Is This Turkey Property A Good Deal?

Question

Hi Everyone,

We are about to purchase our first turnkey property, but I would love to get feedback on whether you feel these numbers are accurate and whether the house is a good buy.  This company sells the house at the beginning, and we would pay for the rehab, carrying costs, etc.  After the rehab, the company finds a tenant, and then we can refinance and pull 70-80% of the equity out depending on which lender we work with.

The information we received is below.

Address: 4363 North 62nd Street, Milwaukee, WI 53216

Price: $59,000

Rehab: $22,000

Carrying Costs: $1,000

Closing Costs: $2,000

Total Turnkey Price: $84,000

Estimated ARV: $87,000

Rental Projections:

Monthly Rent: $1,075

Taxes: $183

Management (8%): $86

Vacancy: $54

Insurance: $88

Reserve: $54

Mortgage Payment (Assuming a 5% interest rate on a 25 year note): $355.14

Net Cash Flow: $355.14

Net Annual Cash Flow: $3,071

Cash on Cash Return: $15.17%

Thanks in advance for your feedback!

Darren Budahn · Answer

I wouldn't pay $59,000 for a house on 62nd and Congress that needs over 20k in rehab. I think the ARV is optimistic. You are certainly paying retail with those numbers. There's simply no spread there. You may as well buy a flipped house and not deal with the headache of a rehab if there's no equity in the deal anyway. Honestl there's better deals on the MLS than this one IMO.

Dawn Anastasi · Answer

I'm in Milwaukee and I say at $84,000 for this property it is NOT a good deal. Run.

Jay Hinrichs · Answer

@Chris Clothier  I know too funny Chris... all these folks that are new think they invented this stuff LOL.

the pitch went like this.

put 4k down  buy 4 properties  ( your easy to get loans).  close escrow walk out of escrow with 5 to 8k per prop cash out.. you get your 4k back plus 20 to 30k in your jeans.. and the homes will cash flow 100 a month each after all in costs..

So you can imagine how many got sold that way.. all you needed was the 4k and a 700 fico and w2 income.. we recall how easy it was for financing in those days.

We were doing 20 to 40 of these per month  LOL..

Also the idea was the cash back at close was to be used for reserves this is what they were sold you put those funds into reserve to help you with your properties.

Well many of those folks had never gotten 25k in their account at anyone time.. so the reserve account went for the new Jet Ski they deserved to have.. the fabulous Hawaiian vacation they needed to have and deserved.. etc etc.

Yup the good ole days...

WE were insulated from this for 6 years as our average loan paid off in 94 days..   But when it cratered oh man.. these folks had no reserves they could not afford a simple turn over they were totally under capitalized and as we know turn key operators in those days did not sell A and B class so the assets just did not perform on a razor thin budget and then the defaults happened.. and there you go the ugly cycle.

Jay Hinrichs · Answer

@Chris Clothier   in my day of doing these it was not about the publics perception of the provider IE they are weak or strong.

It was how they were sold the deal by the West coast marketers.. and in those days as you know the value proposition and the sales pitch was   CASH BACK AT CLOSING.

not only did people get into these deals with only 1k out of pocket in the beginning ( because we allowed it and made the loan to put them into title) but they would get 4 to 8k cashout refi proceeds.

this is what drove the model... frankly had nothing to do with the vendor or turn key company.. it was all about West coast marketing pitch.

Remember these folks came to turn key from Weekend radio shows I LA.. way before BP or internet marketing. Also shows in San Diego you probably know Jay and Bill down there..

We have some of it today with Mike in the Bay ARea there are still many doing sales from their radio shows.

but when rate and term cash out refi died.. so did the model.. so then frm 09 to 2011 or 2012 it was hammer time for IRA buyers who could pay cash and or cash buyers.. now financing is back with 20% down . but no cash out..

I agree with you though having TRUE cash equity into the deals is far better than where we came from short of cash sales. and because of competition and the inner net turn key folks have had to up there game.. I think we have talked a lot how what your selling to day is not anything you sold when you started and or you would never go back to those asset class's that you originally sold.. and the same holds true for just about anyone in the business that wants to sustain a business.

Chris Clothier · Answer

@Jay Hinrichs When we first started we used this plan.  We look today at companies doing this and it just screams "brand new" company, "I have no money to operate" as a company, and "I want to put all the risk on the buyer" as a business strategy.  We were brand new to it and thought this was a good way to go about building our company, but quickly realized it made us look weak.  That is a broad stroke and you just talked about a 12-year old company still using the model successfully.  I would imagine they are very good at their unique value offeringl.

That is just my opinion as an entrepreneur and not as an investor.  As an entrepreneur, I would look to get out of this model as soon as possible just because I feel it makes me look weak as a company to investors.

As for @Marlene Goldenberg , she can decide how it makes her feel and obviously she was excited about this deal.  I think you and I are giving her the same advice that she needs to have all of her financing and planning in place before signing a contract and moving forward.  There is just too much risk, in my opinion, to go about this investment without being crystal clear on exactly how it is going to perform from start to refinance and beyond.

Chris Clothier · Answer

@Marlene Goldenberg -

I can't speak to your specific deal because I am not sure of your expectations nor your long-term investment plan.  However, when you read the other comments on here you should get a sense from a couple of people that this is a high-risk style of investment.  Probably way more risk than what any investor should take unless they are very experienced with long-term relationships in place to manage that risk.  In this scenario, it doesn't look like that is the case.

Your biggest risk is the refinancing.  In 2009, there were thousands if not millions of homeowners and investors who had refinancing in place ready to close on a Tuesday and suddenly on a Wednesday, without warning, the rules changed and they were stuck with properties that they had borrowed hard money to purchase, home equity lines to purchase, cashed in stock investments to purchase, borrowed money from friends and family to purchase ~ all with the plan to refinance most of that money back after the deal was done.  A vast majority had nowhere to turn and could not refinance their money and ended up in very bad situations.  I would not go into a deal where the definition of success is dependent on being able to execute a refinance at the end if I did not have long-term, experienced relationships in place and had experience doing deals this way.

Best of luck with however you move forward.

Brent Coombs · Answer

The word "turnkey" doesn't apply here! Someone is trying to wholesale you a home that is already multi-listed for just $47,500! So you would be throwing away $11,500 unnecessarily before you even get started on the rehab!

(Not to mention the DISCOUNT you should try to get below $47,500). And ANY home you buy should be easy enough to put into the hands of a Property Manager after you've done its repairs.

What REAL value is being offered? Hint: none!

Steve Vaughan · Answer

Last time I bought a turkey property it didn't work out lol.

Adam Slipher · Answer

Agree with Darren. Off-Market turnkeys over there are less than that.

Joshua Malik · Answer

I can't say if it is a good deal for you, but I am impressed by the deal for your seller.  It appears that they have it under contract now (for no more than the $47,500 list price I would assume) and they'll have it sold immediately for a nice profit and not even have to pay for the rehab.

Is This Turkey Property A Good Deal?

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