Turnkey Deal Gone Bad...

64 Replies

We had someone come to Birmingham from Miami over the weekend to check on five houses that he bought for ‘clients’.

Here’s a snapshot of the situation:

  • He’s owned these properties somewhere around a year
  • He’s never seen them in person until this past Saturday
  • His current property manager has been less than responsive
  • he owns a mix of “D” and “F” houses...one of them is a disaster and another one will become a disaster

As we drove his five properties, we had the opportunity to give this investor a real life education on the low-end Birmingham, Alabama rental market. We were brutally honest about what we found as well as our thoughts on how it could possibly be fixed.

This is what we found:

  1. House #1 - In an “F” neighborhood and is currently rented for $400 per month. IF/WHEN this tenant moves out, it’s going to be a mess. The property will be vandalized almost immediately and he will be left with a $10,000 to $20,000 rehab that he’ll never be able to recover from. We encouraged him to do whatever necessary to make sure the tenant is the happiest person in the neighborhood...KEEP THE TENANT!
  2. House #2 - In a “D” neighborhood and currently vacant. Just a few things on the outside of the house that we noticed and suggested he repair. He didn’t have keys for any of these houses so we weren’t able to get a look at what was going on inside.
  3. House #3 - In a “D+” neighborhood and the tenants were moving out on Saturday. The investor understood that they were being evicted because of non payment. When he saw them moving the washer and dryer out he said we should call the cops and report them because they were stealing….the only problem with that is that he has no idea what was provided in the lease and what wasn’t. Plus he had no proof of ownership so stopping the move out wouldn’t have done much good. It’s not a good situation.
  4. House #4 - In a “D” neighborhood and is currently rented for approximately $500/month.
  5. House #5 - In an “F” neighborhood and is vacant. We were able to get into this house because it has been completely destroyed. It was built around 1920, has 12ft ceilings and everything has been stolen from the home...including the cast iron bathtub which we’re sure was sold somewhere. Our opinion was that he could probably sell the house ‘as-is’ for 2k or he could put about 25k in it to have it rent ready. Either scenario is not good. He suggested that it be rehabbed in stages...the only problem with that is that it will be vandalized in the exact stages it’s rehabbed.

So what are the lessons?

  • Visit and walk the neighborhoods before you buy
  • Know and trust your turnkey provider
  • Understand and appreciate what it takes to find a good tenant
  • Know and trust your property manager

Any lessons I’m missing??

Take things SLOW with a turn key company. If you must go turn key but one at a time. See how it fares after their "year long guarantee" before deciding to buy 4 more. 

Wow, I feel bad for the investor.  Man, I am a newbie and been learning lots.  I guess I will stick local for now.  I am just starting.  I got a house rented but that used to be my own home but I moved to another house and kept that.   It feels good to have a rental because it is income without you working.  I was thinking to get another outside my area since things over here are expensive.  But there are too many unknowns or I guess more homework than I am willing to do.  

Thanks for the head up.

biggest lesson here is don't invest in D class nieghborhoods.  Strong C and B only.  

I worked with this guy as well but decided it wasn't a good fit for us... he actually doesn't own any of these houses. He wholesaled them to 5 investors and is currently trying to salvage the damage he's done. I'm glad he took the time to come see the properties for himself - he didn't seem to believe what I was explaining over the phone.

Its scary how people are willing to buy turnkey properties without doing proper due diligence on what they are buying as well as properly vetting who they are buying from. If everyone did this and were thorough about it, there would be so many more happy turnkey buyers out there.

I actually just closed on my third turnkey today and am ecstatic about it.  I know and trust my turnkey sellers and they would never sell a properties like these.

Do you proper research folks!  

Thanks for sharing the story too Spencer.  People need to read stuff like this every so often to put them in line.

WOW! Unbelievably lax due diligence in the part of the investor! REI is a not just a contact but combat sport. I can't even begin to understand this way of thinking. A fool and his money ... Trust, but verify...
Originally posted by @Account Closed :

biggest lesson here is don't invest in D class nieghborhoods.  Strong C and B only.  

 And F neighborhoods, only for those who feel they need to punish themselves.

I'm a new investor looking at turnkey for my first investment, thanks for posting this, helps me keep things in perspective and reminds me that due diligence is paramount.

Quick newbie question, where is a good place to find neighborhood ratings?

There are quite a few takeaways here.  

1) Work with a reputable turnkey provider.  By reputable, I don't mean one which advertises heavily or has a glitzy website, but rather one that has its "clients" interests at heart. 

2) Always visit the properties or at least the city in which you're investing.  It doesn't have to be for the 1st property, but definitely before the 2nd or 3rd. 

3) Turnkey providers - if really turnkey - should be able to provide financials for the property, even if just a few months old. 

4) Don't invest in anything less than C. It's just not worth the stress.  It's like buying penny stocks.  Everybody has a friend that made a killing on X stock that went up 2,500)% --- but most go to $0.00. 

Also, I'm not a huge fan of "rent guarantees."  That reeks desperation to me. If the property is effectively rehabbed, tenanting it with good people shouldn't be difficult. 

@Spencer Sutton

I think your title is a little misleading this is not a turn key gone bad..

This is a out of state Marketer / wholesaler that got hooked up with some low life rehabbers and they sold investors a bill of goods.

