Turnkey Deal Gone Bad...

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Turnkey Deal Gone Bad...

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

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??

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

@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.

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  • Spencer SuttonBusiness Member
    OP
    Investor · Birmingham, AL · Member since 2015 · 119 posts · 148 votes
    11y

    Thanks @Chris Clothier

     I know that Matthew just shared some of the KPIs we track at gkhouses.com. We're in growth mode like you all (a good bit smaller though) and I'd love to get on the phone sometime and share ideas.

    Feel free to shoot me an email if you're interested.

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  • Michael Hayworth
    Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes
    11y

    So not to derail this thread, but I'm wondering about turnkey..

    I've been rehabbing homes for years now. I can find deals even in a bad economy. And I've been able to find really good quality renters. So I think, "why don't I buy some extra properties and sell them turnkey"?

    But then my next thought is....why would I do all the work of getting a good tenant in there to sell it to someone else for the same or less than I could sell it for as a flip? And with a flip there's no "getting a tenant" hassle.

    So what am I missing? Is turnkey only for markets or neighborhoods where flips are tougher to make money on?

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

    @Michael Hayworth

      yes generally speaking .... most turn key investors are buy and hold and want to hit a certain delta vs a vi returns... and for sure if you can flip it retail to a homeowner then there is no reason to be in the turn key business and take on that added liability.. however the neighborhoods Generrally are far different.. you don't have a lot of turn key rehab going in areas that also have a lot of retail flip s going on... apples and oranges.

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  • Mhamed Channaj
    Investor · Pittsburgh, PA · Member since 2014 · 68 posts · 12 votes
    11y

    what do you expect from D & F neighborhood ?

    0Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    11y
    Originally posted by @Mhamed Channaj:

    what do you expect from D & F neighborhood ?

    Tenants not paying
    Tenants breaking leases
    Evictions
    High vacancy
    Thousands of dollars in damage repair at tenant turnover
    Stolen air conditioners
    Stripped copper
    Drug dealers
    Half a dozen people living there without being on the lease

    Other than that, they're not bad.

    5Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    11y
    Originally posted by @Michael Hayworth:

    So not to derail this thread, but I'm wondering about turnkey..

    I've been rehabbing homes for years now. I can find deals even in a bad economy. And I've been able to find really good quality renters. So I think, "why don't I buy some extra properties and sell them turnkey"?

    But then my next thought is....why would I do all the work of getting a good tenant in there to sell it to someone else for the same or less than I could sell it for as a flip? And with a flip there's no "getting a tenant" hassle.

    So what am I missing? Is turnkey only for markets or neighborhoods where flips are tougher to make money on?

    Just for clarification, a turn key is a flip. It's just not a retail flip. Generally, for a retail flip to be successful, the property has to be in A class. owner occupied neighborhood. These properties don't make the best rentals because they will have lower ROI's. Most turn key rentals will be in B or C class areas.

    0Reply
  • Mhamed Channaj
    Investor · Pittsburgh, PA · Member since 2014 · 68 posts · 12 votes
    11y

    @Mike D'Arrigo Exactly thank you. 

    0Reply
  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    11y
    Originally posted by @Michael Hayworth:

    So not to derail this thread, but I'm wondering about turnkey..

    I've been rehabbing homes for years now. I can find deals even in a bad economy. And I've been able to find really good quality renters. So I think, "why don't I buy some extra properties and sell them turnkey"?

    But then my next thought is....why would I do all the work of getting a good tenant in there to sell it to someone else for the same or less than I could sell it for as a flip? And with a flip there's no "getting a tenant" hassle.

    So what am I missing? Is turnkey only for markets or neighborhoods where flips are tougher to make money on?

    I think the only thing you are missing is volume.  And the fact that the word turnkey is just a marketing term.  It really has no meaning and just infers that much of the work is done for an investor and they can invest passively.

    So if you could buy enough "extras" - more than you could retail - and you could purchase, renovate and sell them for a healthy profit for you and the rental rates on those properties allow the purchasing investor to make the return he is looking for....then you may have something that works.  

