Advice please: Who is responsible for errors ?

[Patrik Kusek]

 I recently purchased a property in Jacksonville Florida.   The transaction had some bumps but we worked things out and closed on time. Later I found the original pro forma provided by the turnkey operator listed the rent at $1105, however upon receiving the current tenants lease it showed a rent of $1005. I based some of my decision based on the financials of the proforma. Who is responsible? Is there anything to do? I’ve left  message with the primary contact but haven’t heard back. 

[Chris Clothier]

Originally posted by @Jay Hinrichs:

@Chris Clothier  that was my thought if there was a representation of rent and the rent was different most TK companies would do as you suggest.. make up for the slip up.

if its just a marketing profroma saying what rent could be .. then that is different.

as you know we also see some of these proforma's that bake in depreciation appreciation year over year rental increase and run those out 10 years to get to some pretty big IRR numbers.. and we know that investors just tend to focus on bottom line of these proformas..

 Jay - 

Well, we are one company that is trying to show a more complete representation of an investment.  I'm not sure we would qualify under the example you gave, but after 15+ years in the service industry, I can tell you that we are absolutely focusing on helping investors understand there is much more to the numbers than cash flow.  And, that they absolutely must know how to look at numbers.  I've seen some of your comments lately about the proformas provided by companies, and while you and I agree on most things, you were having a discussion on a forum with a company in Alabama and I had a very different take on the topic.

It is my opinion that in order to stand out as a top passive investment company (turnkey), you have to make sure the investor is educated.  It may be a passive investment, but in the end the investor is 100% responsible for their investment so they need to understand how everything works together. Meaning, the data given needs to be a complete picture and the investor needs to understand that picture.  Including the fact that appreciation of both price and rent absolutely occur over time.  So does principle reduction and capital expenditure as well as vacancy and routine maintenance.  You and I have always said on here that taking 50% of rents and measuring that number against your investment is a pretty good basic way to evaluate a deal.  No investor should simply take a simple looking sheet with some bottom line cash flow and make a buying decision based on that.  They need to understand.  

It sounded like you guys were saying that Turnkey companies are to blame based on how they show numbers.  Even going so far as to say there is only one true way to show numbers and that is not correct, in my opinion.  There is plenty of data out there to show how properties perform in given markets.  The better companies are not just collecting data and spitting out useless facts, but instead are showing how that data can be used by an educated investor to show how a property should perform.  We always say property management can make or break an investment, well...the better property management companies are absolutely doing things that effect rental market rate and appreciation of rents.  Markets go through cycles in value up and down, but a better kept asset without deferred maintenance and with a track record of income, can absolutely hold and even increase in value regardless of what a general market is doing.

I personally now only invest based on IRR numbers and I run my projections out to 5, 7, 10 and 15 years. Why? Because I have the data supporting over 10 years of managing a massive number of properties. I have the data that shows the difference in rental rates and the increases you can achieve by making subtle changes to the service you provide to residents. That data tells a story and I am a firm believer that passive investors need to have a deeper understanding of how calculations work in real estate and dig much deeper than a monthly cash flow number. The numbers can be too easily manipulated and there are far too many companies that will sell an investor a property by presenting a contract within minutes of first contact, and all based on simple math that they provide meant to speak to the lowest and easiest to understand (but also manipulate) number.

Now, none of that is to say that plugging in fake projections to boost IRR doesn't happen or is not wrong. It absolutely is. I was just pointing out that we as a company have invested an enormous amount of time, energy and money into collecting, measuring and adjusting our business based on data and now are focusing on educating investors before they buy. An investor should never simply rely on a data sheet from a company - or an agent or another investor, etc. Investors today really need to be more patient and really understand that investing for the long-term, done correctly, is a powerful tool at their disposal. And they need to know what that long-term IRR looks like.

Sorry to the original poster on here for being long winded!  There is a lot to take in here and I really look forward to seeing Jay in January and getting to talk face to face.  For those of you that don't know, I love talking real estate with Jay and I think in the end we both really want to educate and help investors on here.  I figured this was a pretty good place to at least lay out a case for companies giving investors access to more data and educating investors before they purchase on how all of those numbers interact and effect their investment.  Again, do your due diligence always.  Not everyone has even been in the business long enough.  Too many newer companies have only bought, sold and managed in the appreciating economy and weren't even in business during the last down turn.  In other words, make sure your source actually knows what they are saying and speaks from a long history. 

[Patrik Kusek]

Originally posted by @Chris Clothier:

 Thanks for your comment Chris. You bring up a good point.  To clarify, this property already had  tenants in it.  The pro forma listed the rent amount and also that it was currently for rented on a one year lease. To me it was presented as a fact since they already had the information. If it were vacant and we didn’t get the amount of rent that we expected then that would be a different story. Thanks for comments I appreciate talking through this with everyone. 

[Jay Hinrichs]

@Chris Clothier  the point I was trying to make and maybe it did not come out right.

is that with real estate you simply cant have linear growth year in year out for 10 to 15 years.

Rents simply will not go up year in year out and appreciation depending on market can swing wildly as we know.

