First Deal Gone wrong or bad PM?

Real Estate Deal Analysis & Advice
10yFollow

First Deal Gone wrong or bad PM?

Brian Naumann
Mishawaka, IN · Member since 2016 · 25 posts · 6 votes

Hi Everyone,

I closed on my first TK property in Memphis, TN on August 17th. Yay me! 

Found out during the rehab's home inspection that there were (inherited) tenants in the property during the rehab, I thought this was a good thing until I asked what their rental terms were and got no clear response from my rehabber/PM.

September 10th rolls around and its time to get PAID!!! The PM says they did a lease renewal on Sept. 7th and the tenant would be paying on the 20th. I asked, are they paying Sept rent on the 20th or Sept. and Oct rent? No response. Sept 20th comes and goes and I get a message that the tenant did not pay and the PM wants to know if I want to file a FED! Yes, I do. I am not running a charitable housing establishment.

So lets review; I've collected $0 in rent. The tenant has already gotten at least 2+ months free rent, by the time I get them out it will likely add another month. I get to pay to evict. I also get to pay 2 months PITI out of pocket! Glad I had reserve funds set aside. To add insult to injury, I also received notice that the property in un-insurable. I've talked to some trusted advisors and they said this can happen when the insurance company inspects during the rehab process and can be easily resolved. I know I'm freaking out.

So is this just bad luck or should I be firing my PM after the eviction?

Thoughts and opinions welcome.

Thanks

Brian

0Reply
47 views

Most Popular Reply

James Wise
Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
10y

I would like to chime in on something that's been mentioned in this thread a few times but I really want to hammer it home for all those who are reading. If the price points in your backyard are in the same ballpark as those in another state, stay home. 

The big midwest rental markets such as Cleveland, Cinci, Toledo, Indy, Memphis, KC, Pennsylvania etc are all pretty similar. Similar enough that it's like splitting hairs which one you decide to invest in. At Holton-Wise we get 5-6 leads a week coming in on the website from investors from the above mentioned markets looking to invest in Cleveland and we always ask them "why Cleveland?"

If you live in one of these markets or have personal ties to one of these markets then that is the market you should be investing in. Being close or having personal ties will far outweigh any small variable that makes you think one market is superior to another.

The midwestern rental product is ideal for the investor who is priced out of their own market or wants a passive investment in their own market. Things are always going to be more expensive when you are several states away as you have to rely on paying others to do everything for you. Turnkey/Property Management companies (like everyone else in the world) do not work for free so you better believe it's going to cost you more to do everything.

8Reply
See this reply in the discussion

47 Replies

Jump to latestLatest
  • Jimmy Cantave
    Miami, FL · Member since 2015 · 154 posts · 38 votes
    10y

    @brian 

    @Brian Naumann Wow months I hope you can get this resolve quickn

    1Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    What TK company? Did you check them out? Did you get any other advice or help besides them? It sounds like you have two problems..the TK company and the PM company. Are they one and the same? Why is the property uninsuerable?

    1Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    If the TK company and the PM company is the same, then I would make a clean break. They had to know during the transaction this was going to happen, thus they were not being transparent with you. I checked the chain of title on the property looks like it was never actually purchased by the TK company, rather it was Quit claimed from the old owner to them.  Last year, the owner purchases for $69,000 and you bought for $42,000.  That seems odd.  Maybe the old owner realized the challenges that area will present and decided to take a loss then sink more money into.  Who know, hard to tell.  Hopefully the property was rehabbed well, but with it not being insurable, sound like it wasn't.  With the house being vacant, when you get the insurance resolved, check the policy, it may only be good for 60 days on a vacant home.  In that area, you will certainly want it to be insured as vandalism could be an issue.  Hopefully the area was presented to you for what it is.  C class would be a stretch.

    901-848-9028
    3Reply
  • James Martin
    Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes
    10y

    WoW! It's unfortunate that you're have such a terrible experience, but the property can be insured while its vacant. These areas "C class⤵️" can be very unforgiving if your PM Company's attitude or approach is one that's laxed. 

