Are turnkey investors losing their minds?

Buying & Selling Real Estate
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Are turnkey investors losing their minds?

Jesse S.
Rental Property Investor · Brooklyn, NY · Member since 2017 · 45 posts · 37 votes
I own two out of state SFRs in Memphis that I purchased from a turnkey provider about a year ago. I’m looking to add a few more to my portfolio but I’ve had a hard time finding properties that fit my investment criteria (i.e. price point, target rent, neighborhood, etc). I’m on the distribution list for a couple different turnkey providers in Memphis for investors that are ready to purchase. Recently there were three properties that looked promising that I wanted to investigate further.   Property #1- All that was listed for this property was an address, price, and projected rent. They deal packet wasn’t ready yet so I couldn’t see the scope of work, so I requested it and they promised to send it to me by the end of the day. About 4 hours later, they responded again and said that somebody else already reserved the property (without seeing the SOW).   Property #2- Full deal packet was available, I took a few hours to run my own financial projections, look at comparables, look at the neighborhood, and ultimately decided that I wanted to buy it. I emailed the office to reserve it, and they responded in 30 mins that the property was already taken.   Property #3- I opened the email immediately when I received it in a cab and the full deal packet was available. I did some light touch due dilligence while in the cab, and then 40 mins later I reopened the deal packet and saw that it was already taken.   In all three instances, properties were released and then reserved within a matter of hours (if not minutes!). How can anyone do due diligence to know what they are buying in that time? Have investors become so savvy that they know what 2-3 metrics matter and only focus on them? Or have investors lost their mind because they are so desperate for yield that they buy anything called “turnkey” and assume it’s a good deal?   I take this as a massively worrying sign and I’m tempted to stay on the sidelines until things cool down. Once we get a dip, then I’d be ready to pick up a bunch of places once the demand slows. Is anyone else noticing the same thing?
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Frank S.
Investor · Simpsonville, SC · Member since 2015 · 19 posts · 32 votes
7y

@jesse s.  You are not alone. In my experience “locking up the contract” with certain phrases does not work well. In fact, it hurts. Sellers, agents, wholesalers and investors are well aware of this tactic and will simply not reply or reply back with an “as is” offer especially if the property is getting a lot of interest.

Buying is the easy part. You can buy anything. Selling for profit and/or returns and creating a smart exit strategy is the hard part.

Your analysis is a rational decision process. What I am beginning to see in the market is irrational.

That tells me something about this market…

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  • Kelly DeWinter
    Member since 2018 · 259 posts · 159 votes
    7y

    Not Crazy, overly optimistic probably, Turnkeys are in the drivers seat in this cycle. Property prices are high, investors are willing to pay their prices. Interest rates are low, hard money is expensive. 

    1Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    Properties in decent areas in Memphis are hard to come by these days at realistic prices so you just have to jump on them ASAP.  You can always pull out if something smells fishy. I have bought literally hundreds of homes with only an address and a few photos.  Do your due diligence after you have it tied up.

    4Reply
  • Alyssa Dyer
    Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
    7y

    @Dean Letfus I agree all the way. With the contracts I see, there are 20 days built into the inspection period if anything comes up that you don't like during that time. Drop it and get your EM back! 

    @Jesse S.Do those providers do a normal inspection process? 

    2Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
    7y
    Originally posted by @Jesse S.:
    I own two out of state SFRs in Memphis that I purchased from a turnkey provider about a year ago. I’m looking to add a few more to my portfolio but I’ve had a hard time finding properties that fit my investment criteria (i.e. price point, target rent, neighborhood, etc). I’m on the distribution list for a couple different turnkey providers in Memphis for investors that are ready to purchase. Recently there were three properties that looked promising that I wanted to investigate further.

    Property #1- All that was listed for this property was an address, price, and projected rent. They deal packet wasn’t ready yet so I couldn’t see the scope of work, so I requested it and they promised to send it to me by the end of the day. About 4 hours later, they responded again and said that somebody else already reserved the property (without seeing the SOW).

