Turnkey Deal Gone Bad...

Spencer Sutton · 2015-06-01T09:23:50-07:00

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 yearHe’s never seen them in person until this past SaturdayHis current property manager has been less than responsivehe owns a mix of “D” and “F” houses...one of them is a disaster and another one will become a disasterAs 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: 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!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.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.House #4 - In a “D” neighborhood and is currently rented for approximately $500/month.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 buyKnow and trust your turnkey providerUnderstand and appreciate what it takes to find a good tenant Know and trust your property managerAny lessons I’m missing??

Account Closed

Registered Nurse (ICU) · San Jose, CA · Member since 2014 · 496 posts · 332 votes

11y

@Kevin Trumbull best place to find what class a neighborhood is is to determine it yourself. Do the research and make your own opinion on the property class. Crime rates, vacancy rates, poverty rates, rents, purchase prices, the quality of the homes, the supply and demand of the areas, and many more can all be found online and pieced together to classify a property. The local investors are also a good resource to confirm your research. But ultimately you should be the one deciding the class. Trust nobody and don't believe everything you read on some online rating tool!

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Pritam Sinha

Reseda, CA · Member since 2013 · 1 post · 0 votes

11y

Turnkeys are often a misnomer.

As a new in the country when I purchased 95 properties in 2005-2006 all over the country, I learnt the hard way what turnkey means.

What is marketed as turnkey is NEVER truly a turnkey. It is a myth at best. Ask anybody who has been trying to buy turnkey for a significantly long time.

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Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

11y

@Pritam Sinha - finally someone with an iota of sense!

Keep it up, boys. I'm getting my money's worth in entertainment here. Love the TK theatrics :)

Those $30,000 PIGS sure are sexy-looking (from afar, that is). It's always you CA guys thinking you can outsmart the marketplace. I know you'all are smart, but damn...

Picking a good TK provider is an interesting sport, @Jay Hinrichs...the mind contortions are a fabulous thing to watch :)

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Rafael Norat

Investor · Lodi, NJ · Member since 2013 · 487 posts · 179 votes

11y

"Turnkey" should be simply noted as a marketing term. I don't think there's anything wrong with using it as such, as many aspects of "turnkey" investments have "hands-off" elements to it, another marketing term!

Having the properties bought, fixed, rented, and managed can certainly have "hands-off" elements to it. But, it's you who ultimately decides which team to build and work with as well as you're involvement.

Learn and move on!

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Pritam Sinha

since your post is directly on topic about turn key gone bad... can you expound a little on what your experinces were and if you were to do it all over how you would have lessened the learning curve ( which I bet was expensive).

IE: did you get told something was a great area and it turned out to be a very bad area. Or did you buy on a street that turned bad after you bought. ETC ETC. Would be great to get some real world feedback..

And I have to assume you probably bought in most of the popular turn key markets.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Rafael Norat

In my mind the reason the term Turn Key was coined and is used to describe a certain sector of RE investing is the markets themselves.

For most lets say that invest on the west coast to buy something that cash flows one would be looking at small multi to multi one generally would never be looking at a SFR for a cash flow rental unless one though there was pretty nice appreciation upside. So when we go shopping we cannot find literally hundreds of homes that have had complete reno's on them.. If they have those are sold retail.. as there is a huge shortage of homes in most of the West coast areas and high demand for primary housing.

Unless mid west and some of the upper east and deep south.. WEre your demographics and life styles are totally different than say the West coast or very upper east coast or generally the entire east coast any city within 30 miles of the water.

In these markets you will in any city on any day have thousands of vacant homes that have either been left by owners just moving on... ( used to be foreclosures that has calmed down) and or burnt out landlords.. And the areas are generally 50% or better renter occupied.. So there is a need to fix these homes and put them back into service.. as that is the highest and best use.. YOu cannot generally in these cash flow areas fix them and retail them.. it happens but not in the renter dominated sub markets.

This is what has created the industry of turn key.. And because there is not enough demand locally for rental houses at a PRICE point that the locals can make any significant profit they must take the Product to the market that can afford it .. thinks they are good buys based on comparision to their market and will pay for it.

