If buying a turn key, do I need a contractor?

Question

If I’m buying a “turn-key” type of property, and I already have a property inspector and appraiser going to the home do I still need to send a contractor in for a quote? It seems like I may not even need a contractor at all if maybe something small, would it still be worth mine and my contractor’s time to have him visit my potential property get a quote?

James Wise · Answer

Not generally necessary. By getting an appraisal & a home inspection you've done a considerable amount of due diligence. It's those that skip all of those steps that run into problems. Now if the inspector or appraiser uncovered a major defect during their inspections you may want to send in a contractor to bid the cost to repair the issue for you. Other than you should be good to go with the 1st two inspections.

Clayton Mobley · Answer

As for your current prop, I would ask for a list of work that was done to make this tenant-ready and when. Again, I'd ask this regardless of the T vs t issue - you should know what has been done to the property. I would also ask about the age and condition of capex items like flooring, roofing, boiler, HVAC, etc. If the property looks great but has older capex items, it isn't really turnkey, and you'll be looking at a hefty repair or replacement bill sooner than you think.

Rather than a GC, I would consider getting your own inspection. This should highlight any issues that you might not be able to see with the naked eye, and give you a better idea of what you're buying. If the provider or seller doesn't want you to do this, run away. Anyone selling you something should be ok with you knowing what you're buying, inside and out.

Good luck!

Clayton Mobley · Answer

@Codi Clausen you've gotten the right answer here from @Jason DiClemente and @Lance Robinson - if you are buying a turnkey product, it should be tenant-ready, with everything new or nearly so.

However, I want to underscore something Lance pointed out - the difference between a Turnkey property and a 'turnkey' property. I know I know, same word, it gets confusing because folks tend to throw the term around a lot when referring to different things.

'Capital T' Turnkey is a property sold to you by a provider. This means there is a company that finds props, rehabs them, sells them to investors, and then manages them long-term. This should be a full-service company, which means they do all these things in-house (not contracting you out to a third-party PM you can't vet ahead of time, for example).

'Lower case t' turnkey just means a property that is tenant-ready. You can buy it from a national marketing company, an agent, or the guy next door. In this case, you are responsible for finding a tenant and managing it, or hiring a PM company of your own.

In both cases, the property should not require the attention of a GC. Pretty much by definition, if you need a GC then the property is not T/turnkey. However, the difference between the two types of investments (both of which can and do work well) is that someone is responsible to you after the sale in Turnkey - the Turnkey provider is also the PM, which means they are incentivized to A) make sure they sell you a property that will be easy to rent, since they're the ones responsible for tenanting B) by properties that are in areas with strong demand, for the same reason and C) do solid rehab work so that good tenants stay longer and maintenance costs don't eat through your returns. Of course, some providers can and do cut corners, but it's not in their best interest in the long-run. Clients know when PM service is shoddy, and they tend to get quite upset pretty quick when there are constant maintenance issues or tenant turnover. Of course, vetting and asking questions of any provider you consider is crucial.

With turnkey properties, you run the risk of finding someone that just needs to sell the place and move on. No one is responsible to you long-term - the owner, the agent both need to just make the sale, whatever GC did the rehab work is long gone. Again, this type of investment can still be a solid choice - and the benefit can be that you get the prop at a lower price if the seller is motivated - I'm just pointing out the legwork you'd need to be doing on your end to make sure you're getting what you pay for. Regardless of the T vs t issue, you need to vet vet vet, and ask questions. The difference is that in one scenario, the provider is trying to build trust and a long-term relationship, in the other, there's no such incentive.

Lance Robinson · Answer

@Codi Clausen as @Jason DiClemente stated, it should be ready to go without needing a contractor. Do you mean a turnkey property or that the property is turn key? Two different things. If a turnkey property, I assume out of area, I would make sure to heavily vet the PM as well as their contractors as you will need them at some point. That's my favorite way to work with my PMs and contractors. I've found this to be nearly perfect in a specific market and then doubled down and continue to buy there because the "feet on the street" are that important. Hope that helps, let me know if you have any other specific Qs!Lance

If buying a turn key, do I need a contractor?

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