Turnkey Provider Gimmicks - Do New Investors Care

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Turnkey Provider Gimmicks - Do New Investors Care

Curt DavisBusiness Member
Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes

I feel lately I have been seeing many TK providers here on BP lately pitching their company and properties along with showcasing all the guarantees they are offering for prospective clients who might do business with them.  Here are just a handful of the things I have been seeing:

  • No maintenance for 12-24 months
  • No tenant placement for 3yrs
  • No property management fees for 12-24 months
  • Guaranteed rent for 12-24 months
  • 1yr home warranty ( either from a company or from the TK provider )
  • 1yr all you can eat at McDonald's  ( ok so this is not really one of them )

Now I am also a TK provider and yes at times during negotiations with buyers we have offered to pay some closing cost and a few other little things but that's about it.  I have only really noticed guarantees like this on homes that are cheaper meaning under $70k on average.  One could wonder if there is so much padding in the price to be able to offer this on every sale.  One could also wonder about the quality of the area and what will the experience be after the guarantee phase is over.  I am not an expert in these other markets so this is just my thoughts. 

It all sounds great but I would love to hear what some other investors who buy from TK providers think about the guarantees and if you like it or not or if it makes buying out of state from a TK provider more comfortable.

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  • Steve Perkins
    Investor · Denver, CO · Member since 2014 · 71 posts · 44 votes
    11y

    @Curt Davis 

    I have mixed feelings.  The warranty and repair guarantees don't mean a whole lot to me other than making me want to know more about exactly what they will be doing with the rehab.  If the rehab is good, they probably aren't losing much, if anything on fixing warrantied or guaranteed items because these things aren't likely to need repair in the first 2 years.  So, I guess for me, the warranty or guarantee on repairs is just a red flag to really dig into the SOW on the rehab to see what is and is not being done.

    Rental guarantee is a little scary.  On the one hand, it's nice to know you'll have no fees for 12-24 months as you're starting out, but it really raises the question as to whether this provider can/will be able to provide you quality tenants past the guarantee date.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
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    Related reading:

    http://www.biggerpockets.com/forums/311/topics/139...

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  • Curt DavisBusiness Member
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    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
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    @Steve Babiak

    Thanks for posting the other link.  I think some of the suggestions offered are far too outside the realm of realistic.  You dont even get a 5yr guarantee on anything when you build a brand new home let alone renovate a home thats 40 yrs old.  

    A buy-back program is also unrealistic but hey, if you never ask you never know. 

    Thanks!!

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  • John Ma
    Investor · Arlington, VA · Member since 2014 · 151 posts · 37 votes
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    @Curt Davis I have toured some properties with a TK company that offers guaranty rent, and home warranty on full rehab, with majority of properties being 60k-100k.  

    The specific one I toured, rehabbed the property completely- roof, walls, plumbing, electrical, floors, bathrooms, and kitchen. They have their own construction guys that do the work. I've seen the craftsmanship. They are decent- Somewhere between just a hit rough around the edges and a perfect craftsman job. 

    As you can guess based on the TK sale price, some of the houses are being bought around 30k and under in a "developing" area, however they guaranty tenants, whom they screen and manage.

    Hope this helps in your research Curt.

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  • Curt DavisBusiness Member
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    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    11y

    @John Ma

    Thank you for your reply, not my main questions is were those extra guarantees, did those make you want to buy from them, was it the deciding factor?  Would you have purchased from them even if they were not offering that?

    Thanks

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  • Brie SchmidtBusiness Member
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    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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    @Curt Davis -I almost bought 9 properties from a tk company about a year ago.  It was the rent guarantees and vacancy guarantees that made me want to buy from them.  The deal fell through because the inspections and living conditions were terrible.  After talking with many TK companies over the past year most have told me they don't need to offer guarantees because their product speaks for themselves and their long term investor happiness is much more important than the short term deal, so they don't feel they need to offer them because the numbers they quote are the numbers they get.  

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  • Curt DavisBusiness Member
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    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
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    @Brie Schmidt

    Thank you for the insight.   So a question back to you then, would those same enticements still be needed in order for you to purchase or not really anymore. 

    Thanks

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  • John Ma
    Investor · Arlington, VA · Member since 2014 · 151 posts · 37 votes
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    @Curt Davis  I think every consumer is going to have a different opinion, however with the TK offering that, it does add a little bit of assurace knowing the TK provider isn't jut selling a product and leaving. It shows they are behind their product, even though we both know the TK is still involved in the cycle after the client owns the property regardless if thats offered or not. So yes, i would say it makes make the deal appear to have more value.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Curt Davis   From my experience good TK operators will self warranty for items without advertising about them. those that advertise do take on substantial risks in my mind.

