My first Turn Key deal - its not impressive...

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My first Turn Key deal - its not impressive...

Mike E.
Investor · Orange, CA · Member since 2015 · 16 posts · 29 votes

Ok so I am extremely embarrassed to put these numbers out to the public but hopefully someone can learn from my amateur mistakes...

I bought a house in DFW area from a Turn key provider, apparently the best in the business (Memphis Invest). I flew out, spent the day and was satisfied with everything I saw. So I am ready to make the move... Well hit some hiccups along the way and ran into much higher insurance than what was proposed - by about $500  The estimated number on the initial estimated sheet looked like this-

Purchase - 128,900

20% down - 25,780

closing costs - 1,500

Rent approx - 1,225-1,325

Est Prop Taxes - 2,329

Est ROI - 13.46%

Est cash flow after fixed expenses- 13.46%

Hooray! Right? Nope, wrong... Here are my actual numbers 

Purchase - 128,900

Down payment - 25,780

Closing costs -  2,966

Prop Taxes - 2,842.8

Insurance - 190.58

Rent - 1295

PM Fee - 129.5

Actual cash flow after expenses and 5% vac and 5% expenses - $92.80

Actual ROI - 3.7ish %

Folks, not that I didn't know before, but ALWAYS, I mean ALWAYS check ALL of your numbers. Also, never take anything for face value when dealing with anyone. I thought I could trust my "adviser" but that clearly is not the case. I am quite embarrassed as I clearly did NOT analyze this enough... I did work my numbers, but when everything shook out at the end these are the real numbers. I found myself half way into this deal with my earnest money on the line and almost walked away the day of signing as i wasn't feeling comfortable, but I clearly should I have.  I really wanted to make this work for me as I am a busy professional that doesn't have the time to go to auctions/hunt through mlls/finds deals, rehab, list, repeat... I am also in market that you cant buy and cash flow out the gate, we are also on the high end of the market fluctuations right now in So California. 

I am definitely going to look at other strategies and perhaps other turnkey companies to see what else might possibly make sense. I have a goal to acquire many more properties in the coming years, my primary target currently is 10 in the next 6 years. I have already bought 1, so 9 to go! Any tips, advice, strategies or opportunities are welcomed- please PM me. 

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Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
10y

So, I held off from posting on here yesterday because I felt like the best course of action is always to call the client directly if someone is not happy.  That is what any good business owner should always so first.  Second, I listened to what he had to say and immediately offered to buy this property back full price plus cover his closing costs.  No dollar figure, no profit number and no sale is worth my families' or companies' reputation.  I made this offer to Mike based on a couple of things:

1.  He had just closed on the property two weeks ago.
2.  I felt that his experience in closing this property was not up to our standards.  He had too many questions and I felt we did not do enough to answer his questions adequately before he closed.  

During the call he took responsibility for being a grown and informed investor and I took responsibility for my team not making sure he was fully satisfied and completely happy with the property and the numbers. I think he struggled to take me up on my offer because he ultimately made the decision that the investment was the right one for him and he closed.  That showed humility on his part and I appreciated it.  Upon further inspection of the numbers, there are a few things that he and I cleared up.

1.  Taxes are $2,369 on this property.  That is pulled directly from the tax certificate and $40 higher than 2014 which is the number we originally gave him.  The Hud-1 was a little confusing and Mike believed that his taxes may have been over $2,800.  They are not.

2.  The property is in a flood zone, but an small, odd one at best with a drainage ditch located a couple of streets away.  The property was listed with flood insurance when it was sold and we were able to provide insurance at a cost of $150 per month to Mike.  He did a lot of due diligence and worked hard on his own to find adequate insurance and eventually went with a policy that had a higher premium and lower deductible. He felt the insurance we provided had too high of a deductible.  That is a very fair assessment and the insurance costs ultimately eat deep into his return.

3.  Lastly, the property was occupied with a paying tenant at closing.  They had signed a 2-year lease and paid the first year in full.  There was some confusion as to was he receiving the full rent from day one which only added to his angst.    

I want to be clear that we do not have a policy nor do we have a guarantee that we will buy properties back from investors.  We do, however, work very hard to make sure that every investor is fully informed and fully prepared and happy with the investment that they make.  We do not deal with these types of situations often if ever!  

But in this case, I thought that we as a team could have done better before Mike closed and met his expectations.  We didn't in this case and, with such a short period of time having passed, I did not hesitate to offer to buy the property back 100%.   

