Fair market value of a turnkey property

Buying & Selling Real Estate
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Fair market value of a turnkey property

Account Closed
Member since 2019 · 13 posts · 4 votes

Hi! I am considering buying a property from a TK provider in Memphis. But when I am searching the address on zillow or other sites, the home value appears half of what the TK company wants for the house. Are the prices that overestimated or is zillow that inaccurate? What is holding me back is that if I need to sell it in a few years like in 5-7 years, I am concerned that the price won't be even close to what I paid and I might end up losing not only the downpayment but will have mortgage balance as well. What is your exit strategy?  

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

many turn key homes are bought in as is condition.. and then 15 to 40k is put into them to bring them up to turn key condition.. you maybe seeing properties that are in need of full rehab.

have to compare apples to apples.

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

    many turn key homes are bought in as is condition.. and then 15 to 40k is put into them to bring them up to turn key condition.. you maybe seeing properties that are in need of full rehab.

    have to compare apples to apples.

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  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    7y
    Originally posted by @Account Closed:

    Hi! I am considering buying a property from a TK provider in Memphis. But when I am searching the address on zillow or other sites, the home value appears half of what the TK company wants for the house. Are the prices that overestimated or is zillow that inaccurate? What is holding me back is that if I need to sell it in a few years like in 5-7 years, I am concerned that the price won't be even close to what I paid and I might end up losing not only the downpayment but will have mortgage balance as well. What is your exit strategy?  

    Never trust Zillow's prices. They are the worst. I would have a licensed real estate agent run actual comps off of the MLS.

    1Reply
  • Account Closed
    OP
    Member since 2019 · 13 posts · 4 votes
    7y

    @Jay Hinrichs thank you for the answer. Is the appraisal usually close to the market value? 

    0Reply
  • Account Closed
    OP
    Member since 2019 · 13 posts · 4 votes
    7y

    @Tom Ott maybe you can recommend an agent in the area? I'd love to get an idea of what it is actually worth if I need to sell. I also checked realtor.com and found a fully renovated property built in 2007 for the same price but better finishes... 

    0Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    7y

     I wish I could, but I am pretty much only in the Cleveland market. Good luck! 

    0Reply
  • Account Closed
    OP
    Member since 2019 · 13 posts · 4 votes
    7y

    Thanks a lot @Tom Ott! In general, from your experience could there be a huge difference between the appraisal (like 20% higher) and the market price?

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

    You would have to define fair market value. Generally a turnkey property will not appraise as high as your purchase price. A number of reasons for this including the obvious things like low sales of trashed houses or start sales in the area.

    Also if buying a properly rehabbed house you often are buying the best house in the street and it may have had a lot of money put into it which is not going to be reflected int he appraisal as there is always a ceiling on a streets value.

    And as has already been stated zillow is not a reliable valuation tool. Having said that, if you can buy something from a turnkey and zillows value is close this is a very good indicator that you are not paying too much for it.

    Lastly remember that turnkey by definition means you are paying full retail plus a bit usually as they have to buy the home, hold it, fully rehab it and then sell it to you making sure nothing is going to go wrong in the first year PLUS make a profit and pay several people involved in the transaction.

    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    7y
    Originally posted by @Dean Letfus:

    You would have to define fair market value. Generally a turnkey property will not appraise as high as your purchase price. A number of reasons for this including the obvious things like low sales of trashed houses or start sales in the area.

    Also if buying a properly rehabbed house you often are buying the best house in the street and it may have had a lot of money put into it which is not going to be reflected int he appraisal as there is always a ceiling on a streets value.

    And as has already been stated zillow is not a reliable valuation tool. Having said that, if you can buy something from a turnkey and zillows value is close this is a very good indicator that you are not paying too much for it.

    Lastly remember that turnkey by definition means you are paying full retail plus a bit usually as they have to buy the home, hold it, fully rehab it and then sell it to you making sure nothing is going to go wrong in the first year PLUS make a profit and pay several people involved in the transaction.

