Low Appraisal for a Turnkey Property

91 Replies

As a new real estate investor, I decided to ease my way into SFR ownership through turnkey companies. After vetting companies, I settled on two in markets I decided to invest in (1) Memphis Invest, and (2) Memphis Investment Properties. Yes, I confused the two at the start. However, as I selected properties that I wanted to make offers on with each, I learned that the two were very different in at least one important way – at least for me.

The PSA I was sent from Memphis Investment Properties (MIP) had an appraisal contingency that gave me several options if the property didn't appraise for at least as much as the purchase price, including allowing me to cancel the contract. As it turned out, the property appraised above the purchase price and I closed on my first rental property.

However, the PSA I got from Memphis Invest had no appraisal contingency. When I brought this to the attention of my Memphis Invest Portfolio Advisor, she explained that I would have to go through with the purchase even if the appraisal came in lower than the purchase price. She said that appraisals occasionally came in low and that I should be prepared to bring additional funds to closing in case it happened to me. Because Memphis Invest wouldn't negotiate on this point, I didn't commit to buy the property. 

As a newbie, I'm wondering which of these approaches to low appraisals in purchasing SFRs (MIP or Memphis Invest) is more common among turnkey companies. Also, are the any circumstances in which an investor should be prepared to make up the difference out of pocket for the gap between the appraisal and the purchase price? Although this doesn't seem prudent to me, I'm open to learning about circumstances beyond my limited knowledge about real estate investing in which this might make sense.

I'll be interested to see what people have to say about this. I'm pretty new too, and have shied away from turnkeys because I can't see purchasing a property above market value in a market that sees very little appreciation (Memphis). I have trouble seeing what the exit strategy would be for these. I guess it depends on your goals. 


@Ron James I have been researching a lot as well and it is more uncommon for good quality companies. For less quality companies, in my experience it is even less common or unheard off. I am also working with Memphis Invest and they told me the same thing. 

The question then becomes one of the balance of cost and quality. Memphis Invest claims that their renovations are broader and therefore cost more which is not always accepted by appraisers. As the investor, you benefit because you won't have the repairs of those items. On the other hand, if you use the BP rental property calculator you will see that you should account for repairs, capex, etc. and lenders also want to see that you have sufficient reserves in case your property isn't rented. 

An argument could be made that you could have your tenant create the reserves and repair money that you might need at a later point. That's why I think inspections are as important as appraisals. If the inspection says a property has major system issues, I would not buy it, even if it appraises. With Memphis Invest you probably don't have the inspection issue but it might not appraise.

That brings the whole thing back to math. If you have a house you like but need to bring $5000 to closing because asking and appraised value are off by that amount you can calculate how long you need to accumulate repair money, capex money, and possibly your positive cash flow to get to those $5000. 

I always feel an inspection report should be good for at least 3 years. Assuming that is true you would get to the $5000 in 36 months if you have repair + CAPEX of $139/month. In that case you can keep your positive cash flow as passive income.

If the money to bring to closing is $10K, you have to have $280/month in repair and Capex to get to your equal point.

For me, and I am not saying I am an expert, in most cases, it does not really calculate out in a way where I am better off paying right now when the tenants can pay for it over time.

If the repair/renovation quality of your TK provider is so bad that you have major repairs in the first 3 years, it's probably not the right provider.

That's how I look at it. Maybe it helps you a little in your decision process.

Having turned a many properties over to several of the turnkey outfits in Memphis and watching the progression of these properties, I can say there are some slight differences in their approach. I am not in the business of upselling either of these companies, but I can vouch that some spend a significantly higher amount on their renovations. The goal of this to reduce capex, maintenance and overall costs for at least for the first 10 years. Secondly, these higher cost renovations are to achieve a premium rent rate. I would also consider the differences in their property management, length of leases and quality of tenants. 

Some have a brand to uphold, and their products speak for themselves. Others have spawned as a more cost effective alternative to this. Others offer renovation warranties on their properties. I simply look at these as either buying a Ferrari, or a Corvette, or a with a 10 year warranty. 

Best of luck either way! 

@Ron James memphis invest doesn’t have an appraisal contingency becaUse about 30 percent of their properties don’t appraise (that’s directly off another BP thread).