    We routinely get full price offers on our properties - especially in DFW - from retail buyers, but we are built for volume and speed so we do not often sell the retail route.  That fact alone should tell you that turnkey is not limited to tough neighborhoods or areas where you cannot sell retail.  Unfortunately that is a lot of the junk that gets peddled as turnkey, but not all of it is that way.

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  • Zach Adams
    Investor · Vista, CA · Member since 2015 · 163 posts · 58 votes
    11y
    Originally posted by @Jay Hinrichs:

    @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..

     Damn good stuff @Jay Hinrichs

    1Reply
  • Jose Salcedo
    Professional · Austin, TX · Member since 2015 · 11 posts · 3 votes
    11y

    Market analysis can be managed from afar but it requires the right team.  First time investors should be involved on every aspect of that investment to gain a true understanding.  In order to grow you should be able to trust your business partners so you can hold everyone accountable, including yourself. 

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    11y

    I think with turnkey many investors and TK start ups are new. It's the blind leading the blind and  when something goes wrong ( usually does ) they both try to point fingers at each other and claim they were duped! lol

    Over the years on this site it is VERY RARE that you hear of people that bought turn key and now say " It's the best decision of my life " and " Returns have been amazing. My only problem is I can't buy more and am tapped out! ".

    Usually it's crickets from these people that bought TK. I do know people that bought houses with cash back in 2010 or so and the values have almost doubled They rehabbed themselves so there was a bunch of built in equity down the road even if they did not cash flow that greatly. Rents were depressed back then in markets and has come back stronger but now for most places is just averaging. These properties were bought in great areas.

    Today it seems that most of the great areas have inflated. Residential properties that are real cheap are for a reason and the property and area comes into question. If you buy TK with say 10k built in equity and okay cash flow and the tenant goes out that slim margin you had as a buyer can erode quickly.

    I think it is amazing what some of these large PM companies do. I am on the commercial transaction side by choice. PM is ALOT of work and headache for reduced returns. I think the key is will WHO you do business with be around when the going gets tough??

    It's almost like a marriage in that you stick it through the relationship with the good and the bad times. I don't do PM work but after a transaction I stick with the client on a constant basis and will try to help when they ask. Others use a "one and done" approach to a client relationship and go for volume. Any successful business long term is about relationship building on a continual basis. It's like a car. If you keep the car in good shape and keep the gas filled it moves along nicely.

    If you neglect the car and stop putting in gas the car breaks down and starts to fall apart.

    TK properties are not passive in my opinion. I think that is a sellable word buzzed through the industry. People with a little coin like the thought of owning something hands off with no issues so they buy into the dream.

    The stories I hear today are where people bought 50k or 60k houses for 1,200 rent in an A area  5 years ago during the bottom for cash. Today those same houses are going for 120,000 or more in the marketplace. At 1% or less rent to sales price ratio today these houses you can buy today are not monster cash flowing but are in better areas. The stuff now in the low 50k or 60k pricing tends to be in rough areas where the main component is not appreciation but only cash flow so you have to buy right for the condition of the property and repairs needed or you can lose everything.

    I think research would show in these rougher areas cash flow is the main driver and that over time little to no appreciation at all occurs. I know some people that buy in higher end areas but they expect little to zero cash flow and the PM charges them less because of no headaches to deal with. They are basically holding for some appreciation, rent growth, and principal pay down for retirement.   

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  • Mark Shaffar
    Real Estate Agent · Madison, WI · Member since 2015 · 328 posts · 88 votes
    11y

    @Joel Owens

    Seems like plenty of positive turnkey reviews on turnkey-reviews.com. I know I had a good experience. I also work for the one I was buying from so I'm not exactly unbiased.

    0Reply
  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    I am glad you made this post and I hope this drives the point home to any would be investor in D and F properties especially new investors. That great feeling you may get by thinking you purchased a property for next to nothing will soon ware away as you pay for property taxes, and maintenance as well as go through the headaches over collecting rents etc. Then your exit strategy will go out the window as well after you see what you end up with after having rented the place out for a while and are stuck with an unrecoverable repair bill. There is a saying, " long distance love is for fools" , and we all know what happens to a fool and his money. 

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