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Spencer SuttonBusiness Member

OP

Investor · Birmingham, AL · Member since 2015 · 119 posts · 148 votes

11y

Is there a conflict of interest for turnkey providers who are also property managers?

This may need to become a post itself but I was talking to an investor the other day who noticed something strange.

His house sat vacant and was told 'we're just not getting applications for the area'...but at the same time this group was filling up turnkey packages of houses to sell to out of state investors.

It seems the temptation would be for a turnkey/PM to fill up a package of 3 or 5 or 10 houses to be sold for a profit of $10,000 - $20,000 (or higher per house) and be less interested to fill up a house where they only get paid 10% management fee.

Is it or isn't it a conflict of interest?

Interested in different people's perspective.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Spencer Sutton

This is a great question ,,, Maybe Chris Clothier will chime in since he is the US single largest Turn Key operator and one of the very largest SFR PM companies in the US as well.

There are two schools of thought on this.

1. PM in the cash flow markets is just very tough and top flight turn key or higher volume TK companies are forced to bring it in house to control their own destiny... As opposed to subbing it out and having a PM destroy there relationship with a buyer because the PM fell down on the job.

2. The second thought is just what you brought up... Although as we know PM is a for profit business and truly independent PM's like yourself will generally cost far more for the owner than an in house PM company on an on going basis since your company only derives its income from management the only way you can be profitable in these areas at these rent rates is to up charge for any and all of your services.. if you don't you can't be a profitable company just charging 8 or 10% of income.. So this affects the owners bottom line and many times in a negative way... I was not there when my old company moved their 35 houses from your firm but I believe this was an issue bottom line expenses were much higher than bringing them semi in house..

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Spencer SuttonBusiness Member

OP

Investor · Birmingham, AL · Member since 2015 · 119 posts · 148 votes

11y

@Jay Hinrichs

You may be right in some respects and that's a fair argument...but as far as your old company moving their 35 houses it wasn't a bottom line issue. They did all of their own maintenance work and our leasing fees were half.

I would also say that the best way for a PM to increase profits is to increase their efficiency. We've been able to do that with technology.

At the same time we're not looking to be the low cost provider in our market. We want to offer a great product/service and let owners decide what's important to them.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Spencer Sutton

agreed... I think PM as a business until you get to 2k units or better is a pretty tough go unless you up charge for everything.. or you work for small wages.

But since we are talking about Turn key... one needs to keep the marketing message in mind... Where you have turn key companies putting out the Performa's and they strive to keep those numbers in check... So when they go to a ( use your words a non low cost provider) it blows their numbers they told the folks.. and next thing you know they are getting blow back and realize they need to bring PM in house to control costs.. Since they are making 10 to 20k cash up front they can do PM basically for cost ,,, keep their clients happy because the numbers are as they advertised..

One of my long time clients up in Indy has about 1500 doors... He has never in the 15 years Ive known him used the PM company as any kind of profit center.. it makes enough to pay for staff but he keeps costs in control for the turn key buyers..

So I totally get were your coming from and I would never do PM personally without getting paid a bunch of money to do it. Way to much drama with the tenant base you deal with day in and day out...

So that is why in my mind turn key companies have PM in house..

1. Control Costs

2. ability to keep the performance in line with what they advertise.

3. Alleviate the total melt down scenario that I have seen ( especially in Detroit) IE the PM ran off with 300k of owners rents..

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Alan Mackenthun

Rental Property Investor · Englewood FL & Prior Lake, MN · Member since 2012 · 107 posts · 33 votes

11y

Originally posted by @Kevin Trumbull:

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?

You need to visit the properties, walk the neighborhood and judge for yourself. I don't think you'll find A, B, C, .. neighborhood ratings anywhere. A real estate agent cannot even estimate a rating as it could be considered steering (illegal).

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Gaurav M.

