Low Appraisal for a Turnkey Property

Low Appraisal for a Turnkey Property

Rockville, MD · Member since 2019 · 19 posts · 13 votes

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.

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

@Chris Clothier  well Clayton Morris comes to mind of the worse of the worse I have witnessed.

those that give inferior product usually don't last to long.. so longevity in the market place is a key indicator.

right now I see the TK  industry if we can call it that somewhat stressed.. to do full renovations like your company does you simply have to move up in asset class and price points.. you cannot do a full rehab on a 75k exit property MOST of the time.

so something has to give.. 

The wholesaler community has not helped this at all.. with everyone and their brother jumping in.. then wanting to make 10 to 20k or more on a wholesale flip this drives up prices as well and when that happens renovation budgets get paired back. 

The other thing I see happening frankly is the investors themselves they all have this saying  ( My Criteria ) and basically they read on BP or other places about your failing if you don't get a 10 or 12% return or more etc etc.. we see this on BP as well Hey why are you buying there when you can get double digits here.. .. And again with those ( especially turn key ) as they are new they just don't know the risk they are taking for those returns..  I know many companies realized this long ago and moved up and out of certain asset class's as it just not sustainable for the investor or the TK company. 

I mean really what's the difference in a 150 cash flow and a 200..  its a whopping 600 a year.. but to those that are focused on % returns they just look at that with no context to the risk they are taking.. 

and what kills landlords   ???    Turn over  Cap ex  and tenants that are under the median income of an area.

But median income or median price point houses in most MSAs are not the highest returns out of the gate but have the stability and the ability to raise rent and you can do a much nicer job on the reno to cut down on major expenses.

so bottom line we are talking about 30 to 60 year old homes generally speaking.. and most of the componants are beyond useful life.. so to get a home that is going to treat you well over the next decade you need.

1. new roof  6 to 10k

2. New Hvac  4500 to  6k

3. upgraded panel and electrical and all wall sockets etc  3k or so.

4. A real paint job and calking  3 to 5k 

5.  And this is a big one new energy effiecient windows..  5k and up.

6. new doors and trim packages 3k or so.

7. new cabinets and appliances 3 to 4k

8. new water heater and vented properly  1k

9. and this is a big one  NEW Sewer line to the street if its not PVC already.. 2 to 5k  this one catch's many flat footed.

10. Flat work replaced or repaired..

11. little bit of landscaping

12. new light fixtures.

13. tenant proof flooring.. 

And so to buy a rental that your going to have a solid 10 year run on.. there is no way your doing 10 to 15k renos  So U simply get what you pay for.. 

And of course I stole this one from you.. there is a vast difference in a 1200 to 1500 dollar renter than a 600 dollar renter VAST.

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  • Investor · Dallas, GA · Member since 2016 · 59 posts · 57 votes
    7y

    @Ali Boone @Caleb Heimsoth

    I agree Ali. I’m not trying to sound like a jerk, but maybe you bought the wrong turnkey or perhaps your goals were different?

  • Rental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
    7y

    @Ron James You are very welcome

  • Rockville, MD · Member since 2019 · 19 posts · 13 votes
    7y

    @Ola Dantis I was careful to buy a property that should have produced cash flow once rented. Fortunately, the property was rented before closing so that I got cash flow from the start. 

  • Rockville, MD · Member since 2019 · 19 posts · 13 votes
    7y

    @Ali Boone Good advice. I'm already looking at a couple of others, Norada and BuyMemphisNow. I will also look at whether I can put together a team on the ground in Memphis.

  • Rockville, MD · Member since 2019 · 19 posts · 13 votes
    7y

    @Mike Yerington I'm on the wait list for Mid South Home Buyers. I expect to hear from them in November or December.

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

    Wow..Midsouth’s wait list is til November or December? I guess I need to get to work LOL 

  • Rockville, MD · Member since 2019 · 19 posts · 13 votes
    7y

    @Danielle Wolter My goals for this first property were modest. I wanted at least $150 cash flow and for the cash-on-cash to be at least 5%. My purchase exceeded both these goals. I also wanted to get experience owing a rent house. It remains to be seen If the property performs as I hope it will. Honestly, I didn't give any thought to an exit strategy. I know I should have. I'll think about it for my next purchase.

  • Attorney · Forest Hills, NY · Member since 2019 · 73 posts · 57 votes
    7y

    @Ron James

    Hi Ron,

    I'm currently under contract with MIP. I was looking at Memphis invest, but decided against them because their fees seemed relatively high. Did you make a decision as to who you'll be working with ?