    1Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    Yes, you can buy a vacant home policy for about $350.  Which will be good for a certain amount of time, then you would have to renew.

    901-848-9028
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Alex Craig  one part of my e book on buying out of area rentals goes into insurance and these very issues.

    I suspect this is going to get much worse before it gets better.. 

    how do you rehab a house with the tenant in them.. maybe a light turn over thats it..

    this person looks like made a cardinal error in buying low end rental in bad neighborhood probably becasue the numbers looked so good.. I suspect he will lose between rent .. and having to rehab it for real again 5 to 10k right out of the shoot. 

    and to make the statement glad I had reserves. .well anyone buying a rental without substantial reserves is just a crash and burn waiting to happen especially in low end areas like this.

    There is a reason most TK companies of high repute refuse to work in these areas anymore.. 

    I see this as someone being totally taken advantage of ...  would be nice to get a review on turnkey reviews on this company. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @Jay Hinrichs your right on everything.  These are the people who give TK a bad name. The thing that sticks out is Brian's comment that he did not get a response from PM when asking about the rent.  Good TK and PM companies who work with out of state investors must communicate the good and the bad.  The communication really separates the men from boys in this space.

    901-848-9028
    1Reply
  • Duane Kidman
    Professional · Mansfield, TX · Member since 2013 · 77 posts · 44 votes
    10y

    Whenever dealing with Turn Key properties, absolute due diligence is a must: check out the company through the State, BBB, and references; background check the people you are dealing with; get copies of tenant documentation; perform your own tenant qualification; order a house inspection; get an insurance quote; review area crime reports; speak with area businesses and Chamber of Commerce; review local school district; if you can visit and drive the area, etc.  

    Due diligence will save you most of the headaches you are dealing with most of the time.  In retrospect, it's time to do these things to assess where you are and what needs to minimize collateral damage.  Good luck.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Alex Craig  unfortunately the cycle in these price point homes is just a rinse repeat cycle.. burnt out landlord syndrome.. local wholesaler investor snags them from out of area buyer tired of losing money.

    the chances are greater than 99% that htis person will never make a dime first 3 months his cash loss's will equal 3 to 4 years of cash flow so he will never catch up... and now he is stuck.. property as it sits is probably not worth more than 15k or so to a local wholesaler / low end turn key buyer... sad but true.

    And its why I always preach on BP buy the BEST you can buy not the cheapest.. the cheapest in the midwest markets is only appropriate for locals that own lots of these and do it for a living.. these are simply not appropriate for out of area passive investors they get killed financially .

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Which TK company is this?

    Did you look at Memphis Invest for the area before purchasing?

    This goes back to 40k TK houses do not work because of crap area and the rehab for the TK operator to make money has to be more minimal in nature versus redoing everything and selling TK at 65k to 70k or more etc.

    One you are paying more but usually getting a better area, management, tenant base, and most everything is new so capital cost outlay is minimized year over year.

    Hopefully you didn't pay more than 40k plus for the area. I don't focus on residential or TK but when looking at those properties and areas look at various companies  and compare and contrast risk versus benefit.

    In those bad areas to find a good property manager you might have to pay 10 to 12% or more management fee as the tenant is more intensive and more difficult to protect the income stream. You might want to pay someone on BP here that is local to drive by and give an honest assessment of the property and area to see what you are in for. 

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    3Reply
  • James WachobBusiness Member
    Real Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 890 votes
    10y

    @Joel Owens Memphis is an amazing place for SFR investing. We have clients from around the world who have chosen Memphis as their place to invest! Homes are affordable and rents are relatively high... Let's set up a time to discuss your goals.

