Ideas on Analyzing Turn key deals

16 Replies

This thread is meant to show new turnkey investors some of the things to look for when analyzing a potential turnkey deal. Please add yours!

First if you you haven't done this look for a highly recommended turnkey company. Ask your friends, fellow investors, or any one you know who might be doing turnkey investing. Ask here on BP. Tell those that don't want to say anything in an open forum to private message you.

2) check that company out online looking for complaints and non company related (if you can determine that) recommendations.

3) Talk extensively with a company you have found. Ask them things like how long have you been doing this, can you give me contact info for three turnkey investors, what has been the biggest complaint from their investors. What is the expected ROI? What kinds of repairs are they seeing most often? Compare what the company says to what the investors say. Also if the repairs seem strange, like repeated electrical problems, repeated plumbing or roof leaks, paint, drywall or siding issues just about anything that a rehabbed house shouldn't be expected to have are warning signs.

4) Analyze some of their deals. Take a look at Zillow and see what the zestimate is (sometimes that is very inaccurate though!). Look to see what things have sold for in the surrounding area. See what other properties are renting for in the area. If the property is way out of whack with the comps then see if they have done an extensive rehab to justify the extra cost. Hint if they are not showing you their after rehab pictures then that is a flashing red warning sign.

5) See how many houses they have for rent (if they are PMing it) compared to how many houses they have sold. If it seems like a lot then that may be a warning sign.

I'll add more later. But please add to this list if you'd like.

I like this list! I know some will disagree, but I think going out there, meeting the company and going on a tour of their properties (in all stages of repair) is a good idea as well.

Also, @Cal C. - can you explain #5 a little bit further? What makes that a warning sign? Thanks again for this!

Originally posted by @Dave Olverson :
I like this list! I know some will disagree, but I think going out there, meeting the company and going on a tour of their properties (in all stages of repair) is a good idea as well.

Also, @Cal C. - can you explain #5 a little bit further? What makes that a warning sign? Thanks again for this!

Basically if they have a high percentage of vacancies then that is a problem.

Ignore everything the turnkey seller tells you and verify every fact on your own. That's not specific to turnkey, it applies to all deals.

Verify prices. Look at for sale listings in the area. Get sold data and compare that. The turnkeys I've examined are almost always at retail. Many are above retail.

Verify rent. Rentometer.com and craigslist can help. Drive the area and look for for-rent signs and call them.

How do you drive the area? Go there. Unwilling or unable to go? Then you SHOULD NOT BUY IN THAT AREA. Boots on the ground is essential to making any purchase.

Examine the house thoroughly. Its easy to slap on some paint and laminate and hide a lot of issues. Assume the rehab has been quickly and shoddily done until you convince yourself otherwise.

Talk to unaffiliated PMs in the same area.

Drive the neighborhood. Almost anything will look good with the right pictures. Look for the bad, not just the good.

Again, all this really applies to any deal, not just turnkeys.

Right, got it. Sorry, I misunderstood and thought you were talking about doors that had been rented. Great call!

Originally posted by @Jon Holdman :
Ignore everything the turnkey seller tells you and verify every fact on your own. That's not specific to turnkey, it applies to all deals.

Verify prices. Look at for sale listings in the area. Get sold data and compare that. The turnkeys I've examined are almost always at retail. Many are above retail.

Verify rent. Rentometer.com and craigslist can help. Drive the area and look for for-rent signs and call them.

How do you drive the area? Go there. Unwilling or unable to go? Then you SHOULD NOT BUY IN THAT AREA. Boots on the ground is essential to making any purchase.

Examine the house thoroughly. Its easy to slap on some paint and laminate and hide a lot of issues. Assume the rehab has been quickly and shoddily done until you convince yourself otherwise.

Talk to unaffiliated PMs in the same area.

Drive the neighborhood. Almost anything will look good with the right pictures. Look for the bad, not just the good.

Again, all this really applies to any deal, not just turnkeys.

I agree totally, but I was thinking of investors, particularly overseas investors, who couldn't actually get on the ground for whatever reason. As you do I strongly recommend walking the ground and driving the neighborhood!