You should not be shocked this happens in every market... Just check out Detroit and what the foreign marketing companies have done to investors there. and basically any big city that is a big Turn Key or Cash flow market... These types of homes exist in each and every one of them along with the culprits that prey on good meaning investors who for whatever reason put all their trust and faith into out of state marketing's companies.  And like anything in RE not all marketing companies do this or want to do this.. But even the best get their clients into bad deals because the TK guy they were trusting feel down on the job.. OR its just the risk of owning rentals anywhere in America.

I tend to think folks would be somewhat wiser to get to know and meet the actual turn key provider.. one reason once the deal is done the marketing folks are down the road they have been paid just like any other RE agent.

There are some really good TK guys in B ham  who are under the radar and do a great job.

So this is not Turn key gone bad.. this is Marketing agent not doing proper due diligence and walking his clients into a mess that they will never recover from.  Buyers just can't be this trusting So many buyers just don't know or understand how neighborhoods cannot be like their own.. they are clueless as to what these areas are really like.. the tenant base in them and the risk they take on.. Of course until its to late and they lost all their dough like what is happening here

There is always this talk on BP of what crooks the gurus' are.. well these bad marketing folks and the flippers they hook up with are just as bad if not worse.

@Kevin Trumbull There are a variety of sources besides locals. To get a birdseye view I like esri tapestry. They have 67 unique segments for hoods. You can compare to your own market and extrapolate at a distance. If that checks out, check out rentfaxpro. This is what some lenders use. You can get the average durations both occupancy and vacancy on the street level. 

On average I would steer clear of out of state TK marketers. I am sure there are great ones but it is not exactly clear who they represent....the buyer or seller? As well I have seen some don't know the hoods very well. A local TK would have a feel for what is going on better in most cases. It can take many hours of effort to figure what is happening in any giving area despite what some like to promote. If the marketer has not done that for you then there is no value in what they are offering. Good Luck!

@Jay Hinrichs You are probably right...that may be a better description of what happened. 

It ultimately all comes back to marketing...whether that's from the TK guy, the wholesaler or the out of state marketer.  Investors believe what they hear about the returns and don't do enough homework.

I'm sure there are some solid Birmingham turn key providers...and if there's not, there is a big market for them here based on the calls we get every week.

@Spencer Sutton

  I have been financing turn key operators in B ham since 2002... So yes there are good one's there... I have owned 40 homes with partners there... ( sold out almost 2 years ago now).. I continue to invest there...

I checked out your website.. and its evident to me your company is a higher end management company.. Most out of state investors are not going to buy higher end properties for rentals as they would rival what they can buy at home. 

I own some of these nice brick and new homes as rentals as well in the south.. they are a dream to manage compared to cash flow homes so much so that I do not need PM services just placement service when they go vacant. .. it takes a very switched on PM to handle these higher cash flow type areas even there in B Ham... Sound like your looking to move down into this asset class and give it a run.. Hell you were brave enough to walk around a bombed out ghetto dog  that says something.. LOL> I think  you to are going to go through a learning curve and you ...

Question did you offer to manage those D and F class or did you pass Like Decas did?

@Jay Hinrichs Well...we actually have a lot of experience in these areas.

I've been buying those kinds of homes here in B'ham (as well as nicer ones) since 2003. At one point I owned around 30 C/D/F houses and still have about 15. The ones I sold off I sold to local wholesalers/landlords.

We do manage a lot of property in the B area of town but about 60% of our houses (out of 1,000 we manage) are considered investment and in the C/D/F areas....so we're not looking to 'move down' into those areas b/c we're already there.

We did not offer to manage his properties but if he asks us to, we probably would. I don't suspect he'll call back because of our candor during the time we had Saturday. He had a difficult time believing the truth of what he was dealing with here in B'ham....and that was probably because his experience is not going to end well.

@Spencer Sutton

  sounds good,,, I think you manage our portfolio prior to my exit... I think we ended up moving to another company though

@Jay Hinrichs Yes...maybe so. We've been around since 2008 and we haven't kept every owner we've managed for! 

Are you selling turnkey here in B'ham?  Or are you partnered in some way with a turnkey provider here in B'ham?

I just saw one of the houses for sale on your site was one of my old houses I bought back in 2005 as a part of a 10 house package....small world!

@Roberto Chan make sure to do your homework!  Take your time and get some insight from a third party if you're looking to buy turnkey. Look for someone who doesn't have anything to gain...no conflict of interest whether you buy or don't.

@Account Closed I'm glad you posted this. It summarizes what to expect with these properties quite well and not just in Birmingham. We see the same results in Indianapolis and Kansas City.

@Mike D'Arrigo

I think one of the problems is that out of state investors are told something is a B/C neighborhood when in fact it is not. 

In my opinion there's serious temptation to lie if someone has a property they can flip and make 15k profit on if all they have to do is fudge the class of neighborhood.

And you're right about the unrealistic pro forma numbers...they're ridiculous. 

Originally posted by @Spencer Sutton :

@Mike D'Arrigo

I think one of the problems is that out of state investors are told something is a B/C neighborhood when in fact it is not. 

You're absolutely right. I see it a lot. Something investors can and should be doing so they don't get hoodwinked in know what rents are in different areas. If they see that rents in a B class area are around $1000 and the rent on their so called B class property is $700, it's a pretty good clue that someone's not being honest with them. Then of course, the can always call a property manager and get their input on the area.

@Spencer Sutton

 what site is that  ?   I don't have a site.. I don't sell turn key...

@Spencer Sutton

  OK got it .. I thought you meant I have a site were I was personally selling turn key and that I do not do... !!  the other site is self explanatory.

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