    James

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @James Wachob not to speak for Joel however we had a nice chat when we were both panelist at the big Oakland event. somehow I don't think SFR rentals are in his wish bucket.. Joel is a high producing commercial broker.. So I suspect his commission income yearly provides all the cash flow he could want or need.. :)

    Maybe one of you Memphis turn key companies that have good reputations will contact the OP off line and offer to do an assessment of what he has.. I fear if he does not get some honest feedback and help this person will lose if not all but the majority of his investment.. I have seen this play many times.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Brian Naumann
    OP
    Mishawaka, IN · Member since 2016 · 25 posts · 6 votes
    10y

    @John Thedford @Duane Kidman checked out both companies before I even considered the deal, both companies were rated A or A+ on the BBB. I also did online reviews of the TK provider (which is separate from the PM / Rehabber). I used many review sites including @Jay Hinrichs turnkey review. I did every type of due diligence I could to ensure I made sure I knew everything about the providers, neighborhood, crime, and insurance quotes from 5 different agents. @Alex Craig  Everything about the area where the house is just like the neighborhood I live in as far as crime and demographics we are considered a B-C neighborhood. Are you saying its less than a C class neighborhood?  

    The provider has been super attentive and has responded promptly to my concerns. They have also acted as an intermediary when I wasn't getting answers from the PM.

    @Jay Hinrichs not all of have the millions of dollars to buy high end homes. Some of us plan on buying smaller properties, let our tenants pay down the mortgage then 1031 exchange into bigger multi-family properties.  I get tired of seeing you bashing people because they didn't buy $150k properties, assuming that you can't make money on these properties. I have a local mentor that is up to 20+ properties and they are anywhere from $40k -$60k and he is killing it! I saw the numbers and I couldn't believe how well he was doing, that's why he is my local mentor.

    1Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    the person who sold you the home should cover all your eviction cost in this situation. 

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
    0Reply
  • Brian Naumann
    OP
    Mishawaka, IN · Member since 2016 · 25 posts · 6 votes
    10y

    @Curt Davis good to know! Thanks

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Brian Naumann  well I am not the one with a low end home in Memphis with no tenant and about to take a huge loss.... now your defending those that put you in this mess... :)  you have a nice dream but wrong asset to make that dream come true, unless you live there and make it your lifes work.. I have clients of mine that I have helped buy 100s of these price point homes.. they make it work because its their JOB... thats the only way to make this price point work long term .. but you will find that out over time.  

    also why don't you just buy where you live got to be cheap mid west homes there.. why go to memphis ? 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @Brian Naumann The area is C class at best. I own one at 1311 Homer and I consider that borderline C-.  I consider once you cross National to be C-.  Hispanic gangs are bad in the area.  I would not go to my 1311 Homer in the afternoon. I was ok with that purchase for $29,000 as it was fixed up in 2008.  $42,000 is not all that bad, I see some comps where other investors are buying from providers I have never heard of in the mid 50's ' low 60's.  I agree with @Curt Davis, the provider should cover the cost. I find it hard to believe they did not know the tenant was a bum upon completion of the transaction. 

    901-848-9028
    1Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    the company that sold you your property has very little credibility and are not a well known company. If you asked me who were the  top 8 legit turnkey companies in our market they would never come up in conversation.  I have to agree with @Alex Craig that the seller knew the troubles with this home before you closed on it.  The location of this home is called Nutbush and is a D quality area at best. 

    Sorry for the honesty, this is how I see it. 

    Good luck

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
    1Reply
  • Brian Naumann
    OP
    Mishawaka, IN · Member since 2016 · 25 posts · 6 votes
    10y

    @Jay Hinrichs I am working with my mentor to begin acquiring local properties, I will be following his BRRR methods and be crushing it like him soon.

     I started in Memphis wanting a TK to start with to get my feet wet.  

    0Reply
  • Duane Kidman
    Professional · Mansfield, TX · Member since 2013 · 77 posts · 44 votes
    10y

    @Brian Naumann Sounds like you did most of what you could.  

    I just listened to a Podcast that talked about TurnKey Rentals, and how they staged renters that ended up disappearing on the Investor.  All he could say is he should have performed more due diligence.

