Turnkey is asking to ignore the appraisal value
San Francisco, CA · Member since 2019 · 21 posts · 7 votes
Turnkey is asking to ignore the appraisal value
Most Popular Reply
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
6yOnly if you like starting off $10k in the hole...
64 Replies
- San Francisco, CA · Member since 2019 · 21 posts · 7 votes6y
@Account Closed
Thank you for your reply, I’m learning a lot from the diverse replies I’m getting on this post.
I just wanna explain 2 points
First, as I mentioned in one of my comments above, what I learnt about turnkey is it doesn’t have premiums, they buy distressed low priced properties, rehab them and sell them at the market price. Which means if I’m buying from turnkey I lose any instant equity, but it doesn’t mean I have to lose the next few years equity upfront
Second, I don't see this as legit, because that wasn't mentioned upfront, we went through a series of emails over the span of 20 days, and I already ran the number using the inputs I have, adding an unexpected $10K in an 8 pages contract which you haven't mentioned anything about is not a good sign, and it will also affect the COC greatly since the purchase price is $130K and the down payment is $32k, that's almost 30% of the investment cash - 6yMatt BurrPro MemberReal Estate Investor · Chelsea, MI · Member since 2017 · 56 posts · 13 votes
@Ahmed Youssef
It’s all things you learn and encounter that’s why this page is so helpful it speeds up that knowledge gain.
I would tend to agree with you given more detail. However the other ever present truth is something that doesn’t make sense for one person could make great sense for another based on individual circumstances. So it is hard to give concrete yes no answers on here.
Best of luck.
- 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Ahmed Youssef:
@Account Closed @Matt Burr
Thank you for your reply, I’m learning a lot from the diverse replies I’m getting on this post.
I just wanna explain 2 points
First, as I mentioned in one of my comments above, what I learnt about turnkey is it doesn’t have premiums, they buy distressed low priced properties, rehab them and sell them at the market price. Which means if I’m buying from turnkey I lose any instant equity, but it doesn’t mean I have to lose the next few years equity upfront
Second, I don't see this as legit, because that wasn't mentioned upfront, we went through a series of emails over the span of 20 days, and I already ran the number using the inputs I have, adding an unexpected $10K in an 8 pages contract which you haven't mentioned anything about is not a good sign, and it will also affect the COC greatly since the purchase price is $130K and the down payment is $32k, that's almost 30% of the investment cashI just got an offer on a 1.9 million dollar new build I am just about ready for final finish's on.. and the offer did have an appraisal out.
IE if it does not appraise for the purchase price the buyer can walk.. for me as the seller and this being owner occ.. so a little different than a rental.. I said No problem just get your appraisal done in the due diligence period of 3 weeks.. on owner occ at least the last few years the only place I have had appraisal issues is in Dallas.. were we sold something the buyer offered 200k came in at 185k and since its FHA they don't have the difference even if they wanted to..
So I say all this to just say maybe you can counter at their terms but get your appraisal done upfront and right away so your not holding their inventory hostage during the loan process and back out at the last minute .. even though you would lose the 2500. it cost the operator more than 2500 dollars if you walk.. by the time they pay holding costs tax s insurance and then have to remarket it all over.
and keep in mind a lot of these houses sell for cash.. So appraisals are not done or not needed.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes6y
@Ahmed Youssef this isn’t commonfir turnkey companies and buying a property in this situation is a really bad deal. By the appraisal metric you’re 10k underwater already, but when you factor in sale costs you’re more like 20-25k in the hole.
You don’t want to do this deal. I know you may think it’s a good deal but it’s not. Rehabbed or not, stuff doesn’t break that often and when it does it’s often not nearly as expensive to fix as you might think.
You buy a beautifully rehabbed home, your tenant moves in, stays a few years and leaves. You’ll then spend another 3-5k fixing it. Plus lease up fees, all your cash flow is gone. Since you bought at the top of the market appreciation will be minimal.
- Rental Property Investor · AZ · Member since 2018 · 212 posts · 183 votes6y
The way I see it, they are only protecting the deal from a nimrod appraiser.
If the property is priced at where they believe market is and you wanted to buy it at that price, THAT IS market value.
If an appraiser then says it’s worth $10k less you still agree where market value is, and ignore the nimrod appraiser.
- 6yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by @Ahmed Youssef:
@Account Closed
Thank you for your reply, I’m learning a lot from the diverse replies I’m getting on this post.
I just wanna explain 2 points
First, as I mentioned in one of my comments above, what I learnt about turnkey is it doesn’t have premiums, they buy distressed low priced properties, rehab them and sell them at the market price. Which means if I’m buying from turnkey I lose any instant equity, but it doesn’t mean I have to lose the next few years equity upfront
Second, I don't see this as legit, because that wasn't mentioned upfront, we went through a series of emails over the span of 20 days, and I already ran the number using the inputs I have, adding an unexpected $10K in an 8 pages contract which you haven't mentioned anything about is not a good sign, and it will also affect the COC greatly since the purchase price is $130K and the down payment is $32k, that's almost 30% of the investment cashAhmed,
This information definitely changes my answer!
