Can Turnkey + Landlord-driven Tenant Screening coexist?

24 Replies

Hi guys,

I am getting ready to invest out-of-state since I am focusing on buy-and-hold positive cashflow properties and I live in NYC, which isn't good for that kind of thing. I am fully willing to accept a lower CoC return by doing turnkey (higher purchase price, PM fees, etc.), as that is the convenience I am paying a premium for. Would hire my own home inspector/appraiser/lawyer, etc. so not too many concerns there either.

Where I am VERY spooked is in the tenant screening process. I much prefer to do this myself as I have a background in credit risk/finance and am a decent reader of people. I would much prefer lower rent and a more stable, responsible tenant. I am willing to accept lower returns for lower risk in terms of cash flow fluctuation.

However, it seems that all the TK companies I research already provide a tenant. How have you guys dealt with this issue? Do TK companies allow the owner to get heavily involved in tenant screening - if not for the original in-place tenant, then at least for subsequent tenants? 

Thank you

Hey @Vik C.  - setting the whole Tk aspect to the side for a second, why do you think that you can screen tenants better than a property management company, especially from a long distance?  As you said, you can read people, but I am sure you are aware that is tough to do over a phone.

You are right to be focused on tenant selection and quality management.  Those are the key factors in your success.  But, I can reassure you that there are companies out there who do a very good job of tenant screening and selection and a good job of management as well.  They pretty much focus in on their specialty and probably do not offer management services outside of their clients so they are focused just on the areas of town and the houses that they renovate.  That allows them to really focus their marketing on attracting tenants specific to the areas they operate.  So they can co-exist - you just have to be really diligent in interviewing them and put a lot of your focus on questioning their processes and programs for tenants both before and after they are selected.

Lastly, you can always request to be involved in the tenant selection process.  The worst a company can do is say no and then you can decide from there if you want to move forward with them or not.

best of luck - Chris

@Chris Clothier,

Thanks for your reply. I am quite familiar with your turnkey operation as I have done some research on reputable providers and your names often comes up for Memphis and some of your other markets. Kudos on building a great rep!

My concern is that the TK does not necessarily have the same goals as the owner. For example, a TK may look to get market-level rent which may net more CF in the long-run but may lead to more vacancy and worse tenants than below-market rent where the owner could have their pick of tenants (and pick the one with the best risk profile).

Moreover, and I doubt your TK company does this since you have a good rep, you can imagine a TK provider just getting a tenant in the door quickly to be able to advertise having a high-rent tenant already in place, even if that tenant may have a lower propensity to pay on time each month over time.

So the interests do not always align. Granted, over time interests do begin to align since a bad reputation will not help the TK company succeed in the long-run. But at the end of the day, it would be nice to have some more control and be able to say "I'd rather lower rent and get a high-income, high-credit score tenant with no bad history" rather than to just "trust" the TK company.

@Vik C.

If you can find someone with high income and high credit score with no bad history then you most likely wont find a renter, they will just buy the home if they are that good of a tenant.  It also depends on what type of rental income you are looking for.  High income people want to live in nicer areas where rents will almost always be over $1,000 per month.  If you lower the rent on a for example $1,000 per month home to say $900 you will make it more attractive to more people but it will be lower income people trying to get it.  

Every investor would love to go with your strategy but it is highly unlikely and unrealistic.  

Memphis statistics show that close to 45% of our population are renters so credit score is not a major factor when screening tenants here.  

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

You have more experience than I do in that area, but seems off that credit score would not matter. Before I purchased a home I was a renter and there was a big difference between me (with low credit card utilization, no deliquencies, etc.) vs. a deadbeat who doesn't understand personal finance. Moreover, some financially responsible people choose not to buy or have not yet saved enough for the down payment on a home they want. It doesn't mean they will have poor credit reports.

Maybe the story is different in Memphis, not sure. That said, good credit would be more important than high income in this case. You are right that someone with great income and good credit would likely be owning. =)

@Vik C.

I would recommend you find a turnkey provider whose tenant placement policies align with yours instead of undermining the turnkey provider's operations even if your intentions are in your best interest.

I totally understand your thinking.  It is right to be cautious, but for a relationship to work over the long-term and for you to be able to sleep at night, you are going to have to put a higher level of trust and faith into the company you choose to work with.  They have to earn it of course, but good business persons are going to make decisions based on your happiness as a client and investor.  Plus, they are going to make decisions based on giving themselves the best chance for success managing that property.  

I can promise you that no one who is serious about offering property management wants to take actions that lead to more turnover and an unhappy investor.  Below market rental rates do not always work as an incentive to get a better renter and just because a property is rented at the maximum level for that area does not mean that any applicants will have to stretch to qualify.  Just because a person rents a property, that does not mean they will just accept any property in any condition.  Many tenants are happy to stay for longer periods of time and pay high rent rates if the property is in superior condition and the treatment they receive from the management company matches the rate they are paying.  Those are the real questions I would try and answer rather than trying to maintain control of any of the process.  I just think that would too difficult and you will have trouble finding a partner that will do that.