    This is not a loss, if you use it as a learning experience and consider what else you could have done for the next situation like this.  I hope it turns around for you.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    So Brian you have a local mentor in Indiana that lives close to you but you bought in Memphis?

    That doesn't make any sense especially if the mentors price point is around the same that you paid in Memphis.

    Conventional wisdom says you would get your first property through your local mentor at a a great deal and they can be there for you. You could shadow them and see all of their properties in action.

    It just seems you would have been better off waiting and staying local to buy your first property especially with the low price points. TK investors generally only buy out of state because price points and rents are not inline to cash flow where they live.

    Hopefully that property in Memphis produces money for you soon instead of being no cash flow, high headache from afar, and dead equity from the down payment not generating a return each month.  

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    2Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    James Wachob thanks for the post. I am a principal commercial broker and also a commercial developer and I have plenty of commercial opportunities where I live.

    I do not invest in SFR. I enjoy dealing with businesses specifically retail properties.

    My transactions make me more than enough cash flow yearly so I do value add retail and new development for large equity growth gains on the back end.

    If someone makes 50k,70k etc. per year then buying a SFR can make sense over time. If someone is making 400k,600k,1 million a year income then there are much more passive options for yield.

    Someone making 50k a year might really need that 18% return on SFR as a springboard to eventually quit the job from cash flow etc.

    Other very high income earners have very little time but want to invest. I find those type of investors are fine with an 8 to 10% return or better on commercial assets. 18% off of 100,000 invested is 18,000 annually pre-tax. Not enough to live on. Someone worth 3 million net worth investing 1,500,000 for a 10% return pre-tax is 150,000 a year. That is an amount most can live off of comfortably. So as a persons net worth grows the desire to preserve the wealth with safer assets and lower cash on cash takes precedence over higher returns.

    Once you make it to where you never have to work again you do not want to lose all or most of it chasing anticipated high yield assets with too much risk.  

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Brian Naumann
    OP
    Mishawaka, IN · Member since 2016 · 25 posts · 6 votes
    10y

    @Joel Owens I met my mentor after I had my property under contract.  My mentor walked me thru 4 of his properties that he had just acquired and were being rehabbed. He talked me through  how he would rehab each property and the process he had for renting the property. If I had met him before I had this property under contract I probably would have done this  locally first.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Maybe you could sell that property in Memphis off and invest the proceeds close to home. It depends on the capital you have available.

    If you have 200k cash and put 10k down on the property in Memphis then overall a small percentage of your liquidity. You could keep that property and see how it plays out the first year of owning it.

    If you put down 10k and you have 30k total (20k leftover) you might want to sell it off to bring the capital back to where you live. What you don't want to happen is constantly feeding a property in cash infusions with issues states away that is hampering the growth you could be doing locally building a portfolio. 

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Brian Naumann  that is the proper course of action.. .I funded a lot of deals in Kokomo for instance you can build a very nice cottage investment business there and not put up with the risk you are encountering in Memphis is simply sounds like you got with the wrong company.. 

    Its important for the audience to know you did not buy turn key... the seller maybe you got with a marketing company .. but true turnkey would have the home completely remodeled then a new VETTED tenant would go in.. there would be no hold over bad tenant like your experiencing.. someone has done you  a really bad deed here.   As the boys above have posted and they are all very experienced in Memphis you simply got taken advantage based on your posts.. 

    I also funded deals in Marion IN,  Hammond IN, and of course hundreds in Indy.   rural smaller towns in IN you have to be careful as well  and again you want to buy where you can command 850 to 1200 rents.. buying in these markets and having rents sub 700 is just asking for trouble IE consistent cash flow 

    Also if you want to take the time look at the recent Morris invest thread.. all the top turn key companies chim in on why 40k turn key is not sustainable or advisable.

    Its one thing for you to BRRR them .. buy doing that your probably into the home at least 10 to 20k less than buying it from a rehabber that did all the work for you... so you can move up in quality both in asset and tenant.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free