Are turnkeys overpriced?

28 Replies

@Wale Lawal What you describe is guaranteed to happen when the seller has much greater knowledge about local market conditions than the distant buyer, especially one who is turning to turnkey because he/she has too many demands to invest in any other way.   Either the property will be overpriced or located in a much worse neighborhood than advertised.  

@Diane Tycangco you can't generalize. It all depends on the turn key company, but keep in mind that good turn key companies make their profit by improving the property and creating equity. You shouldn't count on having built in equity but you should pay over market value. Here are a few questions to ask your turn key company which will give you an idea if they are selling over market value.

Do they allow financing or just cash purchases?
What percent ot their properties appraise for less than the asking price?
Do they allow for an appraisal contingency?
If it doesn't appraise, does the buyer have to come up with the difference?

I wouldn't put much stock in Zillow Zestimates. They may be reasonably close in some markets but are way off in others. Keep in mind that the Zestimate is just am automated valuation model driven by computer algorithms. There is no human judgement involved at all. In our markets of Indianapolis and Kansas City, the Zestimate is often way off of the ultimate appraised value. 

With regards to property management, that is not unique to turn key properties. As long as your properties are being managed, you are going to have management fee's regardless of how you came to acquire the property. Property management is critical to success if you are out of state and not managing the property yourself. It is so important to vet them well. None of our PM's charge a lease renewal fee and that is something I would avoid for sure.

Originally posted by @Wale Lawal :
Originally posted by @Ali Boone:
Originally posted by @Wale Lawal:

@Ali Boone from my personal experience, 95% of Turn-Key properties through a Turn-Key Companies are overpriced in the Houston Area. 

They are very scared and the numbers never work for me and my Investors.

That's why I have focused on creating a deal from MLS listings by looking for motivated sellers.

Thank you

When you say overpriced, what do you mean specifically?

Not leaving any meat on the bone for investors. This is what I have experienced in my market. It may not be the same in your markets.

 
Of course, that's the major downside to turnkey--no additional equity in the property right away or way to improve it to force equity. But to call that overpriced is misleading... the turnkey prices are priced correctly. They are typically right at market value. "Overpriced" would suggest you're paying more than what the property is worth. In the case of turnkey, the value of the property is just higher than what a distressed property would be... so you're paying the appropriate value for all of that work being done for you. So you're paying a premium, yes, but that doesn't mean they're overpriced. I only harp on it because that messaging confuses a lot of people and people are misusing the words.

 

Originally posted by @Ali Boone :
Originally posted by @Wale Lawal:
Originally posted by @Ali Boone:
Originally posted by @Wale Lawal:

@Ali Boone from my personal experience, 95% of Turn-Key properties through a Turn-Key Companies are overpriced in the Houston Area. 

They are very scared and the numbers never work for me and my Investors.

That's why I have focused on creating a deal from MLS listings by looking for motivated sellers.

Thank you

When you say overpriced, what do you mean specifically?

Not leaving any meat on the bone for investors. This is what I have experienced in my market. It may not be the same in your markets.

 
Of course, that's the major downside to turnkey--no additional equity in the property right away or way to improve it to force equity. But to call that overpriced is misleading... the turnkey prices are priced correctly. They are typically right at market value. "Overpriced" would suggest you're paying more than what the property is worth. In the case of turnkey, the value of the property is just higher than what a distressed property would be... so you're paying the appropriate value for all of that work being done for you. So you're paying a premium, yes, but that doesn't mean they're overpriced. I only harp on it because that messaging confuses a lot of people and people are misusing the words.

 

TK operator located the distressed property and purchased it, performed the rehab, placed a tenant and either vetted a PM or started a separate entity which focuses on managing their clients' properties. In other words, TK operators incurred the time and labor for the rehab, spend dollars on marketing and finding investors and last but not least, took on the risk associated with the project. After all this time and effort, aren't they entitled to price the property at market value? If I was flipper, I certainly wouldn't leave any meat on the bone after going through the headache of rehabbing the property. 

With that said, "market value" can be a tricky definition when it comes to 'some' TK properties. How is market value defined? Obviously, it's the price at which a person is willing to purchase a home. Typically, this is driven by owner-occupied houses. However, with TK properties in some areas like Memphis or other cities with a well established TK operator presence, it's a little more complicated. If a lot of these houses went on the general MLS and were marketed to owner-occupied buyers in the area, you'd see a substantial drop in price. So what this means is that a lot of these prices are being propped by OOS investors buying up these properties at TK prices. And when appraisals are performed, the neighboring TK activity prices will support the price that's being asked of the current TK you are looking to buy. I guess as long as the TK presence is strong and active in your area, you won't have to worry about the market value of your home going down as it will remain propped up by other investors in your area.

These cities tend to gravitate toward renters as opposed to buyers...and the TK dynamic sort of feeds that trend. All these great new rehabbed units available for rent....while comps have been driven up and more folks are priced out of the market, thereby encouraging them to rent instead.