So while I understand long term IRR projects I was just saying they are still educated guess's as to what the future will hold

and 1000% an investor that is not self managing there returns over time will be directly related to the quality of PM and their interaction with PM allowing the PM to do a good job for them.. sometimes owners are their own worst enemy by not allowing PM to keep their homes in tip top condition.

a little off subject but my partner and I when we bought our planes.. that was one thing we agreed on there would be not one dime spared on maintenance and keeping those things in perfect shape.. you can see other pilots buy the same plane skimp on everything because it was legal.. but when you look at our plane that is now 14 years old its pristine.

[Chris Clothier]

Originally posted by @Patrik Kusek:

Originally posted by @Chris Clothier:

 Thanks for your comment Chris. You bring up a good point.  To clarify, this property already had  tenants in it.  The pro forma listed the rent amount and also that it was currently for rented on a one year lease. To me it was presented as a fact since they already had the information. If it were vacant and we didn’t get the amount of rent that we expected then that would be a different story. Thanks for comments I appreciate talking through this with everyone. 

 In that case, they definitely need to stand behind the data they provided to you.  Again, if it is the company I think based on what you said about customer service, then i'd be shocked if they did not agree and take action to fix for you.  And if they don't, you have a very large forum to share your unfortunate experience and that prospect can certainly help provide leverage for you to get the relief you deserve.  I hope it doesn't come to that.  Good luck and don't let this keep you from building a portfolio!  Best to you ~

[Chris Clothier]

Originally posted by @Jay Hinrichs:

@Chris Clothier  the point I was trying to make and maybe it did not come out right.

is that with real estate you simply cant have linear growth year in year out for 10 to 15 years.

Rents simply will not go up year in year out and appreciation depending on market can swing wildly as we know.

So while I understand long term IRR projects I was just saying they are still educated guess's as to what the future will hold

and 1000% an investor that is not self managing there returns over time will be directly related to the quality of PM and their interaction with PM allowing the PM to do a good job for them.. sometimes owners are their own worst enemy by not allowing PM to keep their homes in tip top condition.

a little off subject but my partner and I when we bought our planes.. that was one thing we agreed on there would be not one dime spared on maintenance and keeping those things in perfect shape.. you can see other pilots buy the same plane skimp on everything because it was legal.. but when you look at our plane that is now 14 years old its pristine.

I think you and I are on the same page.  In this particular case, it looks like @Patrik Kusek wasn't given projections but was shown exactly what the property was supposed to be rented for and with an intact one-year lease.  That information has to be accurate.  That is not a projection but a statement of fact on that particular number.  I think we both would agree that at best this was an oversight that has to be corrected if the company has any integrity.  

[Patrik Kusek]

Originally posted by @Mary M.:

 Mary  I did request all of that information multiple times. The provider said that they were having trouble with the Property management company forwarding information to them. I did get a lot of it but that one piece slipped through the cracks. We were purchasing multiple properties  with 1031 exchange on top so lots of moving parts. We’ll see what happens.

[Sam Shueh]

The signed lease is a legal contract. All others like MLS are supplementary documents. Fussing over $100 is probably not the way to go.

[Brian Ploszay]

Due diligence.  Plus everyone should be cautious around turn-key investment sales.

[Patrik Kusek]

The TK operator has contacted me and we are in the process of resolving the issue. Thank you for your thoughts on this. 

[Kyle Schlosser]

@Patrik Kusek Please keep us informed. Funny how the error always seems to be in the direction of $1005 vs $1105, instead of $1205 vs $1105. Thankfully it won’t at all be a make or break for ykh, but it’s the principle that raises an eyebrow.

[Justin Murray]

@Patrik Kusek It may be worth having the tenants fill out an estoppel form now. I'd be interested in seeing if what they state as their security deposit matches what was transferred to you from the turnkey company. Assuming it was passed along...

[David Des]

Originally posted by @Patrik Kusek:
@Michael Plaks I totally understand the comparison. I knew this. It just sucks. Now I’m paying for their mistake and beat myself up for not noticing sooner. Now I’m not sure I can trust anything this person says.

 I hate to sound pessimistic , But I would go in to any transaction , particularly anything in real estate , with no assumption . But I think , in this specific scenario , I don't feel your mistake was big , but depending on your situation , if that 100 $ was your cash flow , then the punishment was bigger .

I would see if they officially as per contract - made that statement about rent . I bet they did not . Even if they did they will be sure to include a clause that - all of this is approximation . I don't now if it's a honest mistake or intelligent fraud , but it's a lesson for all of us that - anything that's not legally binding is worthless.

Its fascinating but crooks usually , make sure that there is no legal recourse.

[David Des]

Originally posted by @Kyle Schlosser:

@Patrik Kusek Please keep us informed. Funny how the error always seems to be in the direction of $1005 vs $1105, instead of $1205 vs $1105. Thankfully it won’t at all be a make or break for ykh, but it’s the principle that raises an eyebrow.

Yep , the mistakes are always in favor of these companies . I wonder why?

[Curtis Mears]

@Patrik Kusek trust but verify. unless it is written into the contract, nothing they say means anything

[Patrik Kusek]

@David Des , intelligent fraud. Very interesting. Thanks