Your questions and concerns are absolutely valid, but as an investor, my advice would be to remain open to a company convincing you that their interests in keeping you as a long-term client match your interest in buying a property out of area and letting someone else manage your properties for you.        

Anyone with good credit, in a market with $50k houses, is just going to buy a house.  Why wouldn't they?  The down payment will be no barrier, the credit obviously won't be, their income is almost irrelevant.  

Credit score really doesn't matter for renters even in my much more expensive market.  I run a credit check so I can see any judgments, not because I care about things like 30 day lates and cc utilization.

I think Chris is right, your approach is unrealistic.  And I don't sell turnkeys or own any.

Providing you buy the home and want to find your own tenant I can't imagine any company having an issue. We aren't a turnkey company but normally provide our homes rented or being advertised. If you wanted to buy a home vacant but ready for tenanting no company should say no. You are the one taking the risk of extended vacancy not them.

(901) 264-8674

Thanks for all the feedback. I suppose the right approach here is to speak to each TK company and understand their screening process and ask to see the credit report/application of the tenant already renting the property. At some point you have to bite the bullet and trust your partners, but not before you do as much due diligence as possible. I've heard horror stories about TK investments out-of-state, so I'd like to take as much precaution as possible to ensure a good credit history. At the very least no evictions etc. Would even prefer to speak to their former landlords for reference. While a TK may also have the same interests as me in mind, their money-at-risk is so much lower than mine and their portfolio so much more diversified that there is no way they would have the same standards and risk concerns as I would. It wouldn't make sense for them to.

I hope no one takes offense to my stance on the matter. I love the idea of turnkey investing and still plan on using TK to venture out-of-state. At the end of the day though, best to do my HW and be safe rather than be sorry because I trusted a stranger and didn't take every precaution.

Do your due diligence.  Just understand that expecting a 700+ FICO is going to mean an empty house.

True, but perhaps 600 with no evictions or criminal history is doable.

Originally posted by @Dean Letfus :

Providing you buy the home and want to find your own tenant I can't imagine any company having an issue. We aren't a turnkey company but normally provide our homes rented or being advertised. If you wanted to buy a home vacant but ready for tenanting no company should say no. You are the one taking the risk of extended vacancy not them.

 That is true, unless of course the owner wanted to tenant the house and then turn it over to a management company to actually manage the day to day affairs of that home.  It is hard enough to manage homes that are transferred between management companies (i know that is not apples to apples) because you have no idea what message is given to the client.  I could not imagine trying to make it work.  In my opinion it would jsut be tough to set and manage expectations.  

However, I think you would agree with me (possibly).  @Vik C.  will get exactly nothing that he does not ask for, so ask away and see what happens.  

@Chris Clothier  providing the PM spells out they will not accept liability for the tenant when they haven't placed it it might still work. I think we all agree completely the posters idea is hugely flawed but one mans meat is another mans poison.

(901) 264-8674
Originally posted by @Dean Letfus :

@Chris Clothier  providing the PM spells out they will not accept liability for the tenant when they haven't placed it it might still work. I think we all agree completely the posters idea is hugely flawed but one mans meat is another mans poison.

Hi Dean,

I have a few follow-up questions since I am new to this. You mention the idea is hugely flawed, but aren't there landlords who do a lot of the rehab/tenant-screening themselves but who still use a PM just for maintenance, etc.? What is the key difference between those situations and this one? Do TK companies typically take on some kind of liability for the in-place tenant, and if so, what are they on the hook for as compared to the owner? I was not clear on what guarantees/risk-sharing TKs typically provide to the buyer.

Thanks

@Vik C.  - I will let Dean answer your question, but I would recommend to drop the TK part of your question because turnkey is nothing more than a marketing term.  Regardless of buying turnkey or buying yourself and hiring a rehabber and manager, your strategy just needs to be reviewed and vetted.  What you are mentioning can be done, the real question is will a good property management company allow you to place your own tenant.  I am sure there are some out there that would.  Specifically now to your question, are any of them affiliated with or part of a Turnkey company, I dont know the answer to that.

You mention the idea is hugely flawed, but aren't there landlords who do a lot of the rehab/tenant-screening themselves but who still use a PM just for maintenance, etc.? 

Not in Memphis that I know of.  Our market is such hard work you never want a tenant you didn't place yourself

What is the key difference between those situations and this one? 

Do TK companies typically take on some kind of liability for the in-place tenant, and if so, what are they on the hook for as compared to the owner?

Some will guarantee rent for first 12 months. Some guarantee the tenant for the first 6 months and will cover any losses due to bad tenant selection. This is not uncommon when you first buy from them not necessarily over the life of the asset. For example our PM will replace a tenant at their cost that they have placed if they stop paying or turn out to be bad within 6 months.

I was not clear on what guarantees/risk-sharing TKs typically provide to the buyer.

As Chris has said TK is just a term. It's a term I dislike so we renamed our company once we understood the negative connotations of the word.

But to answer your question many turnkeys market their properties at markedly inflated prices. To justify that they offer various incentives and guarantees operating on the law of averages that they won't have to honour those guarantees too often.

To ensure that tenant selection is critical.

