Turnkey is asking to ignore the appraisal value
San Francisco, CA · Member since 2019 · 21 posts · 7 votes
I'm I not reasonable for not signing my turnkey contract because it has this condition?
"If the property appraises for $120,000 or more the buyer agrees to purchase the property at the $129,950 purchase price indicated in this contract."
Do you find that condition common in turnkeys contracts?
Only if you like starting off $10k in the hole...
@Ahmed Youssef
If you aren't interested in flipping and the property cash flows well - then maybe.
It all depends on what your time is worth to you. Remember though, we are at or near the peak of the market cycle, so if this "turnkey" SF is in the midwest, or south - in one of the "hot" markets like detroit/Indianapolis/KC it could very well be worth about 50K during the nexf market downturn.
I think a lot of replies hit the nail on the head. The Turnkey company probably feels the house will appraise for at least $120k. They also are probably pushing the market value at $129k. If you knew the market as well as them you could estimate the value as well as them, but being an out of state investor you probably can't do as good of a job as them. The question becomes, does the investment make sense if the appraisal comes in at $120k? There is plenty of variation between appraisers, so the Turnkey doesn't want to renegotiate if it comes in lower than asking price, but they do give an out for you if their estimation of at least $120k was way off.
Story time! A couple years ago I found myself negotiating an off market deal to buy a portfolio from the heirs of a real estate investor. I wanted to get all properties in contract because one of them was critical to my long term plans. The heirs had an exaggerated idea of what one of the properties was worth, but I entered a contract at their asking price to get everything locked up. When the appraisal for the one property came in SIGNIFICANTLY low we renegotiated that contract and I was able to close up everything.
This turnkey does not was not renegotiate. They know they will be working with investors who are crunching numbers, and a low appraisal gives some leverage to the buyer if a clause like this isn't in place. They are taking away that point of leverage before you as the buyer knows if it is valuable or not.
If the deal doesn't suit you if the appraisal comes in at $120k then don't get into this contract. If the deal still works, then proceed with eyes open.
@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.
I don't think it's against the policy, I just thought that the provider's name is irrelevant since I started this post to ask whether that's common or not.
It's Bridge turnkey, and BTW I don't have anything negative to say about them, they're professional in their process and communications. It's just happened that maybe they forgot to let me know early in the process that a condition like this will be included in the contract.
@Nick Rutkowski @Luke Anderson
There were other terms in the contract which will add make me bring more cash to the closing table
- If the property appraises for $120,000 or more the buyer agrees to purchase the property at the $129,950 purchase price indicated in this contract.
- Buyer will pay property manager for tenant placement fee, 50% of one month rent. (this term is so confusing to me BTW, I'm buying a turnkey, if I'm going to pay for the PM, why don't I buy from a flipper then? )
- Notwithstanding anything else contained herein, and in addition to any other costs that the buyer has agreed to pay, the buyer agrees to pay for the cost of the owner’s title insurance policy.
- Transfer tax
- 100% of the escrow fees
@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.
Thank you for your reply, it really help to look at things from different angles
The turnkey provider used CMA to decide the purchase price, which should match the appraisal or at least won't be 8% away. Also, the property is still under renovation. although I'd give them that they have a rent guarantee for the first year, but that will only match the lower level of the rent range, so if the projected rent is between $1200 and $1250 they guarantee $1200 rent for the first year. But coming with $10K in cash to the closing table because the appraisal came low already ate up the rent guarantee benefits.
Always buy with appraisal.
@Ahmed Youssef It’s an interesting thread for sure. And a great learning experience.
First realize it’s turnkey. It’s going to come with a premium and sometimes attitude. How’s the location etc? You have your appraisal and metrics, stick to them. Not every deal works for you. Don’t force it. The good thing is they r letting you know their terms. Try negotiating. Or walk and find a better deal. I personally tried turnkey and it’s not for me or my style of investing. It’s a good thing to learn. Sometimes, with turnkey you might be asked to pay above the appraisal. What do your numbers say? Do your evaluation and stick to your guts and math. It all depends on the deal and cash flow. Take the evaluations deal by deal. With turkey you’re really not buying to add value it’s already been done so you’re paying for that premiums. Or possibly consider turnkey is not for you to come in and credited investor and invest in syndications with some of the great syndicators on the site. And remember when you’re dealing with turnkey they’re not used to and generally only deal with people all cash not with investors using lenders.
@Nick Rutkowski @Luke Anderson
There were other terms in the contract which will add make me bring more cash to the closing table
- If the property appraises for $120,000 or more the buyer agrees to purchase the property at the $129,950 purchase price indicated in this contract.
- Buyer will pay property manager for tenant placement fee, 50% of one month rent. (this term is so confusing to me BTW, I'm buying a turnkey, if I'm going to pay for the PM, why don't I buy from a flipper then? )
- Notwithstanding anything else contained herein, and in addition to any other costs that the buyer has agreed to pay, the buyer agrees to pay for the cost of the owner’s title insurance policy.
- Transfer tax
- 100% of the escrow fees
Good lord that's a one sided contract. I've got to get into selling turnkeys. I don't know why I've been accepting appraised value, paying for the title insurance policy, transfer tax, and half of the escrow fees as a seller on every deal for so many years!
@Nick Rutkowski @Luke Anderson
There were other terms in the contract which will add make me bring more cash to the closing table
- If the property appraises for $120,000 or more the buyer agrees to purchase the property at the $129,950 purchase price indicated in this contract.
- Buyer will pay property manager for tenant placement fee, 50% of one month rent. (this term is so confusing to me BTW, I'm buying a turnkey, if I'm going to pay for the PM, why don't I buy from a flipper then? )
- Notwithstanding anything else contained herein, and in addition to any other costs that the buyer has agreed to pay, the buyer agrees to pay for the cost of the owner’s title insurance policy.
- Transfer tax
- 100% of the escrow fees
Good lord that's a one sided contract. I've got to get into selling turnkeys. I don't know why I've been accepting appraised value, paying for the title insurance policy, transfer tax, and half of the escrow fees as a seller on every deal for so many years!
Jeez Jeff, it seems like you and I need to revamp our business strategy, HA!
@Ahmed Youssef Personally I would not sign this contract. It is very one sided as I would expect it to be if it is drawn up by the seller. There are too many unknowns from your side. If you’re buying turn key, I would think you should expect the property to already have a tenant in place, which means those fees are already covered and if they were trying to recoup, that is where I saw the premium in the purchase price. Sounds more like you are buying from a flipper that may know a property manager and is putting you two together and getting paid handsomely for that. I don’t know where you are looking but you may want to shop other turn key providers, or start making relationships with property managers on your own. The good ones will already be in tune with the market, have investment oriented realtors and flippers in their contact list. You can get the properties at a reasonable price (at or below appraised value) and negotiate a fair to you placement and management fee. It is your deal so you need to control it. No one else will look out for your interests like you will.
A policy like this doesn’t sit well with me. If the provider feels they have fairly priced a property they should at least be willing to let you walk away from it if it under appraises, or move you to another property of theirs that will appraise to price.
@Ahmed Youssef hard pass. Also, ask if the turn key guys do property management. If so ask then where they manage and how many doors. If A turn key wont manage your property than the rental comps and price they offer you are likely no good
@Ahmed Youssef On a side note, it is quite strange that the turnkey company is making you pay for the tenant placement fee. These are the types of things that make the word turnkey so broad. On the flip side, it may be better that you have a 3rd party PM. I've found that in house PMs are not always the best.