Mike was extremely professional and helpful to me yesterday on our call.  Ultimately it was his demeanor on the call and his handling of our conversation that made this an easy call for me and hopefully I earned the ability to get a "do-over" with him on other properties in the future. 

 As for this one, it is a great property and it will perform.  I have complete faith in the incredible team that we have in Dallas.  However, with it being located in a flood cert. zone and lenders requiring that insurance there will be little room for error.  It will either go into a Clothiers' personal portfolio or possibly an investor with a larger portfolio who will use this property to round out their holdings. 

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    10y

    So, I held off from posting on here yesterday because I felt like the best course of action is always to call the client directly if someone is not happy.  That is what any good business owner should always so first.  Second, I listened to what he had to say and immediately offered to buy this property back full price plus cover his closing costs.  No dollar figure, no profit number and no sale is worth my families' or companies' reputation.  I made this offer to Mike based on a couple of things:

    1.  He had just closed on the property two weeks ago.
    2.  I felt that his experience in closing this property was not up to our standards.  He had too many questions and I felt we did not do enough to answer his questions adequately before he closed.  

    During the call he took responsibility for being a grown and informed investor and I took responsibility for my team not making sure he was fully satisfied and completely happy with the property and the numbers. I think he struggled to take me up on my offer because he ultimately made the decision that the investment was the right one for him and he closed.  That showed humility on his part and I appreciated it.  Upon further inspection of the numbers, there are a few things that he and I cleared up.

    1.  Taxes are $2,369 on this property.  That is pulled directly from the tax certificate and $40 higher than 2014 which is the number we originally gave him.  The Hud-1 was a little confusing and Mike believed that his taxes may have been over $2,800.  They are not.

    2.  The property is in a flood zone, but an small, odd one at best with a drainage ditch located a couple of streets away.  The property was listed with flood insurance when it was sold and we were able to provide insurance at a cost of $150 per month to Mike.  He did a lot of due diligence and worked hard on his own to find adequate insurance and eventually went with a policy that had a higher premium and lower deductible. He felt the insurance we provided had too high of a deductible.  That is a very fair assessment and the insurance costs ultimately eat deep into his return.

    3.  Lastly, the property was occupied with a paying tenant at closing.  They had signed a 2-year lease and paid the first year in full.  There was some confusion as to was he receiving the full rent from day one which only added to his angst.    

    I want to be clear that we do not have a policy nor do we have a guarantee that we will buy properties back from investors.  We do, however, work very hard to make sure that every investor is fully informed and fully prepared and happy with the investment that they make.  We do not deal with these types of situations often if ever!  

    But in this case, I thought that we as a team could have done better before Mike closed and met his expectations.  We didn't in this case and, with such a short period of time having passed, I did not hesitate to offer to buy the property back 100%.   

    Mike was extremely professional and helpful to me yesterday on our call.  Ultimately it was his demeanor on the call and his handling of our conversation that made this an easy call for me and hopefully I earned the ability to get a "do-over" with him on other properties in the future. 

     As for this one, it is a great property and it will perform.  I have complete faith in the incredible team that we have in Dallas.  However, with it being located in a flood cert. zone and lenders requiring that insurance there will be little room for error.  It will either go into a Clothiers' personal portfolio or possibly an investor with a larger portfolio who will use this property to round out their holdings. 

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  • Dana WhickerPro Member
    Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
    10y

    @Chris Clothier Impressive to say the least.

    1Reply
  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    10y

    As for foundations, @Jay Hinrichs we have standard procedures to install soaker systems on every property and every signed lease has terms spelled out for the tenant to keep it operational. A new policy we put in place recently is to have an engineers report on every property we purchase and provide that to the owner. We also have transferable warranty on every property where we do foundation work. After the foundation work is completed, a new engineers survey is completed so on every property, whether work is done or not, there is a baseline measurement so we can track if foundation work is needed. The best foundation companies are going to shoot you straight and stay away from lifetime warranties. They are not worth the paper they are printed on. They will however offer 3-5 year warranties on all piers they install and will make adjustments if needed.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Chris Clothier  good work... foundations just go with the territory there ...

    as long as someone is aware of what needs to be done to keep your property in good order and not freak out if the houses settles because of expansive soils that's half the battle.

    I have been in some doozies in my time... We can have a little of that here in ORegon if a builder built on non compacted fill.. but nothing like what happens there were you just have gods dirt moving on you... :) 

    Flood insurance is a joke these days... one year its out the next year they redraw the maps.. frustrating.