     Dean do you think it's smart to buy above appraised value as a general business plan? Seems highly risky to me. Real estate 101 tells us to buy the ugliest house on the block. Not the nicest. Sure there are times it makes sense but as normal operating procedure that's high risk. Isn't that type of high risk M.O. part of what led you to all of your publicized financial problems and subsequent bankruptcy?

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

    Well the thing is if you know nothing then buying turnkey is the easiest way to start. As long as you know you're paying through the nose in exchange for peace of mind I don't see any issue. It's how I started in the USA.  Once you know more you would do it yourself as you suggest, assuming you have the time of course. 

    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    7y
    Originally posted by @Account Closed:

    Hi! I am considering buying a property from a TK provider in Memphis. But when I am searching the address on zillow or other sites, the home value appears half of what the TK company wants for the house. Are the prices that overestimated or is zillow that inaccurate? What is holding me back is that if I need to sell it in a few years like in 5-7 years, I am concerned that the price won't be even close to what I paid and I might end up losing not only the downpayment but will have mortgage balance as well. What is your exit strategy?  

     When you are buying out of state you should be getting a 3rd party home inspection and an appraisal. Great thing about investing in single family homes or small multi's is the financing. You only put down 25% while the bank puts up the other 75%. Bank will assist you in your due dilligence with their appraisal. They aren't going to let you risk their funds into something super high risk. So listen to the appraiser and proceed with caution sticking to homes that appraised for what you are contracted to pay.

    Now with all of that said there are times when it does makes sense to go above the appraised value. I've done it myself but the risk isn't worth the reward if you're just a random Joe from out of state looking to get started on some passive rentals. The juice has always got to be worth the squeeze. Get your feet wet on some simple deals before getting too aggressive.

    3Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    7y
    Originally posted by @Dean Letfus:

    Well the thing is if you know nothing then buying turnkey is the easiest way to start. As long as you know you're paying through the nose in exchange for peace of mind I don't see any issue. It's how I started in the USA.  Once you know more you would do it yourself as you suggest, assuming you have the time of course. 

     Well sure of course it's easy to start that way. Why wouldn't it be? I imagine if I started a business selling dollars for 50 cents I'd get a lot of customers rather easily. Case in point it's not all that hard to buy a property for it's appraised value. I would argue that if you know nothing about real estate in a particular market or in general this is the one thing you should learn. If you are a newbie investor you have no clue how to value a property properly. An appraisal is a great resource for you as a newbie investor. Sure some appraisals are kinda wonky, we've all been there but speaking in generalities appraisals more often then not are the most accurate way for a brand new armchair investor to determine the value of the property that they are buying.

    2Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    That may work in Ohio James, in Memphis it is a crap shoot. Appraisals are often 10, even 20% off what every agent and investor knows it's worth.  Of course generically you should never buy a property for over appraisal but in Memphis that often means not buying a decent deal.

    We stopped getting appraisals years ago they are too volatile in Memphis. A building inspection on the other hand is worth every cent, ESPECIALLY when buying turnkey.

    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    7y
    Originally posted by @Dean Letfus:

    That may work in Ohio James, in Memphis it is a crap shoot. Appraisals are often 10, even 20% off what every agent and investor knows it's worth.  Of course generically you should never buy a property for over appraisal but in Memphis that often means not buying a decent deal.

    We stopped getting appraisals years ago they are too volatile in Memphis. A building inspection on the other hand is worth every cent, ESPECIALLY when buying turnkey.

    Appraisals only work in Ohio now? Lol I dunno Dean. Seems to me that, that type of logic will get your name in the paper for going broke. I would caution new investors from following this advice, especially given that the source of said advice has already gone broke using this type of logic.

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

    In New Zealand we have an expression that you are "talking out of your rectum". It means someone who doesn't know what they are talking about. You appear to be an expert. 

    I never said they work only in Ohio, can you read?
    I said they don't work well in Memphis.

    Unlike you I have nothing to sell so I'm just trying to help people looking for advice based on my experience.

    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    7y
    Originally posted by @Dean Letfus:

    In New Zealand we have an expression that you are "talking out of your rectum". It means someone who doesn't know what they are talking about. You appear to be an expert. 