If they did not discuss this possibility with you before hand and simply included it in the contract, then that is a red flag and in my opinion a deal killer. That is not what I was referring to in my earlier response. If they were transparent that would be one thing. Transparency would have shown that they are confident in their pricing, but also acknowledge the reality that someone else may have a different opinion (and the bank is going to listen to the appraiser!). But that is not what you just described. I would not move forward with a company that inserts that clause into an 8 page contract without having disclosed and thoroughly discussed the reasoning with me before I ever go under contract. I consider that bush league.
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes6y
Originally posted by @Ahmed Youssef:
@Account Closed @Matt Burr
Thank you for your reply, I’m learning a lot from the diverse replies I’m getting on this post.
I just wanna explain 2 points
First, as I mentioned in one of my comments above, what I learnt about turnkey is it doesn’t have premiums, they buy distressed low priced properties, rehab them and sell them at the market price. Which means if I’m buying from turnkey I lose any instant equity, but it doesn’t mean I have to lose the next few years equity upfront
Second, I don't see this as legit, because that wasn't mentioned upfront, we went through a series of emails over the span of 20 days, and I already ran the number using the inputs I have, adding an unexpected $10K in an 8 pages contract which you haven't mentioned anything about is not a good sign, and it will also affect the COC greatly since the purchase price is $130K and the down payment is $32k, that's almost 30% of the investment cashNo. A turnkey property is one that is free of major repairs needed AND has tenants placed AND management in place with an offer (usually) of future management services. A rehabbed property is where the property was physically distressed and it's all been repaired. A flip is when a property is purchased at a discount and sold without a discount. Yes, all three might be present in the same property, but all three are distinctly different.
Real estate is full of realtors that will tell you the sky is red and somehow get you to believe it. I mean, c'mon, these are sales people who live and die when you sign the papers or not. I don't hate them for it, but I do recognize them for who and what they are. If I had $10000 for every realtor I encountered who listed a property as high as it could go (or over) and then went on to claim the price was typical or market value I could retire and retire quite nicely. What I'm saying about these particular people you're dealing with, is at least they're being transparent about the property value and why they're charging more than market value - I find that to be rare and admirable in this business - maybe you think it's shady. Well, just like market value, it's never the same with two different people.
As far as your numbers, those are your numbers. You get to decide for yourself if they make sense or not.
Good luck investing out of state.
- 6yWill FraserPro MemberReal Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
@Ahmed Youssef In my opinion this makes you reasonable instead of unreasonable. It wouldn't be crazy to agree to pay more than the appraised value, but that methodology can be taken to an extreme (and often is with turnkey companies dealing with OOS investors) because . . . they know they can?
This can work out fine for the first few deals, but what if you spent the time now building up the team that @David Greene talks about in the book on LDREI and got to use that team for deal 1, 2, 3 and beyond? In the example from the snippet of the contract you shared instead of paying $9,950 per house MORE than market value and gaining one ally who knows you'll overpay you could walk away from the deal with a PM, a GC, and a real estate agent that all are going to be working to make your deals better and better AND don't cost you $9,950 per project more than the house is apparently worth?
Thanks to this example I feel good saying that both in the long run AND the short, taking the time to develop your team instead of overpaying a Turnkey provider pays dividends.
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes6y
Originally posted by @Chris Clothier:
Originally posted by @Ahmed Youssef:
@Account Closed @Matt Burr
Thank you for your reply, I’m learning a lot from the diverse replies I’m getting on this post.
I just wanna explain 2 points
First, as I mentioned in one of my comments above, what I learnt about turnkey is it doesn’t have premiums, they buy distressed low priced properties, rehab them and sell them at the market price. Which means if I’m buying from turnkey I lose any instant equity, but it doesn’t mean I have to lose the next few years equity upfront
Second, I don't see this as legit, because that wasn't mentioned upfront, we went through a series of emails over the span of 20 days, and I already ran the number using the inputs I have, adding an unexpected $10K in an 8 pages contract which you haven't mentioned anything about is not a good sign, and it will also affect the COC greatly since the purchase price is $130K and the down payment is $32k, that's almost 30% of the investment cashAhmed,
This information definitely changes my answer!
If they did not discuss this possibility with you before hand and simply included it in the contract, then that is a red flag and in my opinion a deal killer. That is not what I was referring to in my earlier response. If they were transparent that would be one thing. Transparency would have shown that they are confident in their pricing, but also acknowledge the reality that someone else may have a different opinion (and the bank is going to listen to the appraiser!). But that is not what you just described. I would not move forward with a company that inserts that clause into an 8 page contract without having disclosed and thoroughly discussed the reasoning with me before I ever go under contract. I consider that bush league.
