Basic questions on Turnkey investing

9 Replies

Hi all, I'm new to out-of-state investing and looking at Turnkey as a way to start the process. Turnkey ROI seems good compared to what I can get in my local market (San Jose, CA). One thing I have noticed is that in some markets the offered price for Turnkey investment seems to be much higher than market estimates from Zillow or other sites. Certainly there is room for error on any market pricing tool, but several questions for me remain:

1) How can I get a better understanding of the real value of these turnkey properties to make sure I am not paying too much? 

2) Are turnkey prices negotiated similar to regular buyer-seller market, or it is generally a fixed price from the provider?

3) In cases where appraised value is lower than the asking price is financing still possible?  I would expected that rehab should be reflected in the appraisal value, but other factors such as tenant placement which are valuable to me as an investor, would not show up in the appraisal report. I might be willing to pay more than the appraised value, but I do not want to pay cash and give up leverage. How are other people dealing with this?

Thanks for the insight!

Hi @Kevin Kraver - that is sometimes the problem with TK - in some markets and with some providers, the prices can be high - retail or higher. It happens because the provider feels like they can demonstrate cash flow - but be careful because they can minimize certain expenses to make the cash flow look good, but then unexpected expenses could kill your profit. High purchase price also severely limits your exit strategy if you need to sell within the first years.

I've bought TK myself, and some have worked out fine, but some have had evictions and big turnover expenses. Other than not paying too much, success is based on placing a tenant who pays every month. So make sure you do a thorough due diligence on the property management side, and insist on getting a reference from a customer that has gone through an eviction, because you won't know if your property manager is good or bad until they've navigated you through a problem situation like that - all PM's seem great when your tenant pays on time every month. Also, visit providers to get a good sense of the work they do and where their properties are located. 

As far as I know, TK providers don't generally negotiate on price, but there is no harm in trying. Also, if appraisal comes back higher than price, provider should lower the price. You need to ask provider how they handle that situation, and make sure however they handle it is specified in the contract. But since they often sell many properties in the same area, their prior sales can come back in the comps and appraisal might come back higher than you expect.

There are hundreds of other threads out there on this topic, so take time to search through them. Good luck!

@Kevin Kraver

when you have identified your turnkey market, take a tour of neighborhoods. Engage a local investor realtor who can show comps for turnkey properties and suggest you MLS or off market listings that you can rent. That will give u an idea whether turnkey properties is worth it or not.

Another criteria is that your turnkey vendor provides prop mgt in house otherwise you may be dealing with a marketer.

Originally posted by @Kevin Kraver :

Hi all, I'm new to out-of-state investing and looking at Turnkey as a way to start the process. Turnkey ROI seems good compared to what I can get in my local market (San Jose, CA). One thing I have noticed is that in some markets the offered price for Turnkey investment seems to be much higher than market estimates from Zillow or other sites. Certainly there is room for error on any market pricing tool, but several questions for me remain:

1) How can I get a better understanding of the real value of these turnkey properties to make sure I am not paying too much? 

2) Are turnkey prices negotiated similar to regular buyer-seller market, or it is generally a fixed price from the provider?

3) In cases where appraised value is lower than the asking price is financing still possible?  I would expected that rehab should be reflected in the appraisal value, but other factors such as tenant placement which are valuable to me as an investor, would not show up in the appraisal report. I might be willing to pay more than the appraised value, but I do not want to pay cash and give up leverage. How are other people dealing with this?

Thanks for the insight!

 When working with a Turnkey provider, the best bet is to make sure they are a TRUE provider. They should own, renovate, and manage the property all in-house. They should just be listing properties or pushing you off on some other property manager after they sold you a property.

Try looking at:

What to Ask When Working With a Turnkey Provider

@Kevin Kraver

I recently have gone through the turnkey process and have a few underway.  A few things I have learned.

- you will pay top market value for the property.  you need to decide if you are willing to accept this.  Be prepared to hold the property long term as your exit options are limited the first 5 years or so.

- It is best to stick to the turnkey providers that are okay with traditional lending.  This acts an extra safety net as the bank has to vet the deal just as much as you do.  This also compels them to keep the asking price in line with what the appraisal will be.

-With a good provider the appraisal should be within a few thousand.  Some providers will leave it to the investor to make up the gap if the appraisal is low.  I think with how high the demand is right now and with prices being pushed up you may see more of that no (low appraisals and the investor having to make up the difference)

-In a lot of the turnkey markets the 'comps' are other turnkey houses that are being sold for as much as the provider can get for them and still leave enough meat on the bone for cashflow.  I don't think it is an accurate price for what a retail buyer would pay.  This fact alone makes some a little squeamish.