    I do know of companies that have had major troubles with these types of guarantees and probably wished they had not done it. The reality is your not getting a FDIC guarantee your getting a guarantee form a company that you have no clue as to their actual financial situation at the time of the rental guarantee .. Bet intentions may not be backed up by financial reality. Much like those that guarantee Notes how golden are those gurantees past the company told you they guarantee them.. Is there money in escrow held for future loss's.. doubt it on both fronts

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  • Jeremy Vogan
    Investor · Staunton, VA · Member since 2014 · 42 posts · 1 vote
    11y

    With respect, @CurtDavis is mistaken. You can get a 5-year guarantee on new construction rental property under the right circumstances (http://www.biggerpockets.com/forums/517/topics/174...). It all comes down to the company's track record and the specific terms of the deal. My firm has sold $20M in new/newer construction rental property to investors in the last 8 months, much of which came with 5-year guarantees. Our 20-year track record as a builder/developer and the $100M in assets we held onto through the recession speak to our stability and capacity to back our guarantees going forward. Our absolute limit of liability is 8% of purchase price to conform with GAAP rules for a sale, which is a very important benchmark. Companies that promise you more than this probably aren't for real. And the firms that had funds in escrow, teams of lawyers, and reams of paper backing their guarantees - like Lehman Brothers - sometimes don't compare to a seasoned operator with decades of street cred in the business that has everything to lose if they don't do what they say.

    I share this example not to pitch our firm (there are doubtless a number of others like us out there who are legitimate), but to demonstrate that there is a workable business model for long-term guarantees that works for both parties. Now here's the catch, if catch there is:

    1. You will pay top dollar for the properties. This is not all bad, since if you are a B&H investor you're interested in appreciation as an investment goal, and top dollar is that many more comps in the neighborhoods you're investing in, pushing up your property values in the long term.

    2. You won't get rich off the cash flow. Many investors will be happy with a bit of negative CF and some will negotiate for a bit of positive, but in the end you won't make your money every month. You make your money in 5 years when your property is worth 15% more than you paid for it and rents have followed property values.

    All this to say, it can be done. Smartest thing you can do is ask for a buyer's list and call them all up to ensure that the properties they invested in have met their expectations.

    Jeremy Vogan

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Jeremy Vogan Morning Jeremy,, out of sheer curiosity how do you set up these guarantee's do you establish some sort of reserve accounts and have third party reserve study made then fund it ( like a sinking fund) We do this on HOA and condo projects that I owned.

    Interesting concept from a rental stand point, and investor standpoint.. One would have to have grade A stock I would think to pull this off and make it financially feasible for the sellers. I do have first hand experience with some TK that tried this in C or lower class and of course it eat them up

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  • Jeremy Vogan
    Investor · Staunton, VA · Member since 2014 · 42 posts · 1 vote
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    Jay, thanks for asking. Because we are privately owned by more than 100 stockholders, our guarantees are backed by our company's performance and in particular over the last 6 years. We have never made a guarantee in the last two decades that was not honored, and this is evidenced by the fact that two of our longtime investors just signed to back a deal with us to build more than 100 new SFH and a new condo project. It may not be the kind of guarantee that would be attractive on Wall Street, but there are a lot of Main Street investors out there who will appreciate it.

    Another component is our inventory position in the marketplace. At the beginning of the recession we had 1700 building lots in the state of Virginia; after an aggressive "build our way out of the slump" strategy we now have 1100, most of which are in the same communities as the investment property we are selling. Not only do we have daily feet on the street in these locations, but we are also unconditionally committed to property values (read: comps) in our neighborhoods because we are starting new homes there every day and our prices have risen aggressively since 2012. We didn't walk away from a single property since 2008 and we're not going to.

    Finally, these houses and condos and towns are not your typical flip jobs with hair. Every one of these properties is newer construction in great locations and most of them are brand new properties we built ourselves. They meet our internal standards for quality construction and upkeep, and they all command premium rents. The homes will continue to appreciate as they have over the last couple of decades and a number of investors have realized this so far, with $20M sold (for full price!) just since we started the program last summer.

    Hope this helps clarify our strategy!

    JV

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