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @Mike E. Well then we have to change the title to "and it's impressive" I know Chris has tons of repeat business and this would be one example why. This tk deal looked good enough as is but who is behind that deal can be more important. Dallas investing should be better than average in the future according to all the info I have seen. You can scale up if you wish knowing a huge part of the most common risks are being mitigated by your local team. Many TK buyers are not so fortunate. Good luck!

    2Reply
  • David J.
    Investor · Houston, TX · Member since 2009 · 210 posts · 261 votes
    10y

    A 1% rent-to-price ratio in a Texas market with 2-3.5% property taxes is not scalable in my opinion.  You can do better than that all day right off the mls.  The only thing that makes these numbers even remotely tolerable is the low interest 30-yr financing you put in place.  Even with this financing, your margin of error is so small that one flat tire will derail your return for a half a decade. 

    I am not discounting the service MI has provided, and I am glad to see this was turned into a great PR moment, but in my opinion, the risk does not outweigh the reward with these numbers, and these numbers make sense for capital heavy investors that have to deploy enormous amounts of capital.  Hedge funds (often characterized as dumb money) don't even buy 1%ers in the Houston and Dallas markets. 

    TKs obviously have a place in the market and provide a service, but remember there are no "lemon laws" protecting consumers of these products.  Buyer beware.

    And remember when @Ben Leybovichgave himself credit for the $100 a door standard?  Priceless

    3Reply
  • Dan Hatch
    Investor · Milton, FL · Member since 2015 · 44 posts · 16 votes
    10y
    Thanks for sharing
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @David J.  I see these rent to price ratios being like the west coast basically when you factor in tax's etc.  the play here is to let your tenant pay off your home and your basically doing a forced savings... so at the end of the mortgage term you own a free and clear home worth hopefully what you paid for it Minus the 3 or 4 times you had to rehab it over the years.. and you can sell off and grab the cash...

    I don't see these as cash flow profit deals at all.. and whatever cash flow is so small that it gets lost in the clutter of life and owning RE... but I do see it as forced savings.

    And one of the reasons why CA investors will buy with break even or neg cash flow because over 20 or 30 years history has told them the property will be worth 2 to 10X what you paid for it... will Texas properties raise in value that much over the next 20 to 30 years.. History says not really.. But could they double.. maybe and probably.. that's when the real money is made for those that buy on credit.

    You make some excellent counter points though...

    What makes out of CA investing attractive is that one can get into Real Estate game for 20 to 30k its hard to do it in CA. or in the better parts..

    In my early career of selling retirement country land.. that was the play in the late 70's and 80's with the hey day of course in the 50  to 60's... but its was the same theme basically get yourself started in RE.. because you could buy a lot form me for 10k with 1k down and we carry the paper at 150 a month for 7 years... One year our family sold over 1000 of these LOL... But I see the current TK and out of state parallels big time in the same subconscious reasons folks move for less expensive properties out of state.

    Not to mention its pounded into everyone's head that the way to get wealthy is to buy RE and the best RE to buy is cash flow appreciation is the icing on the cake.. Now me I don't buy that one at all but that's me and a CA and West coast mind set.

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    That is something Cali investors should keep in mind... Jays point on cash flow. I do see many chasing it and if appreciation is only icing on the cake, that better be one hell of a cake. If cash flow is your main goal, you can rent out one or two parking spaces in LA for more cash flow than many far away homes can produce. I have been renting one myself for 3+ years for my surf biz. He rents 3 more for about $700 bills extra CF a month. 

    2Reply
  • Austin Hughes
    Rental Property Investor · Lubbock, TX · Member since 2015 · 455 posts · 182 votes
    10y

    My first reaction is- a Memphis Company doing a turnkey in Dalls?!

    Haha, but either way, that's not a bad rental rate! You're positively cash flowing, AND putting money aside every month to cover the unforeseen happenings. 

    DFW is expanding in a big way with all of the companies that are flocking to the area. Like others have said, hopefully the house appreciates too! Also, there are other strategies you could implement to make the most of this property.  Especially in high-appreciation areas like Dallas, Houston, and Austin, owner financing on a wraparound mortgage or doing a lease to own are GREAT strategies.