Other companies like @Chris Clothier  spend big money doing top class rehabs on their inventory and so they have a huge vested interest in ensuring tenants are not going to damage pristine homes so again tenant selection is critical.

As Curt pointed out earlier, specifically in Memphis, a high percentage of the city has criminal and economic damage so you have to be realistic about what a good tenant is.

We have a lot of homes in Memphis and it took us 3 PM's to finally get a good one. We have almost zero issues now with tenants but we have to accept 60 to 120 days vacancy sometimes to get a good one.  

(901) 264-8674

Just to chime in...

Any pm company worth its salt should have transparent screening criteria that they can give to you.  They need to do this to protect themselves from Fair Housing issues.  Some companies have multiple tiers of tenant screening criteria depending on the micro market (student housing/A-class single family).

One of the biggest problems that good pm companies have is inheriting doors with existing tenants that were not placed according to the pm co's criteria.   So many companies may be reluctant to cede control over this aspect of the business.  For example, I spoke to a property manager yesterday who finally, after two years, got all of his own tenants in a 20-plex.  When he took it over it was running 30+% vacancy with slow payers.  Now it's less than 2% with timely paying tenants.

Also, at least in our market, lower rents do not equal better tenants.  Over the years we have found no correlation between discounted rents and better tenants.  We have found that above average properties in a given neighborhood with above average rent consistently get us the best tenants.  Of course, asking too much gets the highest risk tenants and can have longer vacancies.

I think you should focus on the pm company's policies and performance, not the individual tenant.  If a company is running less than 5% vacancies and is getting a very high percentage of timely payments, they know what they're doing.  I can't see how second guessing that from afar will help you.  Also, may pm companies will have other tricks like risk assessment premiums, higher sd's, or guarantor policies to keep vacancies low in marginal markets.

Finally, if you are paying a pm company a percentage of rents collected, how are your goals not aligned?  A pm company wants to be a rent servicer, not a debt collector.  It is in no way in the pm co's best interest spending resources chasing rent every month.  They very much want tenants who pay electronically on the 1st of every month just as much as you do.

Wm

William,

Thank you for the fantastic summary and beginner-friendly approach you took to explaining that. It makes a lot of sense. It sounds like from what I am hearing that the PM does not have much incentive to not put in the best quality / most-likely-to-pay / least-likely-to-wreck tenants. I was more worried originally that turnkey companies (defined as those who buy, rehab, market, sell, manage) would get more benefit from the sale than from the PM and therefore may not have the exact same alignment of interests as the new owner. I think I was wrong in that concern, but I am glad I asked since these were very educational answers.

Cheers,

Vik

@Vik C.  fortunately most of those types of (bad) turnkeys are probably gone now. The companies that never get repeat business because they rip people off eventually give up once there are enough decent companies in the mix!

(901) 264-8674

Vik, I can see your logic on this. Who is going to care more than you regarding your investment. Is there any part, tenant selection, paint condition, even down to the flowers infront. Nobody is going to care more. If you have to train a PM fine. When I have called some PMs to do exactly this, I used the term ala carte and they knew exactly what I was talking about. 

thanks,

Matt

I'm confused on a couple of points: How do you plan on screening out of state tenants from NYC if you don't want to use a PM in your location to do it?  Are you talking about paying a PM to do all the work of finding and screening tenants and then re-doing all the work and then re-screening yourself?  There is a big difference in what is listed on paper and all the ques you pick up showing a prospect a property.  You either need to be there or have somebody who is to pick up these ques.

If you are going to find and screen your own tenants, why pay a PM for monthly maintenance?  Most of the work is at the beginning and very little goes on month-to-month with rentals.  I would find more value in having somebody help me find a tenant than paying them monthly to 90% of the time just cash checks.  When there is an issue, you get a call from the tenant, then make a call to the handyman and then send a check out to whoever fixed the problem.

Why do you keep going back to turn key?  Why not just purchase a rehabbed investment property and place your own tenants if you are so concerned with possible turn key issue?  TK is not for everyone, so maybe it's not for you.

Good luck with your investing.

Bob makes the point to goto a guy like Chris instead and let him deal with it all from the start. Many investors are simply too busy or not that interested to mess with. A guy like Chris in multiple cities with multiple entry levels would make life easier as you scale up. It does make sense to get a near fully rehabbed one either way if you plan on holding.

Thanks,

matt

Try to spend some time on the podcasts and you will find that ALL of us have issues with property management.  Depending on your market, some of the best are unlicensed.  Most decent PMs will not want you selecting the tenants yourself either to avoid inheriting a problem OR more importantly giving up 1st months rent which is the only real money in managing.  If they don't get you there, most PMs will rake you on the maintenance.  You might want to find a market you are comfortable with and ask the PM to just let you give final say on a renter.

As the others have echoed, you are not and never were the typical renter...at least not in today's world.  Anyone with decent credit will buy if they can get a loan....which also isn't easy in a lot of markets.  Maybe 10% of renters could buy but choose not to...unless you're talking about 20-something and that's not the renter I want.

Have you considered starting out with triplex or quad in your market?  That might be the way to go?

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