    I never said they work only in Ohio, can you read?
    I said they don't work well in Memphis.

    Unlike you I have nothing to sell so I'm just trying to help people looking for advice based on my experience.

    Dean there is no need to get aggressive here. You posted some very questionable advice and have had a very questionable run in this business. I think it's only fair to assume you'll get some criticism when handing out this type of advice given a lot of what has been written about your real estate dealings. I mean looking at a few of the links below it reminds me of the various Clayton Morris (Morris Invest) threads that are all around this website and others. If you would like to stay on topic and discuss some factual data that backs up what you are saying about why buying properties for more than their appraised value is a good way to get started in real estate than I am more than happy to have a robust debate with you about it.

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    2Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    7y
    Originally posted by @Dean Letfus:

    In New Zealand we have an expression that you are "talking out of your rectum". It means someone who doesn't know what they are talking about. You appear to be an expert. 

    I never said they work only in Ohio, can you read?
    I said they don't work well in Memphis.

    Unlike you I have nothing to sell so I'm just trying to help people looking for advice based on my experience.

    While we are talking I would appreciate if you could clarify what it is that you mean when you say you aren't here to sell anything. Your profile says you are selling investment properties in Memphis? Below is a direct quote taken from your profile. 

    We supply performing assets at lowest possible prices. We buy to order and guarantee to save you money.

     Please provide clarification.

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

    See you're proving it again.   You are an expert!  I'll leave you to your fantasies!

    0Reply
  • Tiffany Reguera
    Redding, CA · Member since 2016 · 10 posts · 3 votes
    7y

    I just purchased my first Turnkey in Memphis about 6 weeks ago.  Purchase price was somewhere around $75,000.  It appraised for a few thousand below that.  The seller ended up paying a bit more of the closing costs (but not enough for me to break even).  It was my first purchase and I was already invested (emotionally) so I moved forward.  If I purchase directly from a turnkey in the future I'll ask them if they can ensure that the property will appraise for the purchase price (I'm not sure if this will help, clearly I'm very green!).  I don't regret doing the aforementioned, it got my feet wet, but I'll sure try to avoid it in the future.

    1Reply
  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    7y
    Originally posted by @Account Closed:

    Hi! I am considering buying a property from a TK provider in Memphis. But when I am searching the address on zillow or other sites, the home value appears half of what the TK company wants for the house. Are the prices that overestimated or is zillow that inaccurate? What is holding me back is that if I need to sell it in a few years like in 5-7 years, I am concerned that the price won't be even close to what I paid and I might end up losing not only the downpayment but will have mortgage balance as well. What is your exit strategy?  

    Hi Yulyana,

    I'll try to get this back on track for you for after it looks like it has gone off the rails a bit.  In short, I don't believe that a site that aggregates data and tries to give you an estimate of value is going to be as accurate as an independent appraisal of value.  There is so much that goes into the analyzing of a property.  You are smart to be thinking exit strategy on the front end, but even the best made plans can end up not working.  

    There is risk in making a decisions to buy property and your #1 job is to simply try and reduce risk as much as possible.  Where you buy, the price you pay, the condition of the home, the location of the property, the experience level of yourself as an investor and the experience of the people/company you work with, the management of the investment, etc... all play a role in how successful your investment will be.  When you start talking about exit strategies, now you are looking into the future and trying to forecast what will happen.  That can be where paralysis sets in for any investor on any deal.

    As for appraisals and the role they play in for determination to buy a property, they are better than online sites like Zillow in my opinion.  I would not put a lot of time into a computer algorithm generated value.  However, they are simply an opinion of value and are subjective.  If you have multiple appraisers give you an appraisal on the same property, they can vary wildly in opinion of value based on the experience level of the appraiser, their knowledge of renovation costs and even their personal bias toward investing.  So they are simply one more piece of the puzzle you have to put together as an investor when buying properties.

    Not sure if that helped at all, lol!