    Here's what it would look like if you did a lease option:

    • Sell the house for $140K-$160K on a 2 year option. (the high price is because of appreciation.)
    • They pay you a down payment, anywhere from $7K to $20K, which is non-refundable.
    • You rent it for slightly above the market rent, maybe $1400 or $1500. People are eager to pay this if they know they'll be owning the home and building equity.

    Then, you can sell the house, net about $20,000 in profit, and take that $50,000 that you now have in cash to a better turnkey opportunity or lend to fix/flips at higher rates.

    0Reply
  • Ryan Inman
    Financial Planner · Las Vegas, NV · Member since 2015 · 66 posts · 19 votes
    10y

    One thing that I did not like at all, and was a HUGE trap, was the fact that IF (and it always did) the appraisal came in low, they would not negotiate on the price and you had to come out of pocket on the difference. I know that this is a lending and industry standard, but the level of experience that the average buyer is quite low or very new to RE. Its not fraud but really putting the investor in a very bad spot for their investment in the short term, already starting off with a loss.

    Ex: If the home appraised at 100k, but the purchase price was 115k, you would not only be expected to come up with the 20% (or 20k down) but also an additional 15k to get up to the purchase price. The lender (that they nearly force you to use) is well aware of the appraisals coming in low and this whole process is mentioned several times ahead of closing. They do enough volume that they know what to expect and make sure to fully disclose it, which is great, but this is a very big value trap for unsuspecting new investors.

    Its great that this was your first real estate transaction, you took the jump and made a purchase. There are several other mistakes you could have made that would have been way worse, but its a learning experience and you are still in the green. Good luck on future investments.

    Ryan

    1Reply
  • Account Closed
    Contractor · Raleigh, NC · Member since 2014 · 651 posts · 510 votes
    10y

    @Mike E.Though in human terms it was nice that they bought back the house from you, it makes me uneasy.   I read once of a financial planner who had offered to buy back an investment he had sold to a client and that action of buying back triggered all kinds of red flags with the SEC.  Did you have no representation when you did this deal i.e. attorney or realtor?  

    I'd be interested if any of the attorneys on this site would weigh in on this (not this situation specifically but refunds of investments in general).  I know nothing but it seems highly irregular.

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  • Joe Kim
    Rental Property Investor · SF Bay Area, CA · Member since 2014 · 352 posts · 543 votes
    10y

    My biggest advice is don't let the first deal turn you away from REI.

    Given rising values, it's harder to find higher cash flowing properties than in the recent past for sure.

    My first turnkey provider deal was in houston at end of 2013

    100K property "fully rehabbed"

    Rent $1200/month  (1.2% rent to value..not bad right?)

    estimated cash flow $522/month! on 20% down

    Tenant in place for the first 12 months with no vacancy!   Sounds great right?

    Actual cash flow was really $400/month after real taxes, insurance (no vacancy)  maintenance cost not included...see below

    I had on average $150/month in maintenance costs for the entire first year.  Partly the rehab could have been done a little better but largely the tenant was extremely ....let's just say "high maintenance" with all puns intended.  It was about $1800 in maintenance in the first year.  So let's know off $150 off the cash flow = now it's $250/month.

    I raised rent by $100 at the time of renewal to "force" the tenant out and find a new tenant.   Amazingly the tenant renewed at $1300/month.   Well, the maintenance requests kept up still around $150/month.  So the cash flow was $350/month...not the predicted 522+100 = 622/month

    And then I got hit with double whammy in the same month! Roof leaked and needed completely new roof$5000 and AC broke $1000. $6000 Capex in the beginning of 2nd year! (provider gave me $2000 credit at the time of purchase for the roof which was aging but not predicted to fail in 1 year!!)

    Now This past October renewal came up again.  I raised rent AGAIN now by $50/month for 6 month lease (so renewal can reset in April).   Tenant renewed again!

    $1350/month rent on 100K property.  Cash flow is now around $475/month (maintenance requests now finally under control)

    I think the cash flow game is inconsistent but somethings can mitigate it if you can raise rents and if you have some appreciation.   I got both in Houston over these 2 years.   House is now worth around 120K. 

    Overall happy with the investment especially if I can continue to avoid vacancy and/or raise rents.