LOL. Bush league huh? Hmm....
- 6yNed J.Pro MemberInvestor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votesSo a professional whose job is to tell you the real value of the house tells you its worth 290k but you are still forced to pay 299k for it..... is there any other situation in life where you are buying something where you would agree to do that? Probably not.....at minimum you would go back to the negotiation table and talk about the deal and price again. If the numbers don't work with you paying 299k with more $$ being brought at closing, then its not a good deal and walk away... PERIOD Yes appraiser are not always dead on with the value...... but if an objective pro tells me its worth X but the seller says "nope, its worth X + 10%", who am I going to trust? The guy that has zero skin in the game or the guy that profits on the sale? Banks aren't stupid...... they will only lend you $$ based on the appraisal.......they are trying to protect their $$...so do you want to assume the risk that the bank isn't willing to take? Up to you.....
- 6yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Ahmed,
This information definitely changes my answer!
If they did not discuss this possibility with you before hand and simply included it in the contract, then that is a red flag and in my opinion a deal killer. That is not what I was referring to in my earlier response. If they were transparent that would be one thing. Transparency would have shown that they are confident in their pricing, but also acknowledge the reality that someone else may have a different opinion (and the bank is going to listen to the appraiser!). But that is not what you just described. I would not move forward with a company that inserts that clause into an 8 page contract without having disclosed and thoroughly discussed the reasoning with me before I ever go under contract. I consider that bush league.
LOL. Bush league huh? Hmm....
Merritt, which part of that do you not find bush league? I read your response and I read my earlier response and it seems like we both are in full agreement. I say there is nothing wrong if they are being transparent and you say it is admirable. However, we both were wrong. After Ahmed added that they were not transparent, never mentioned appraisals and this was a clause in the contract, my take on the scenario changes. That is not what the best of the best in the business do and not to be admired. Surprising a buyer is bush league - in my opinion. Perhaps I missed your point?
- 6yKevin McGuirePro MemberCTO of BiggerPockets · Seattle, WA · Member since 2019 · 168 posts · 178 votes
@Chris Clothier that matches my view. I investigated a turnkey operator and basically the price is the price. If you want to negotiate and get better value then you’re not the audience for turnkey. As another mentioned, you pay for convenience, that’s the turnkey’s product. As mentioned elsewhere in this thread, the “error on measure” of an appraisal is high. So the operator doesn’t want you to waste their time if the appraisal is off a bit from the asking, but at the same time the contract ensures you have an out if it wildly differs, in other words that they’re not bilking you. Seems a good compromise for both parties. Finally, if you’re concerned about true value, as a lender said to a friend of mine who did invest in a turnkey, the lender has a vested interest in ensuring that the price matches value since they too have money in the deal.
- Realtor · Indianapolis, IN · Member since 2018 · 15 posts · 7 votes6y
@Ahmed Youssef
I think they are trying to protect themselves from a bad appraisal. These people are human and there’s no exact science to pricing a house. The method of comparing houses to come up with a fair price could easily error ten thousand one way or the other. Why not ask for a second opinion in the invest of a low appraisal. I feel like more context is needed to know the true motives here. It costs about 400 dollars to get another appraisal by the way... it would be hard to convince me to get you $1.30 for something that two professionals tell me is worth $1.20
- San Francisco, CA · Member since 2019 · 21 posts · 7 votes6y
@Adam Montgomery @Kevin McGuire Thank you for the helpful replies.
As I learnt from BP - I guess everyone agrees - it's all about the numbers, if the numbers make sense then it's a good deal if not then look for something else. Which is the case with this deal, WITHOUT the $10K and the extra closing cost (including the seller's closing cost too) that I might pay at closing the deal makes 9.x% COC, but WITH adding the risk of the low appraisal and the extra closing cost the deal goes down to 6.x% COC, which is not worth it from my point of view since I'm buying for cash flow not for appreciation.I tried negotiating but they didn't approve, so I walked away from the deal. I posted this post asking whether this is common or not because if it's common between turnkey providers to include a condition like that, then turnkey is not for me. From all the replies I got (BTW thank you everyone for jumping in and trying to explain and help) it's not common nor unheard of, so probably I have to find another turnkey provider with a different contract's language.
- Rental Property Investor · Charlotte, NC · Member since 2017 · 298 posts · 232 votes6y
@Ahmed Youssef if Turnkey is only offering you properties at retail and then making you sign a contract that obligates you to overpay if they missed their numbers I don’t see why you would buy Turnkey to begin with. I could possibly see using Turnkey AND paying retail if I got to choose the property pre-rehab and control what is done during the rehab provided the property cash flows.