Investor · Irvine, CA · Member since 2014 · 53 posts · 27 votes

11y

Agree with the comments here that turnkey has really no meaning. To me it is really no different that buying a property directly from the MLS. If you have a good agent, property manager and contractor in place, you'd rather not go with turnkey. Not to mention the premium that you'll pay for turnkey. Lot of people think turnkey is "hassle free and passive" investing. I don't see how. It still takes the same amount of time and effort (if not more) to do your due diligence.

I have nothing against turnkeys. I know investors who have been happy with their turnkey experience. You just need to analyze every deal closely and figure out if its the best investment for you. Not every turnkey is a great investment.

@Spencer Sutton has some good tips on his blog for out of state investors buying turnkey.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Gaurav M.

the main difference is hiring a contractor from afar can be something that is very hard to do bordering on a nightmare scenario... I think closing on the deal once it has all been updated and rehabbed .. then doing your own post rehab inspection is safer than risking a contractor walking off with your dough.. if your not in the business and passive this can be very risky approach

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Gaurav M.

Investor · Irvine, CA · Member since 2014 · 53 posts · 27 votes

11y

Originally posted by @Jay Hinrichs:

@Gaurav M.

the main difference is hiring a contractor from afar can be something that is very hard to do bordering on a nightmare scenario... I think closing on the deal once it has all been updated and rehabbed .. then doing your own post rehab inspection is safer than risking a contractor walking off with your dough.. if your not in the business and passive this can be very risky approach

Agreed! I should have mentioned that its not faint of the heart. Also the emphasis on great property manager and contractor.

Yes there are many things that can go wrong. I did long distance rehab on a few properties in Phoenix area a few years back. I guess I was lucky that it didn't turn into a nightmare. But I also did have a great Property Manager and contractor. Someone whom I could trust to not rip me off.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

11y

@Gaurav M.

it can happen to the best of us.. having been a HML who did 300 plus rehab loans a year I have some pretty good first hand knowledge about rehab contractors and the good ones and then the bad ones.

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Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

11y

Originally posted by @Spencer Sutton:

Is there a conflict of interest for turnkey providers who are also property managers?

This may need to become a post itself but I was talking to an investor the other day who noticed something strange.

His house sat vacant and was told 'we're just not getting applications for the area'...but at the same time this group was filling up turnkey packages of houses to sell to out of state investors.

It seems the temptation would be for a turnkey/PM to fill up a package of 3 or 5 or 10 houses to be sold for a profit of $10,000 - $20,000 (or higher per house) and be less interested to fill up a house where they only get paid 10% management fee.

Is it or isn't it a conflict of interest?

Interested in different people's perspective.

@Jay Hinrichs I have read through the thread and I agree with something stated earlier, this is not a Turnkey issue. This is just another example of someone without very good basic, business principles buying and selling junk to an equally poor decision maker.

As for this question about turnkey companies and owning the property management company, I don't think it is a conflict of interest. It is not a moral dilemma or anything else that rises to that level.

To me, property management is a separate business from Turnkey and always has been. Either the property management company performs with integrity or they don't. The fact that it is owned by a Turn key company or not has nothing to do with it, in my opinion. To illustrate my point, you can ask the same question about a property management company when you question whether or not they give preferential treatment to owners with more properties over owners with just one property.

The question is always going to be front and center for property owners and it should be. Whether they buy from a TK provider or buy it themselves and hire a property management company, the question will always be there as it relates to how am I going to be treated.

Spencer manages a lot of properties as do we. We are in three markets now and just went over 3,000 properties and sometimes things happen. Properties stay vacant for long periods of time for no rhyme nor reason. Great paying tenants move out in the middle of the night and sometimes properties stay occupied for years without a peep when all along we thought they would be an issue. Property management is not an exact science. You work your butt off, have a set of KPI's that you track on a daily basis and you hold your company and your team accountable to perform on those KPI's for your clients. No different than any other business and same holds true for turnkey companies.

So I would say the real issues are people and integrity. If you deal with good people that know how to operate a profitable business with a stellar reputation, then you are probably going to be ok. If you deal with people promising the moon, lousy business presence and a "stay small keep it all mentality" (meaning they purposely stay small and don't hire team members in order to hold down costs), then whether they are a turnkey company or not makes no difference. They will probably be lousy property managers!