    Property #2- Full deal packet was available, I took a few hours to run my own financial projections, look at comparables, look at the neighborhood, and ultimately decided that I wanted to buy it. I emailed the office to reserve it, and they responded in 30 mins that the property was already taken.

    Property #3- I opened the email immediately when I received it in a cab and the full deal packet was available. I did some light touch due dilligence while in the cab, and then 40 mins later I reopened the deal packet and saw that it was already taken.

    In all three instances, properties were released and then reserved within a matter of hours (if not minutes!). How can anyone do due diligence to know what they are buying in that time? Have investors become so savvy that they know what 2-3 metrics matter and only focus on them? Or have investors lost their mind because they are so desperate for yield that they buy anything called “turnkey” and assume it’s a good deal?

    I take this as a massively worrying sign and I’m tempted to stay on the sidelines until things cool down. Once we get a dip, then I’d be ready to pick up a bunch of places once the demand slows. Is anyone else noticing the same thing?

     Rental properties are a proven way to make money. People love money. Now that the markets more normalized than what they were doing the crash the investors are pushing one another over to get their money in the ring as again more or less rental real estate is a very proven way to make money.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    If it looks good, put in an offer with conditions.  This locks you in, but gives you an out if needed.

    2Reply
  • Jesse S.
    OP
    Rental Property Investor · Brooklyn, NY · Member since 2017 · 45 posts · 37 votes
    7y

    @Alyssa Dyer @Dean Letfus yes, they provide a standard inspection process. However when I refer to due dilligence, I'm not talking only about the inspection process, I'm more thinking about basic things like "what is the neighborhood like", "how is sales price compared to the rest of the neighborhood", "what is my projected cashflow based on the actual taxes, my estimate of maintenance, insurance quote etc".  If I have the house under contract but I'm ultimately not comfortable with the cashflow, can I still back out? I understand backing out due to something you find during the inspection prior to close, but is "I actually dont like the numbers" a legimate out to the contract? 

    1Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    @Jesse S., that info should NEVER come from a turnkey. They can't be trusted. You need your own PM or other professional to tell you that.  Turnkey sells you the car but can't tell you which roads to drive on.

    2Reply
  • Jesse S.
    OP
    Rental Property Investor · Brooklyn, NY · Member since 2017 · 45 posts · 37 votes
    7y

    @Dean Letfus I 100% agree, and thats exactly my point. I'm not taking the turnkey company's word for anything, so I am trying to run my own numbers before putting anything under contract. However when properties are going under contract in under an hour, there is no way those investors are doing their own research; Which I think is crazy! 

    0Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    @Jesse S., but that's what we are saying. Tie the property up first. When I trained investors my first mantra was "You have nothing until you have a signed contract". Never spend a minute on a property you can't definitely buy!

    2Reply
  • Alyssa Dyer
    Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
    7y

    @Jesse S. I'm not sure if your contract is exactly like mine, but mine says you can back out because of your opinion after investigations. So if your opinion is that you don't want this property during the investigation, then you're good to go. 

    "If, in the sole opinion of the Buyer, results of Investigations, Inspections or Reviews are unsatisfactory, the Buyer may cancel the Contract by delivering written notice of cancellation to Seller, in care of Seller’s Broker, if applicable, and receive refund of Earnest Money."

    5Reply
  • Jim O.
    Rental Property Investor · Seattle, WA · Member since 2017 · 39 posts · 12 votes
    7y

    @Alyssa Dyer, I really like your approach to making the contract clear and will be using it in the future.  Thank you very much for sharing.

    1Reply
  • Frank S.
    Investor · Simpsonville, SC · Member since 2015 · 19 posts · 32 votes
    7y

    @jesse s.  You are not alone. In my experience “locking up the contract” with certain phrases does not work well. In fact, it hurts. Sellers, agents, wholesalers and investors are well aware of this tactic and will simply not reply or reply back with an “as is” offer especially if the property is getting a lot of interest.

    Buying is the easy part. You can buy anything. Selling for profit and/or returns and creating a smart exit strategy is the hard part.