-If you are decide you are okay paying top market money then MAKE SURE that the rehab is as extensive as possible.  All Cap Ex items must be new.  Also MAKE SURE the provider owns their own PM company or at leas the PM company is very reliable.  This will make or break it.

I posted the details of my first property under the post 'Another Spartan Invest Turnkey Case Study' if you want the detail.  

Seems like a good model,  only time will tell...........

@Kevin Kraver Generally speaking, you should not be paying more than market for your property. There are some exceptions, of course, but, in general, the appraisal should come in at asking or, if you're lucky, maybe a little more. On (rare) occasion even we have appraisals come in a little bit light, but not usually more than a thousand bucks or so. More often they come in a bit heavy, which is just icing on the cake for the investor.  

How a company deals with a light appraisal will be pretty case-by-case, of course, but if it's just slightly light (like $1000 or so) I'd think that closing a deal with a satisfied client would be worth more than that $1000 to most providers. If a company needs every penny of above-appraisal profit to make the investment worth it to them, there's probably something in their business model that needs tweaking. A $1000 price difference shouldn't make or break the deal for them if their rehab and prop selection processes are on point. I

If your appraisal is lower ($2k or more), you should definitely be seeing if the company can come down on the price - maybe not all the way, but at least to a happy meet-in-the-middle price. I agree having a tenant in place is a boon to you, but they're not guaranteed to stay, or even be a good tenant, and as others have said there could be other factors being downplayed to make the cash flow look good. If the appraisal is craxy light (like $10k plus) there should be a negotiaion and some serious convos about what backs up the higher sales price. Some TK providers do tack on a pretty big premium, and while a slightly higher price may sometimes be justifiable, a huge discrepancy is rarely a good sign. Again, I would see an unjustifiable gap that the company won't negotiate on as a sign that maybe their model isn't very efficient somewhere up the line. 

A few quick answers to your questions:

  1. Any Turnkey provider (who should be full-service, do everything in-house, from scoping props to management) should provide a post-rehab inspection, but also be cool with you getting your own independent inspection. Especially for your first investment with a new provider, the couple hundred bucks you'd spend to verify what they're telling you will pay you back in peace of mind. If the appraisal comes in light, they should (generally speaking) be willing to come down a bit, and there should be a viable reason for you to be paying a higher price if it still ends up being more than $1-2k higher than appraisal. 
  2. Generally, turnkey prices are pretty much fixed, but they should be willing to work with you if the appraisal is very light. Again, the lighter it is, the more flexibility they should be showing, and the more information you should be provided on why this situation arose (ex. are you looking at a townhome in an area with very few similar props so there just aren't enough comps to justify a higher appraisal figure?).
  3. Your loan will depend on the appraised value, since the property is the collateral. Yes, the rehab will be reflected in the appraisal, but things like cash flow performance will not. That being said, if the appraisal comes in low, that is what the lender will use as the value, so you will only be able to secure financing for a portion of that value (say 80%, generally speaking). If your appraisal comes in much lower than your purchase price, and the provider won't negotiate on price, this could become an issue. 

For example: If the price is $150k, but the appraisal comes in at $135k, then you're unlikely to be able to get more than $108k (80% of $135k) in financing. That means that the remaining $27k (20% downpayment) of the 135k appraised value PLUS the $15k difference between appraised value and sale price would be due in cash. That means you're paying $42k in cash and financing $108k, which will bring down your COC return and mean your tenants are paying off less of your investment, which is one of the primary benefits of leverage.

Generally speaking, I would say this may be a red flag, but that depends a lot on how the provider handles it. What you should expect from them depends on how light we're talking here, but at the very least you should be getting some clear communication about why the discrepancy arose. 

Never be afraid to ask questions, and expect clear, data-backed answers. Turnkey can be a great investment, but it requires just as much legwork and due diligence as any other investment type. 

Good luck!

Clayton

Thanks everyone for the great input.  Rob, I appreciate you posting the details of your deal; I'll look there and post separately if I have any questions about it. 

@Kevin Kraver 1. Turnkey companies usually won’t negotiate 2. You get an idea of the value from sold comps which a good provider will show you and the appraisal 3. If the appraisal is 100k, and purchase price is 110k, your lender would lend you 80k (80 percent LTV) and you would need 30k for downpayment Every Turnkey property I bought has that the sale price will be at or below appraisal value. Don’t buy above it. I like having a mix of Turnkey and non turnkey

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