I couldn't agree with @Jon Holdman more. If you are long-distance though and can't go tour the area and properties, you can definitely get insight from an unrelated (to the seller) property management company. Those companies know the most about every neighborhood and can tell you accurately a lot of information.

My favorite part of Jon's post is the mention of turnkeys being no different from any other property in terms of due diligence. It drives me crazy when people distinguish because that's what can get people in trouble. A turnkey is the same as a foreclosure as a short sale as a regular buy as a whatever... you still need to do the exact same due diligence on all of them- property quality, neighborhood quality, PM quality, vacancy rates, tenant quality, etc. Whether a property is a turnkey or not has no effect on the end result.

This article isn't exactly the answer to your post, but contributes towards it, might help some people-

http://www.biggerpockets.com/renewsblog/2013/04/20/due-diligence-turnkey-property/

I agree that regardless if it is a turnkey company or not, due diligence MUST be completed. In fact, if it is a turnkey company you plan to buy from, then you have even more dud diligence to do, not just on the property and location itself, but on the turnkey company.

Knowing the area, the market, the rents, having a team on the ground (agents, repair people, property manager, etc.), and buying right. Paying retail from a turnkey company is NOT a good way to have true cash flow. You must be buying under market typically to have true cash flow.

Understanding operating costs, vacancy factors, and capital expenses is also crucial.

I think there are some people that would disagree with @Will Barnard - of course there is BETTER cash flow if you buy under market on your own and put your own team in place, but I have heard too many stories of people still achieving true cash flow (again, more modest numbers for sure) with turnkey properties.

Granted, with turnkey properties, you have to be much pickier about which market will work and you have to scrutinize the numbers in the same way, but if that level of cash flow helps you reach your goals, then that is not a bad thing!

6) Do a market survey (call around) to PMs in the targeted area and see what kind of rates they offer? If I were going to do a turnkey (I have been considering it) I would no charge to put in the first tenant. 7-10% management fee. No markups on repair costs. Perhaps a 1/2 month charge when a tenant renews a lease. Late charges being split (negotiable).

My intention is to create a situation where the turnkey company has more incentive to sell me (and people I refer to them) additional properties rather than making most of their money on commissions, monthly fees, late charges, repair markups, and annual renewals.

@Cal C. - This is a good topic and I have a couple of responses. The biggest thing I can tell a buyer of TK properties is that this is an investment. It is not a purchase nor is it an emotional reaction and should never be a knee-jerk decision. Do not make an investment based on the features which is often what people are selling. Instead, make your decision on the benefits to you as an investor and the value those benefits provide.

An investor should buy because there is a value that you receive from the investment. You are either saving time or money or both and you should be receiving a consistent and reliable return at the same time. The benefits to you are much more important than the asset itself or the features of that asset.

If investors will look at it like this, then they will not be attracted to the low-price leaders and the shoddy work of operations that are not big enough to provide real value. They will want to buy investment properties that make sense with TK operations that provide them a high level of comfort and peace of mind. Added to the other steps listed on here, designed to provide background on the information a TK company provides, and an investor can make a good well-informed investment decision.

Originally posted by @Cal C. :
6) Do a market survey (call around) to PMs in the targeted area and see what kind of rates they offer? If I were going to do a turnkey (I have been considering it) I would no charge to put in the first tenant. 7-10% management fee. No markups on repair costs. Perhaps a 1/2 month charge when a tenant renews a lease. Late charges being split (negotiable).

My intention is to create a situation where the turnkey company has more incentive to sell me (and people I refer to them) additional properties rather than making most of their money on commissions, monthly fees, late charges, repair markups, and annual renewals.

Cal -

You would go out of business if you operated like this. Please don't be offended, but I have to be very blunt with your statement. I have a TK company with a PM arm that manages just over 2,300 properties and we add around 50 properties a month. We started our PM company at ground zero with no properties. We built it to where it is today and never once were we the lowest price company for our services. However, from day one it was our mission to the best. I have also mentored several other TK companies and self standing PM companies.

All TK companies have incentive to sell additional properties. IF they don't --- they go out of business! I think most miss how to actually do that.

You do not create incentive by being the "low-cost" leader or the Walmart of the TK niche. There are two ways to incentivize an investor to purchase additional properties from you and to refer other investors to your company. Neither of them has anything to do with setting your rates so low that you cannot cover your overhead much less hire team members MUCH LESS pay yourself any income!

