Are turnkeys overpriced?

Member since 2019 · 120 posts · 26 votes

Hi everyone! I was thinking of buying a turnkey for the first time and was comparing the turnkey prices with Zillow estimates of what the property was worth. The difference is so big! Now Zillow does not know what renovations have been put into the property, right? Also, the property management fee 8-10%, plus 15% maintenance fee - if they call the repairman or something, they tack on 15% to the repairman's bill, plus a yearly fee of $250 or a lease renewal fee of $250, adds up to a lot, especially because you are relying so much on the turnkey management since you are so far away. What do you all think? Are turnkeys overpriced and management fees too high? With these fees and higher prices, how can we make money?

I was looking at Memphis and am thinking of Dallas or Houston but property taxes are too high in Texas. Any thoughts?

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Lee RipmaPro Member

Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes

@Diane Tycangco

Zillow is not accurate, at all. Turnkeys are sold at market price so you’re not going to get much equity when you buy but you’re also not doing any work. Google the 4 wealth generators of real estate and see which ones TKs give you. They work for some people, not all people. So it’s not really so much about the turnkey properties as it is about you and your goals! They may meet your goals, they may not. If they don’t figure out your goals and how to meet them.

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Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
5y
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.
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Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
5y
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.
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