    1Reply
  • Mya Austin
    Galion, OH · Member since 2015 · 24 posts · 6 votes
    10y

    Well, though I have worked in the industry for years and have been part owner of two houses in my life . . . the buying properties for income/holdings, etc. is new. & Have not begun to purchase as of yet.  As a "newbie" on the "going to do this" list---the positive thing I see is that if these #s are correct, you still have the property and the perks that do come with that & you are above (earning something) versus being in the hole.  :)   

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    the loan officer made a mistake "PM Fee - 129.5" your down payment created an immediate equity of 20%, the loan was an LTV of 80% and thus there should NOT have been any PMI. You can ALWAYS get pmi withdrawn - - call the loan servicing company and start the process.

    Reserves and Vacancies all part of commercial financing and vary greatly by the bank.

    However, R&V are loan qualification numbers and once you close escrow, they are no longer part of your PnL.

    0Reply
  • Bryan Ratcliff
    Memphis, TN · Member since 2015 · 12 posts · 11 votes
    10y

    I think the PM fee is property management, not PMI. $129.50 would be 10% of the rent which is typical for a management fee.

    1Reply
  • Cliff Harrison
    Rental Property Investor · Shawnee Mission, KS · Member since 2014 · 205 posts · 136 votes
    10y

    The appraisal at $100 over the asking price is interesting.  That seems so common.  I've always wanted to get appraisals completed where the appraiser does not get a copy of the contract.

    In my opinion, 5% maintenance is too low.

    And you need CapEx. On most of my properties I calculated this out to over $110 per month based on average component failure rates and the replacement costs.

    On most of my properties I am budgeting 20% gross rent for combined Expense and CapEx. Some of them are well under budget and some are well over. Since I just have less than one year of actuals to grade myself so far I'm optimistic that my forecast will work out in the aggregate over the long run. I also use 10% vacancy. I mean, why not be conservative when evaluating the deal - don't use numbers from someone who needs to sell you the deal.

    Good luck and thanks for posting!

    Cliff

    0Reply
  • Jonathan J. Miller
    Lender · Denver, CO · Member since 2015 · 275 posts · 35 votes
    10y

    Not bad.  Keep it going and congratulations!

    0Reply
  • Cynthia Calhoun
    Full-Time Investor · Woodstock, GA · Member since 2015 · 105 posts · 47 votes
    10y

    @MikeE.

    You are brave to throw yourself out there for all to see. I did the same, and I must say, it's liberating. OK, so I think the hard lesson and the sad truth is that you were deceived by people posing to be professional consultants. That's where the most harm comes in; however, any day you don't lose money in a RE transaction, is a not necessarily a bad day...maybe not a good day; but it could have been much worse! Chalk it up to experience, and a lesson well learned.  If you went with your own insurance provider, then, you may be able to decrease that premium amount significantly. I believe I got a quote from Memphis Invest once; and ask their insurance provider came in at around $780/year. That was including storm "and" flood insurance. Just my thoughts; but congrats for the leap of faith and the life lesson. Time to move on to next...

    1Reply
  • Douglas SkipworthBusiness Member
    Rental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    @Cynthia Calhoun said it well.

    Here's what I've always heard about learning lessons.

    "Experience is what you get, when you don't get what you want!"

    I've also heard this one a lot.

    "When a man with money meets a man with experience, the man with experience walks away with the money and the man with money walks away with experience!"

    Thanks, @Mike E. for sharing. BP is an awesome place for all of us to learn together!

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  • Cynthia Calhoun
    Full-Time Investor · Woodstock, GA · Member since 2015 · 105 posts · 47 votes
    10y

    @Austin Hughes / @MikeE.

    #1. Technically...Lease Options are illegal in TX. 

    See: SB 629, authored by Sen. Eddie Lucio (Brownsville, TX) and sponsored by Rep. Harold Dutton (Houston, TX), 'and' HB 1823, authored by Rep. Harold Dutton and sponsored by Sen. Eddie Lucio.

    #2. "If and when" you do a lease option in any other states...You should "never" label it a down payment, your contract "must" note that this up-front money is an "Option Fee". Then it will stand up in court as non-refundable.

    2Reply
  • Rachel Pervis
    Real Estate Consultant · Houston, TX · Member since 2015 · 172 posts · 51 votes
    10y

    Thanks Mike for sharing your experience, it was very helpful. If I may I would like to share that in Texas I use the 1% rule on residential homes as a quick way to determine an estimate of the PITI before I crunch anymore numbers when figuring whether there will be any cash flow and the estimated amount of cash flow. So on a property with a sales price of $128,000 my estimated amount for PITI would be $1,280. So with rent rates around $1,295. I would have known that my initial ROI was going to be tight causing me to evaluate further my investment strategy for this property.

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