1. The best way is to do EXACTLY what you say you are going to do. In all cases do not over-promise and more importantly, do not under-deliver. The customer is not always right. That is a fallacy. But the customer is always the customer and you should always respect what they say, think,feel and deliver to them an exceptional investing experience where your integrity cannot be challenged.

2. The second best way (and these two go hand in hand by the way) is to provide exceptional value for your clients. You cannot do that if you do not have the revenue needed to build a TEAM to handle all of the functions of a well operating TK company. Property management is the hardest of all functions that a TK company provides and it is by far the most important piece effecting a clients success. Do it poorly and it does not matter what you charge - you will never sell additional properties or have referrals. Do it really well and you can build a clientele list that raves about your company.

There is no way to be exceptional if you cannot create a business that will support itself and the mission you have with your clients. It is quite easy to overcome the stereotype that TK companies and PM companies create all these ways to nickel and dime investors when you build a great TEAM and deliver on your clients expectations.

I hope you do build a TK operation or a PM company. I think you should. There is an unbelievable freedom to owning your own company - especially one you built from the ground up.

@Chris Clothier

thanks for commenting. The main reason for this post is to prevent as much as possible new investors from being ripped off by shady tk operators and I certainly don't believe your company is one of those. Hopefully, if they go to google and type in analyze Turnkey this thread will pop up or when they actually find BP and search this thread will pop up.

I have a mild interest in buying some TK property not setting up a TK business. I realize I wrote my last comment fairly badly and probably confused you.

I think I'm a little lost with your statement
"if you did it like that you would go out of business." Can you elaborate?

There are a lot of companies out there - especially fist time business owners - that mirror TK companies. They copy advertising and marketing and in general try to mirror the messages. At the same time, they try to be the low-cost leader in everything. The houses are cheaper, the renovations are cheaper, the on-going property management is cheaper.

What they fail to realize (and eventually go out of business) is that your actions have to match what you tell people. If you claim to be the best or to offer very robust services and great property management, then you have to deliver on those claims. You have to have staff to answer the phones, customer service teams to constantly call your clients, a full staff to rent to tenants, close leases, answer service calls, dispatch service calls, call tenants after the service to make sure they are satisfied, call tenants within 90 days of lease expiration to discuss renewal......and the list goes on and on.

In order to accomplish all of the tasks that great property management companies accomplish, you have to have consistent revenue streams. Not charging for lease up, charging discount rates for monthly management, not up-charging on maintenance are just three examples of reducing the cost to an individual owner of a property which on paper raises his return and makes him happy. When the management starts and problems occur - which will happen - the management company does not have the staff or the resources to respond appropriately. They have not been charging enough money for their services to build out a team and invest in technology. They only have enough revenue to feed themselves.

This is why you hear about management companies that never call back clients or the horror stories where investors fly across country and go to view their property and find out the reason they have not received rent or a call back is their property is vacant and a mess.

The old adage is true that consumers get exactly what they pay for. Some are willing to pay higher prices for the best services. Some pay higher prices and accept crappy services and some look for the low cost leader and deal with whatever service they get.

Ok Got it thanks for explaining what you meant.

Originally posted by @Dave Olverson :
I think there are some people that would disagree with @Will Barnard - of course there is BETTER cash flow if you buy under market on your own and put your own team in place, but I have heard too many stories of people still achieving true cash flow (again, more modest numbers for sure) with turnkey properties.

I doubt anyone would disagree with what I stated above. You likely missed my point, but please note that I stated not to pay "retail" from a TK company or any seller for that matter. My point was that regardless if it is a TK dealer or not, you should buy below market to achieve cash flow. Many good TK companies can still deliver a TK property below the full retail value, thus leaving meat on the bone for the investor.

I am new to this, granted, but from the people I have talked to, it seems as though, if the rents and numbers work out to provide positive cash flow, then you CAN buy at retail and have the investment work out. The idea here is that the people purchasing the turnkeys are not doing so for appreciation (or to flip the house at retail value), but simply to achieve positive cash flow, which, in the right markets, is possible at retail value.

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