When I was doing turnkey I chose to not go with Memphis invest for this reason. You’ll be negative equity from the start. Don’t buy you many TK propeties; they don’t typically work out long term

@Ron James maybe not an answer to the question you asked, but A few years back, I liked the idea that the turnkey outfits were pitching. So I tried it out. Put an offer in on a house, contingent on personal inspection, cuz hey, trust is earned, not granted. Upon inspection, the place was, well not turnkey. The rehab work ranged from embarrassingly bad to dangerous.

We passed on that overpriced turd and instead just found a good RE agent we could work with, some reliable contractors and managers, and subsequently purchased 3 cash flowing properties in the Memphis suburbs that were better deals on better properties. My experience doing it the old fashioned way has been a lot easier than expected, and pretty damn close to turnkey.

I don’t see a need to overpay just because the turnkey company says you have to; all contract terms that aren’t statutory are negotiable.

Interesting dilemma. The only time I ever worked with turnkey companies that had the same policy as MemphisInvest was back in the 2011-2012 days when so many properties were being sold, that the TK providers didn't have time to deal with it, and properties were so cheap anyway, you had to just be prepared in case it came in low. Since things have evened out more though, I don't think any of the TK providers I work with now have a hard rule one way or another. Usually if an appraisal comes in low, the investor just takes it to the provider, and the provider either contests the appraisal (appraisals can come in low unnecessarily...there's sometimes little rhyme or reason behind an appraisal, and it can depend on the appraiser's mood that day), or they'll negotiate on the price with the investor, or they'll let the investor out of the contract. It's that easy. Maybe you want to check out a few more turnkey providers than just two, and see what answers you get across the board?
Originally posted by @Caleb Heimsoth :

@Ron James memphis invest doesn’t have an appraisal contingency becaUse about 30 percent of their properties don’t appraise (that’s directly off another BP thread).

When I was doing turnkey I chose to not go with Memphis invest for this reason. You’ll be negative equity from the start. Don’t buy you many TK propeties; they don’t typically work out long term

Why don't they typically work out in the long-term? Mine have been fine.

Originally posted by @Danielle Wolter :

I'll be interested to see what people have to say about this. I'm pretty new too, and have shied away from turnkeys because I can't see purchasing a property above market value in a market that sees very little appreciation (Memphis). I have trouble seeing what the exit strategy would be for these. I guess it depends on your goals. 

Turnkeys shouldn't be sold above market value. At least not as a general rule of thumb... occasionally some can get lower appraisals, but as a whole, they should be sold right at or around market value. If a provider only sells above market, you should look into another provider.

@Ali Boone Definitely agree with that. I've found a couple turnkey providers that do sell at market and those are the ones I will stick with if I decide to buy turnkey.

Hi @Ron James — Welcome to BiggerPockets.

We have worked with both (still with one).  Regarding MI, they should have disclosed to you that the property is priced above market value. It’s your decision whether you want to pursue a deal priced that way. I personally wouldn’t.

That is NOT normal or typical with turnkey investments. Very few of our properties sales are priced above market value, so that is the exception not the rule.

Also, an appraisal contingency is often common in a purchase agreement. Always good to have one to give you the option to decide.

Continued success!

CC: @Danielle Wolter  

Originally posted by @Marco Santarelli :

Hi @Ron James — Welcome to BiggerPockets.

We have worked with both (still with one).  Regarding MI, they should have disclosed to you that the property is priced above market value. It’s your decision whether you want to pursue a deal priced that way. I personally wouldn’t.

That is NOT normal or typical with turnkey investments. Very few of our properties sales are priced above market value, so that is the exception not the rule.

Also, an appraisal contingency is often common in a purchase agreement. Always good to have one to give you the option to decide.

Continued success!