  • Rental Property Investor · Houston, TX · Member since 2014 · 139 posts · 140 votes
    7y

    @Marco Santarelli this is off the topic but my husband and I really enjoy listening to your podcasts! Keep em coming!

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

    @Ali Boone if I remember correctly (correct me if I’m wrong) but you bought all your TK properties in the early 2010s which was when any property was a bargain. Now if you’re buying at the 1 percent rule (where most TK properties sell) I think you break even at best long term.

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

    @Ron James at this point in the cycle I wouldn’t buy TK as when the recession comes you will have plummeting value.

    Your best bet is to buy local and do some of the work yourself (depending on what it is).

    It blows my mind the price differential for some of this stuff of paying someone to do it vs doing it myself.

    I’ve done TK and I’ve done it myself so I have seen both sides.

    Great example: new water heater (paying someone to to it) 800-900 (including labor and the water heater)

    Doing it myself: 400-500. It’s basically half price.

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

    @Ron James if you’re earning 5 percent in real estate you’re doing it wrong. The return doesn’t justify the risk (assuming this is leveraged, if it’s cash that’s different).

    You can earn 8 percent in the S and P 500 and do zero work (obviously this is over the long term)

  • Rockville, MD · Member since 2019 · 19 posts · 13 votes
    7y

    @Scott Kaczmarek Without intentionally planning, I expect to keep the property for the foreseeable future so long as it is productive. Bring more that 20% to closing would have caused me to meet neither of my two goals - cashflow and cash-on-cash.

  • Rockville, MD · Member since 2019 · 19 posts · 13 votes
    7y

    @Marky Suazo I closed on a property I bought from MIP earlier this month. The place was rented at the expected rent level before I closed.

  • Rockville, MD · Member since 2019 · 19 posts · 13 votes
    7y

    @Caleb Heimsoth The deal is leveraged. Although my goal was 5%, I'm getting 7.5% plus cash flow, tax deductions, mortgage pay down, etc.

  • Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    7y
    Originally posted by @Ron James:

    @Ali Boone Good advice. I'm already looking at a couple of others, Norada and BuyMemphisNow. I will also look at whether I can put together a team on the ground in Memphis.

    Cool! Definitely helpful to shop around and see what everyone offers. Any reason you're particularly focused on Memphis?

  • Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    7y
    Originally posted by @Caleb Heimsoth:

    @Ali Boone if I remember correctly (correct me if I’m wrong) but you bought all your TK properties in the early 2010s which was when any property was a bargain. Now if you’re buying at the 1 percent rule (where most TK properties sell) I think you break even at best long term.

    What are you basing that assumption on?

  • Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y
    Originally posted by @Ali Boone:
    Originally posted by @Caleb Heimsoth:

    @Ali Boone if I remember correctly (correct me if I’m wrong) but you bought all your TK properties in the early 2010s which was when any property was a bargain. Now if you’re buying at the 1 percent rule (where most TK properties sell) I think you break even at best long term.

    What are you basing that assumption on?

    Which assumption are you referring to? The 1 Percent rule assumption is based on my experience.  

  • Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    @Ali Boone

    As an investment, why would you pay market value? Why wouldn’t you look for better deals or buy properties needing rehab and GC it yourself? I do not have any experience with TK other than what I’ve read on BP, but it sounds like a lot of the companies are turds, and I can only imagine the quality of their rehabs being the same. But I could be very wrong..

  • Investor · Dublin, CA · Member since 2016 · 19 posts · 13 votes
    7y

    @Mike Yerington lol, everything in Memphis is named Mid South something or other, isn’t it.

  • Attorney · Forest Hills, NY · Member since 2019 · 73 posts · 57 votes
    7y

    @Ron James great news , congratulations! I’m in the process of closing with them as well. I should be done by next week. Still no tenant, though.

  • Rockville, MD · Member since 2019 · 19 posts · 13 votes
    7y

    @Ali Boone I'm in Memphis because the numbers work for me there. I'm also looking for properties in Kansas City and Atlanta.

  • Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    @Ron James my next rental purchase may be in rockville lol

  • Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
    7y
    Originally posted by @Jasmine H.:

    @Marco Santarelli this is off the topic but my husband and I really enjoy listening to your podcasts!  Keep em coming!

    Awe, shucks...  Glad you like my podcast! 

    Thanks Jasmine!  :-)

  • Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    7y
    Originally posted by @Ron James:

    @Ola Dantis I was careful to buy a property that should have produced cash flow once rented. Fortunately, the property was rented before closing so that I got cash flow from the start. 

    That is fantastic!  

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