    Your analysis is a rational decision process. What I am beginning to see in the market is irrational.

    That tells me something about this market…

    6Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Frank S.:

    @jesse s.  You are not alone. In my experience “locking up the contract” with certain phrases does not work well. In fact, it hurts. Sellers, agents, wholesalers and investors are well aware of this tactic and will simply not reply or reply back with an “as is” offer especially if the property is getting a lot of interest.

    Buying is the easy part. You can buy anything. Selling for profit and/or returns and creating a smart exit strategy is the hard part.

    Your analysis is a rational decision process. What I am beginning to see in the market is irrational.

    That tells me something about this market…

    as-is doesn't mean you can't back out if inspections find something that you feel is a deal-breaker.  

    Originally posted by @Jesse S.:

    @Alyssa Dyer @Dean Letfus yes, they provide a standard inspection process. However when I refer to due dilligence, I'm not talking only about the inspection process, I'm more thinking about basic things like "what is the neighborhood like", "how is sales price compared to the rest of the neighborhood", "what is my projected cashflow based on the actual taxes, my estimate of maintenance, insurance quote etc". If I have the house under contract but I'm ultimately not comfortable with the cashflow, can I still back out? I understand backing out due to something you find during the inspection prior to close, but is "I actually dont like the numbers" a legimate out to the contract?

    No, it's not. RE has a lot of grey areas, though (from both buying and selling sides). As long as you have that inspection period baked in, you have a way out. Definitely do not tell them "I'm pulling out cuz cashflow is bad" as one of the reasons, tho.

    1Reply
  • Jonathan McGee
    Rental Property Investor · Memphis, TN · Member since 2017 · 155 posts · 151 votes
    7y

    From a wholesaling standpoint, the Memphis market seems to be experiencing some type of "investor boom" and creating a competitive market. I would not doubt investors are starting to jump at any and every opportunity without the SoW, especially from a reputable turnkey company. I'm starting to get a surge of refinance buyers approaching me for deals that they can purchase from me if I remodel for them. 


    As stated above, you may want to start jumping on opportunities and at least getting it contracted with a due diligence period. Otherwise, you may have to start getting creative and getting hands on with people on the ground here. 


    Good luck!

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    not saying this is whats happening but those were the same sales techniques that lured Morris invest folks to make irrational purchases.. its called the take away close.. and again I am not saying anyone in Memphis is doing this.. But its a common technique in sales.

    Also this is what happened in crowdfunding deals a few years ago.. a loan was put up for investors and it was gone in 20 minutes NO one could do due diligence and the investors had to just trust the Crowdfunding plat forms.. and well we know where that ended up for many of the loans.. 

    One should always be able to put up a reasonable deposit.. and have 10 business days to do your Due diligence IE home inspection.. etc.. then go hard with your deposit.

    this is one reason I don't deal with wholesalers they try to get non refundable money out of you up front.. And with all the amateur wholesalers out there who knows if they can actually close and good luck getting your money back LOL.

    Buying a rental simply is not that complicated.. you should be able to make a contingent offer based on address price and rents.. the other micro numbers tax's ( which its very smart in that market to make sure because of double tax) and if there is a owner occ exemption can by quite a bit different once you close and blow your numbers. Then do a standard escrow order your home inspection etc.. If they are not willing to do that I would then just move to MLS were this would be standard procedure and maybe just buy a slightly used house and figure on a little stuff to keep it running. There are always investors looking to exit their rentals ALWAYS

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    U know the other thing about this.. is it finally looks like its happened.. TK or out of state investing has far less failed landlords then there used to be.. so the inventory in the nicer areas is not getting cycled like it did 10 years ago.

    and since they are not building any more of it.. there had to come to a tipping point were demand is simply outstripping supply so they are able to push pricing and the investors are settling for smaller returns.. IE the Coast type markets.