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Gautam Venkatesan

Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes

11y

@Chris Clothier

could you please expound on the key performance indicators you use to track PM companies?

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Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

11y

Originally posted by @Gautam Venkatesan:

@Chris Clothier

could you please expound on the key performance indicators you use to track PM companies?

Hi Gautam,

I will start a separate thread and list them out or send you an email. That would probably be a hijacking of the thread if we started down the KPI conversation!

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Shai Neubauer

Flipper/Rehabber · Brooklyn, NY · Member since 2015 · 41 posts · 19 votes

11y

Great thread.

Chris, can you link to the new thread whenever you post it.

Thanks.

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Spencer SuttonBusiness Member

OP

Investor · Birmingham, AL · Member since 2015 · 119 posts · 148 votes

11y

@Chris Clothier

Thanks for your input and on spot. At the end of the day integrity, trust and a solid business model is what's needed for any RE group to do well long term.

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Gautam Venkatesan

Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes

11y

Originally posted by @Chris Clothier:

Originally posted by @Gautam Venkatesan:

@Chris Clothier

could you please expound on the key performance indicators you use to track PM companies?

Hi Gautam,

I will start a separate thread and list them out or send you an email. That would probably be a hijacking of the thread if we started down the KPI conversation!

Much appreciated sir!

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Zoran M.

Real Estate Investor · Cleveland, OH · Member since 2013 · 301 posts · 112 votes

11y

@Chris Clothier - love that you track KPIs. Its imperative for any business.

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Mark Shaffar

Real Estate Agent · Madison, WI · Member since 2015 · 328 posts · 88 votes

11y

Originally posted by @Gaurav M.:

Originally posted by @Jay Hinrichs:

@Gaurav M.

the main difference is hiring a contractor from afar can be something that is very hard to do bordering on a nightmare scenario... I think closing on the deal once it has all been updated and rehabbed .. then doing your own post rehab inspection is safer than risking a contractor walking off with your dough.. if your not in the business and passive this can be very risky approach

Agreed! I should have mentioned that its not faint of the heart. Also the emphasis on great property manager and contractor.

Yes there are many things that can go wrong. I did long distance rehab on a few properties in Phoenix area a few years back. I guess I was lucky that it didn't turn into a nightmare. But I also did have a great Property Manager and contractor. Someone whom I could trust to not rip me off.

Seems like the general thrust of this thread comes up on threads related to any real estate investing. You need to do due diligence on your contractors, neighborhoods, PMs, and/ or turnkey providers. DIY without turnkey doesn't eliminate risk.

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Brandon Montano

Real Estate Investor · San Diego, CA · Member since 2015 · 6 posts · 1 vote

11y

When dealing with a turn key company, one of the biggest things to consider is the company. How many deals have they done? Are their clients happy after purchasing an investment. The company I work for helps clients from find investment opportunities that are specifically tailored to their goals all the way down till where they want to sell. If there are any issues during that process they have a company that they can fall back on. The biggest thing I make my clients understand is the area and the risks involved. If your looking to invest outside of your backyard with a company and want a passive form of income make sure you ask what are the vacancy rates, what crimes have happened in the area, what are the schools like, is it a renters market, how strongly has the neighborhood appreciated, and so on. There is never wrong with asking.

There is many questions that need to be asked and the reason why my clients have become successful with turn key investments is because I am very transparent with every property that they are looking for.

By the way my company has properties in Birmingham Alabama and after doing my research there are some tough neighborhoods but in some areas they are completely safe. For instance having 0 crimes in the surrounding area is a plus in a market.

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Chris ClothierBusiness Member

Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes

11y

Here is the thread with the KPI that we track. Feel free to comment or even leave the key performance indicators that you think are important if they are not listed.

http://www.biggerpockets.com/forums/311/topics/200...

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Turnkey Deal Gone Bad...

Turnkey Deal Gone Bad...

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