed this a bit.
So I am curious...who here has actually purchased a TK property and sold it or went through a 1031 exchange?
What was your purchase price? How long did you hold it? How was the sale/exchange process? What was the sale price and appreciation?
Would love to hear from someone with some experience on this.
- Rental Property Investor · Mansfield, OH · Member since 2017 · 151 posts · 117 votes9y
@Roger S. - I am biased from a customer perspective. I don't like people making blanket statements when they're unwilling to say if they have experience with a specific vendor or strategy. I give out data because I have it.
I hope other customers of turnkey companies speak up too on this thread! :-)
- Dallas, TX · Member since 2016 · 1k+ posts · 745 votes9y
Originally posted by @Payton Batliner:
Hey Guys, I'm new here and have also just started looking into TK. I have the same doubts as @Micah Mcarthur.
Seems as though one of the biggest risks is purchasing a completely renovated property for retail/market price and getting hit when you try to sell, @Sabrina Brown addressed this a bit.
So I am curious...who here has actually purchased a TK property and sold it or went through a 1031 exchange?
What was your purchase price? How long did you hold it? How was the sale/exchange process? What was the sale price and appreciation?
Would love to hear from someone with some experience on this.
We don't do TK investing, but I think you have to think about what a TK provider generally is doing. A good one will get you a property that will cash flow, its less focused on capital appreciation. You cant predict capital appreciation no one can. You can , I wouldnt expect a TK provider to know that a property would have great appreciation if they did by definition they would hold it. I mean if I buy a property and I know its going to double in value by next year, then why would I sell it?
TK investments are long term cash flow plays when done properly. Its the equivalent of buying a utility stock and a year later wondering how your capital appreciation turned out.
As a buyer you should be determining the growth of the metro area, the relative price appreciation etc. You should also take it upon yourself to make sure the property is fairly valued, in a good neighborhood for rentals and the tenants are paying a market rent, that the rehab was done property, the tenant was properly screened etc.
With TK you are buying long term cash flow, not appreciation, appreciation is icing on the cake imo.
- Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes9y
@Account Closed poses to be a customer of a turnkey company, but guess who owns the company in his link? It's him. Guess where his 2 customer reviews come from? Him and his wife. I am not against turnkey, but I would be very wary of dealing with a group that is already presenting themselves in such a way.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes9y
Turnkey is more of a service than a product. You will be paying a premium because you are paying someone else to perform a service for you. It's pretty simple. It's the investors that think they can or should be getting a turnkey product for the same price as if they did the work themselves who get into trouble creating false expectations.
If I go to a steak house I expect to pay more for the steak than when I buy it from the grocery store. Why? Because someone else cooked it. Pretty simple stuff really.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
@Micah Mcarthur I think most of the posts here are spot on. Both the ones saying that you're paying a premium for a service (like @James Wise) and the ones that are saying it's an offering targeted towards the coastals (like @Chris Mason). What I think you'll find is that most of the marketing, promotion, etc. always talk about the yield. So the tone is very much akin to the real estate being an annuity offering but the yield is 10% cash-on-cash. You buy the asset and just sit back waiting for checks to come in the mail. And guess what, in the rising-tide real estate market of the last 7ish years I'm sure that many deals have worked out well. The pro-formas just sound infinitely better than 1% you get in your bank account, the 1.25% in the CD you habitually roll over, etc. Not to mention that a lot of TK investors don't have the time or ability to run a rehab project in the midwest. If they are the doctor or software engineer that Chris posits then they already work 60 hours a week.
But you also have the n=1 statistical challenge. One vacancy becomes 100% vacant. One bad tenant can destroy a year's worth of cash-flow. The "doctor in California" has neither the time nor inclination to keep up on what prevailing rents are, how the local economy is doing, what is happening with major employers, etc. Worst of all, some of the time people buy these things without getting on a plane and walking around the neighborhood. They don't look at the street, the area, crime rates, etc. The *worst* thing you can do in any deal is outsource your diligence to someone who earns a commission on the deal. Get their opinion, decide how much weight to give it, but don't use it as a substitute for your own diligence.
- Rental Property Investor · Mansfield, OH · Member since 2017 · 151 posts · 117 votes9y
@Bryan O. Please read the about page of my website. I am not the owner of the turnkey company.
- Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes9y
doesn't it just really come down to two things: Time and Money? The value of a TK is that they free up your time at the expense of more money. This happens everywhere... you pay for knowledge one way or another.
Some people on the other hand have the time to study a market, make connections, and find property under market. It's probably safe to assume that this person places a higher value on dollar figures then they do time... so of course a TK is terrible choice.
The problem is that it's far too easy for a "well paid" person to have some disposable income and make a poor investment due to poor due diligence. The person that finds value in a TK almost might lack the skill set or the time to do thorough or even proper due diligence... which increases their chances of making a crappy investment. The person with that skill set/time is unlikely to use a TK and seek out a better value elsewhere.
People make poor financial choices all the time... doesn't mean they got scammed.
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