    Since rents really don't go up a ton in these areas they stay fairly static along the section 8 lines.. 

    no way to push pricing down to create higher yields when rents don't really move.. so investors have to settle for less return.. 

    in the long run should create some appreciation.. and that has certainly manifested itself on the wholesale side of things with every body and their brother wanting to do that.. and just keep pushing prices.. rehab is rehab those prices have gone up some.. but end of the day the props will only sell for what an investor will settle for for a given cash flow return. since virtually none of this goes to owner occ.. its more commercial in nature.

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  • Frank S.
    Investor · Simpsonville, SC · Member since 2015 · 19 posts · 32 votes
    7y

    @Jay Hinrichs

    I don’t call them wholesales any more. They are re-sellers.

    They post a house for showing one day only, limited window of time to see it (I’ve seen less than 30 minutes so you have no time for inspections), specify no contingencies will be considered, require large earnest deposit and want a considerable amount over what they have contracted with the seller.

    This creates a frenzy and urgency among the buyers as they see the crowds crawling all over the property during this viewing period.

    They sell.

    This is the market we are in and they are taking full advantage of buyers willing to accept that risk.

    Caveat Emptor!

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Frank S.:

    @Jay Hinrichs

    I don’t call them wholesales any more. They are re-sellers.

    They post a house for showing one day only, limited window of time to see it (I’ve seen less than 30 minutes so you have no time for inspections), specify no contingencies will be considered, require large earnest deposit and want a considerable amount over what they have contracted with the seller.

    This creates a frenzy and urgency among the buyers as they see the crowds crawling all over the property during this viewing period.

    They sell.

    This is the market we are in and they are taking full advantage of buyers willing to accept that risk.

    Caveat Emptor!

    HOmey don't play that game I can find deals without those terms and conditions..  sorry that some have to ..  

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  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    You don't need any fancy clauses if you know what you're doing. Just make sure your contract states that if EM is not paid within, let's say. 48 or 72 hours, then the contract is dead. If you have people in place 2 to 3 days should be plenty of time to get your DD done. If you don't like the deal don't pay the EM.  The more clauses you have in your contract the less likely it is that the seller will sign. I generally use whatever contract the seller sends me and just add in the EM termination.

    KISS principle.

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Alyssa Dyer  I love the wording in your contracts, but do sellers love it? I would imagine some sellers merely say no to such wording. 

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Dean Letfus  How many times have you merely not paid the EM, which then cancels the contract? I don't know the size of the area you buy in, but in a small area I would think after 2-3 times of that word will get around that you don't like to follow through on contracts. 

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    I have not been able to close a deal this year. I have been outbid on numerous properties though. In the meantime, my personal investments are up 14% for the year. I'd rather my investments make zero than make a bad purchase, so I am just being patient while I keep shopping. 

    0Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    @Anthony Wick, my personal experience in the USA in 3 cities is that people do it all the time. It's never affected me, not that I do it often. I can generally get my guys to walk through a property the day I find it and give me a rehab bid and rental estimate.

    0Reply
  • Gilmer Legaspi
    Member since 2019 · 8 posts · 1 vote
    7y

    @Jesse S.

    Hi. Just want to ask what. Turnkey company you’re using in Memphis.

    0Reply
  • Jonathan Oh
    Investor · Las Vegas, NV · Member since 2019 · 499 posts · 259 votes
    7y

    @Jesse S.

    There could be several reasons for this. One could definitely be what you're thinking - overly-eager investors who are afraid they are missing out on deals. And they assume because it is "turnkey" that the property is free of any issues. But they may also be some investors who knows the market very well. For example, I invest in KC and generally know where progress is occurring and where rental demand is strong. I also know, which areas are safe and which areas should be avoided. If I get an address, sqft, beds, and baths of a property - I can quickly figure out market rent and see if there is something to pursue. If there is, then like many of the BP members above are saying - reserve it and put contingencies in the contract making sure that the tk sellers have indeed completed all the rehab they stated. Also, I don't know about how your tk providers handles things, but the ones I've purchased through accepted backup offers. Deals do fall out, so keep an eye out for that. You have to accept that competition is fierce right now, but don't let that stop you from picking up properties that you like.

    Hope this helps. Feel free to message me if you have other questions.

    1Reply
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