In this situation I might even consider overpaying up to 10% IF, and this is a big IF, they could provide me reference backed evidence that they could rent and manage the property at a high enough efficiency rate to increase my cash flow to a point where I would recoup the difference in out of pocket expenses within 24 months AND they guaranteed me a refund of the difference if they failed.
I think you would be much better served by networking and finding reputable contractors and PM's to help you through any rehabs and then target light rehab properties off the MLS that can be had all-in for 90-100% of retail. When dealing with traditional sellers on these types of properties you typically have an option to cancel if the property fails to appraise, especially when financing, that forces the seller to return any EMD monies if they are unwilling to accept the lower price and you cancel the contract. If a Turnkey is unwilling to operate under the same standards I would run the other way.
- Investor · Chicago · Member since 2018 · 113 posts · 51 votes6y
it sounds like they are trying to put the squeeze on you. That only benefits them.
I might accept those terms, if they accepted an appraisal contingency, but I'd want to have a lot of confidence in the appraiser.
For example: if the property appraises for $XXX less than the amount of the agreed upon purchase price, then the buyer has the option to buy at $XXX or cancel the contract. - Member since 2019 · 1k+ posts · 1k+ votes6y
@Mike S.
Negative. It is, however, without a doubt the most extensively documented (right down to the original oil filter) and multiple published SLP Firehawk Trans Am Convertible. And for more details than that I would have to direct you to private message as it is documented well enough that you’ll have more personal info on me than I’m comfortable with sharing publicly online if I told you more vehicle specifics. Just passed 30,000 miles (52,000kms) last season. It’s won multiple awards and comes with about $8-10,000 in brand new SLP replacement parts. And if you’re a Firebird guy you know about the now defunct SLP. And if you’re a Firebird guy deep at heart, you’ve most likely seen this car. ... although if you were north of the 49th I would be more confident on that last part. I’m owner #2.
- Rental Property Investor · AZ · Member since 2018 · 212 posts · 183 votes6y
If it’s not a thirdgen then it’s just another 4th gen.
Originally posted by @Kris H.:
@Mike S.
Negative. It is, however, without a doubt the most extensively documented (right down to the original oil filter) and multiple published SLP Firehawk Trans Am Convertible. And for more details than that I would have to direct you to private message as it is documented well enough that you’ll have more personal info on me than I’m comfortable with sharing publicly online if I told you more vehicle specifics. Just passed 30,000 miles (52,000kms) last season. It’s won multiple awards and comes with about $8-10,000 in brand new SLP replacement parts. And if you’re a Firebird guy you know about the now defunct SLP. And if you’re a Firebird guy deep at heart, you’ve most likely seen this car. ... although if you were north of the 49th I would be more confident on that last part. I’m owner #2.
- Member since 2019 · 1k+ posts · 1k+ votes6y
@Scott Anderson
I see you’ve enabled the sarcasm font on your computer Scott... ;)
- 6yDavid NutakorPro MemberRental Property Investor · Palmdale, CA · Member since 2016 · 122 posts · 88 votes
@Ahmed Youssef, is it against BP’s policy to mention the name of the Turnkey company? Maybe they have a good reason for writing the contract the way it is and can provide further explanation on this issue.
- Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes6y
@Ahmed Youssef
What do your other terms look like? Sometimes I’ll overpay A SMALL AMOUNT, in order to get my terms which will decrease my overall costs. Is the property in a growing area? If so, then maybe paying 10k over won’t be a big deal in 5-10 years.
- 6yLuke AndersonPro MemberRental Property Investor · Enterprise, AL · Member since 2016 · 166 posts · 117 votes
@Ahmed Youssef If you think it is worth up to $9,000 to already have property management and a tenant, than sure. I don’t think it would cost you that difference to put together a property manager and have it rented. Personally I would develop a relationship with a property manager and purchase ready to rent properties at or below the appraised value. I don’t know your market, but in mine, no one is paying above appraised value.
- Investor · Marietta, GA · Member since 2016 · 98 posts · 168 votes6y
@Ahmed Youssef- Think of it slightly differently- The Turnkey Companies have done all of the heavy lifting on that property - They found the property, they renovated it, they placed a tenant that will allow you to cash flow at the 1% rule or higher.. there is incredible convenience in that scenario. They even pre-screened the tenant and are collecting legit rents. Also, there are different types of appraisals out there- the income approach and the comparative market analysis approach (CMA). Most appraisal companies use the CMA approach, where as turn-key companies are going to market the property based on the Income approach- again, both legit ways to value a property. Sometimes appraisers, when using the CMA approach will pick homes that are not necessarily like-kind properties. The turn key property is renovated- fixed up- where as the appraiser my compare it to a dump down the street.
I guess my point is that appraisals are subjective based on the appraiser- they don't always provide the most accurate price. So it makes sense to me Turn key companies would build that clause in a contract to protect the renovated value of the property.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.