CC: @Danielle Wolter  

I just spent a wonderful day in continuing ed class yesterday for my mortgage bankers license.. and this topic came up with all the RMLOs in the room..  and were it was going is that  lenders are going to start relying on algorithms more than appraisals.. and we are seeing many loans done WITHOUT appraisals at least in the Owner occ space..  My comment was well this could really spit out wild variations in value. As turnkey markets and the location of these homes .. there are always bombed out houses and or ones with tremendous amount of differed maintenance .. So on the same block you have a sale at 50k and one at 120k.. this has been the bane of the appraisal world in these areas for last 10 to 12 years.. And unless the lender has in house appraisers your going to get wild swings in value.. so to say no one should not pay more than an appraisal well that's not exactly accurate.. Just like anyone who thinks they bought a smoking deal because the appraisal came in lower than their purchase price and they think they have bonus equity that's not real either.   

If this new model of eschewing 3p appraisers gets to the investor loan arena I can see all sorts of havoc in the industry.   Buyers not really knowing any better since a vast majority of turnkey buyers are first time buyers  they just don't understand the inner workings  of the business in these areas.

Especially buyers from high priced markets and their only experience maybe buying a personal residence and they did not deal with appraisal issues.. 

I know when we are building our new construction we have not had an appraisal issue in over 300 new builds.. never more but never less.  

Bringing more money to closing just doesn't seem like a great deal to me especially if you are already buying a turnkey property.  

Not to mention, there will still be other fees to pay to the turnkey operator. Though there are other real estate investment approaches out there, it's advisable to buy a turnkey asset that will cash flow from day 1 and you wouldn't have to worry about asset appraising or not. 

@Ron James . - How long do you intend to hold the property? If you’re intention is to hold for a short period (I consider that less than 10 years) you might consider not putting forth the additional cash. I say might only because I agree with others that have stated appraisals are one person’s opinion. If you choose to bring more money to the closing table, do your numbers still support the additional outlay? If the house is renovated to a high degree it may still be worth the investment.

Funny enough that @Jay Hinrichs mentions the changes he’s seen with lenders regarding appraisals. I bought a new primary residence 2 months ago and the lender came back to me and said they didn’t need an appraisal. I was putting 25% down and I know the buyer underpriced the house 5%. Since I bought the place knowing we were going to stay there at least 10 years, I was okay with proceeding without the appraisal.

Originally posted by @Scott Kaczmarek :

@Ron James. - How long do you intend to hold the property? If you’re intention is to hold for a short period (I consider that less than 10 years) you might consider not putting forth the additional cash. I say might only because I agree with others that have stated appraisals are one person’s opinion. If you choose to bring more money to the closing table, do your numbers still support the additional outlay? If the house is renovated to a high degree it may still be worth the investment.

Funny enough that @Jay Hinrichs mentions the changes he’s seen with lenders regarding appraisals. I bought a new primary residence 2 months ago and the lender came back to me and said they didn’t need an appraisal. I was putting 25% down and I know the buyer underpriced the house 5%. Since I bought the place knowing we were going to stay there at least 10 years, I was okay with proceeding without the appraisal.

A part of the issue with this appraisals is the fact that so few younger folks are getting into it.. its an aging field..  it takes a full 4 year degree in most states and then 2 years of apprentice..  This years CE we had a pretty good instructor we talked shop most of the time. instead of deep dive into all the alphabet agencies and acts.

@Jonathan 

@Jonathan McGee The things you list to consider in assessing turkey companies were very helpful. I looked at many of them in making my decision. However, I admit that at this point in my brand new investing career its hard for me to know the true quality of a turnkey company (whether it's a Ferrari or Corvette). No matter how this turns out, I am glad I made a decision that got me off the sidelines. 

Originally posted by @Scott Kaczmarek :

@Jay Hinrichs interesting! Sounds like the appraisal field is much like the trucking industry. When was the last time you looked into the cab of an over the road can and saw anyone under 50

well at least trucking will have EV s rolling soon and then full blown automation and auto pilot.. I have Teslas and the auto pilot is pretty cool.  So in long stretch's of certain parts of the country drivers will not be necessary.  Be like big ships and Harbor pilots..  truck rolls point to point on automation.. then driver gets in to pull it into the loading doc.

@Jay Hinrichs - it’s the amazing modern day we live in! All though my old F250 diesel won’t abide.

I’ll say that I do appreciate your input into these forums. I’ve learned a lot from you and thank you for your input and participation. Thanks Jay.