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    7y
    Originally posted by @Tiffany Reguera:

    I just purchased my first Turnkey in Memphis about 6 weeks ago.  Purchase price was somewhere around $75,000.  It appraised for a few thousand below that.  The seller ended up paying a bit more of the closing costs (but not enough for me to break even).  It was my first purchase and I was already invested (emotionally) so I moved forward.  If I purchase directly from a turnkey in the future I'll ask them if they can ensure that the property will appraise for the purchase price (I'm not sure if this will help, clearly I'm very green!).  I don't regret doing the aforementioned, it got my feet wet, but I'll sure try to avoid it in the future.

    Congratulations on getting moving forward!  Whatever you do in the future, just remember that making an investment like this where you put your trust in someone else to provide a service, it is all about setting expectations - on both sides.  Having clarity on how issues will be handled before they occur goes a long way in helping to detach emotions from your decisions.  I hope your investment goes great for you!

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  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    7y
    Originally posted by @Tiffany Reguera:

    I just purchased my first Turnkey in Memphis about 6 weeks ago.  Purchase price was somewhere around $75,000.  It appraised for a few thousand below that.  The seller ended up paying a bit more of the closing costs (but not enough for me to break even).  It was my first purchase and I was already invested (emotionally) so I moved forward.  If I purchase directly from a turnkey in the future I'll ask them if they can ensure that the property will appraise for the purchase price (I'm not sure if this will help, clearly I'm very green!).  I don't regret doing the aforementioned, it got my feet wet, but I'll sure try to avoid it in the future.

     When negotiating real estate deals the property appraising for the purchase price or higher is a very common contingency that is used. I think that's a great idea for you to put that in your offers. Now of course we can't guarantee the seller will accept that contingency but it's a negotiation and it's better to cross that bridge early on before you've committed emotional resources and paid for your inspection and appraisal.

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

    Any time you have areas that have a lot of rehab going on  IE older homes that have been rentals for years or older homeowners with a ton of differed maintenance.. there will be a wide swing in valuations based on condition.

    so what throws many off are the sales that happen to those looking to do full blown rehab so they may pick up a home for 40k that needs 40k in rehab and after done is worth 100k.. and its on the same street were a home owner was neat as a pin and got full retail for theirs.. and for sure depends on who appraises it and how many comps were in the area and how long ago etc etc.. 

    Its not like when we build a new community and every 2500 sq ft home is basically the same with the same finishes and sells for 500k  so our apprasials are always for purchase price not lower not higher.. just depends on area and housing stock

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Yulyana Karpava. If you buy turnkey in memphis and then sell in 5-7 years with realtors and a traditional sale, you will likely lose money.

    The commissions and closing costs will eat any profit you have realized and this assuming your tenant stays for most if not that entire time period. If your tenant leaves and you have lease up commissions, turnover costs and so forth your losses will he even greater.

    Another issue you’ll have is buying turnkey is basically like buying a car new. You buy a rehabbed, in great condition house. It appraises for the price you pay when you buy it. The turnkey companies are basically setting their own comps. Then the tenant moves in and your house isn’t in great shape after a year or two. Then in 5-7 years all the systems are older now too. So that’ll be a sticking point for some people.

    3Reply
  • Anthony Rosa
    Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes
    7y

    There is no exit strategy with TK.  You bought at top dollar and more than likely the home will not appreciate in value. More than likely you will pay more than top dollar for a TK property.

    There are homes for sale and listed on the MLS that a TK provider will want to sell you for more than double the list price. But, the TK company will not let you know its for sale and listed on the MLS. The TK company already inspected the home, knows the rehab cost and their profit target.

    1Reply
  • Jonathan Oh
    Investor · Las Vegas, NV · Member since 2019 · 499 posts · 259 votes
    7y

    @Account Closed I work at Zillow and love the company, but I will tell you that even I don't take the Zestimate seriously - especially when it comes to turnkey. Keep in mind, the tk you're looking at could have been bought and sold off-market. Zillow does not know the extent of rehab that has gone into the property. One of my turnkeys appraised at $92k, but was valued significantly less on Zillow. It's been a great investment so far. Instead of relying on Zillow or other online platforms, order a proper appraisal. Rely on actual professionals that physical see the property rather than some algorithm that doesn't have the full picture.

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