All Forum Posts by: Chris Clothier

I totally missed that - I was so focused on the thread!   

Was it a turnkey property?  I didn’t see that stated.

 Laura, your expectations are not too high.  However, you need to move NOW!  The costs and lack of communication are not normal and once you settle and allow them to not answer or charge you without oversight or fail to provide proof, then you have set a new expectation for them.  And unfortunately, many companies will always perform down to lower expectations until you eventually are left with no control at all.  I hate that you are dealing with this, but my advice is to get control as a fast as you can on the property before you lose anything else.  You should absolutely never accept this type of behavior from a management company and never give a second chance.  How they handle this scenario is exactly who they are.  As an investor you cannot afford to wait.

Bret,

I appreciate your response and sharing a bit of background.  Congrats on closing on your third property! 

There a lot of passive investors who go the Turnkey route and they hardly ever share here on BP because for some reason there can be some almost shaming from posters against those who buy turnkey.  The common assumption is that Turnkey investors are either brand new therefor uneducated, or lazy or a mix of both.  There can certainly be some looking down on anyone who buys this way from others.  Not always, but sometimes.

So, sharing your story about being an active investor but also choosing to do long-term buy & hold in another market passively AND doing it the turnkey route, is really good for other readers to hear!

Thank you man! 

There is a difference and a different approach that passive and active investors should take when performing due diligence. After 23 years buying and selling real estate, 18 years owning and operating a passive, turnkey investment company with my family and having made every mistake an investor can make, I feel comfortable in voicing my opinions on this topic, some would say, rather forcefully. Passive investors must take a different approach to their investments than active investors.

First, so we are clear, I define a passive investor as one that truly takes no active role in identifying, renovating, marketing for sale or lease, or managing an investment property. By definition, most long-term buy and hold investors are going to be passive as few investors seek to flip houses or move in and out quickly in a passive way. So, for this forum post, I speak about passive investors as those that are looking to limit their role to oversight of the people or companies they are relying on for their success.

And, I am going to focus heavily on the turnkey niche, since it is one of the most popular topics here on the BiggerPockets forums and the word is so heavily used that in many ways it has lost its meaning. I prefer to use the marketing term “passive investment” but since turnkey is more popular, those operating in my niche are forced to keep using it. I define turnkey as:
- an investment where an investor is buying a property from a company or individual that owns the property.
- They have recently completed a full renovation. (In my opinion that means no deferred maintenance, but that is more about standards than definition)
- There is active management representation in place and that is provided by the same company doing the renovation. (Again, this is more about standards than definition)

Those three standards are how I define passive, turnkey investments. The company owns the property, they have completed a recent, full renovation, and the property is under management when you purchase the property. Anything short of those three standards, and in my opinion, it is not a turnkey property. Those are the three identifiable ‘heavy-lifting” areas.

So, how does the due diligence that a passive investor does on a turnkey property differ from an active investor?

This is the order in which passive investors must do their due diligence:
1. Identify the expectations. The exact results that you expect in order to call your investment a success.
2. Identify markets that you believe align with your expectations and have the highest probability of your success.
3. Identify existing companies or teams in those markets that give you highest probability of hitting your expectations.
4. Interview those companies and referrals of those companies to determine if what they offer and how they offer it give you the highest probability of hitting your expectations.
5. There is nothing wrong with going to visit a market at this point, but go with your eyes wide open. In most cases, you will have no idea what you are looking at or if you can trust what you are seeing. The biggest factor in visiting is to meet the company you are possibly going to do business with. If you have already built trust, then you are verifying if everything you have been told, if the very reason you think they give you the highest probability of success, matches with what you are seeing on the ground. The be very clear, you are doing your DUE DILIGENCE on the COMPANY! Are they all smoke and mirrors or do they actually match up with the story they told you on the phone. How big is the team? What systems are they using? Do you feel safe looking at the example houses? Are they trying to get you to sign on the dotted line right there on the spot for a house? Are they requiring you to put down a deposit to even come visit or get on a list to see houses? All of these questions should factor in to your due diligence on their professionalism and if you truly believe that houses you purchase from them and are managed by them will actually meet your expectations. It is easy to use paper returns and great marketing messages to be convincing, which is why looking people in the eye is your best way to do Due Diligence on a company.
6. Then and only then should you even consider a property.

You see, in my conversations recently, there are a lot of investors who want to do the same due diligence that active investors do, but they are making passive investments. Active investors are responsible for the purchase price of the property they are buying. They are responsible for the negotiation of that purchase price. They are responsible for understanding neighborhoods dynamics and knowing how certain renovations have certain effects on the mindset on residents. They are responsible for every facet of their investment and ultimately if that investment hits their expectations.

Passive, turnkey investors have zero input in each of those areas. They don’t pick the neighborhood that a turnkey company works in. They do not pick the renovations that a turnkey company does or how good they do them. They don’t decide the standards of how a turnkey company operates their management company. They get to pick the turnkey company they work with, and that about sums up the decisions they get to make outside of saying yes or no to a property.

A passive investors #1 job is to do their Due Diligence on the Turnkey companies! Now, don’t misread anything here. Every investor gets to decide when they say yes to an investment. You can still decide which neighborhoods you want to avoid or which types of homes, prices, rental prices you want to focus on from a turnkey company. You can still say to no to any properties that don’t fit your needs.But the fact of the matter is, no amount of due diligence a passive investor does on an individual property, can make up for a failure to do proper due diligence on a company. Bad companies with poor business standards and practices can ruin a fantastic investment property in a very short period of time. And unfortunately, history tells us that there are more poorly run companies than there are good.

Too often, in my opinion, passive investors are focusing on details that they have no control over. Those details are controlled by the company they are buying from. I’ve actually talked a lot of investors OUT OF doing business with my families’ company because I recognize in them the traits of active investors. Perhaps they start with one or two passive investments, but I know they really want to be active. They are asking the right questions and digging in and doing research that will have no effect on the success of their passive investments. In reality, investors who have the patience and stamina to put in the extra work it requires to be really good at active investing are never going to have their expectations met with a passive investment. They will always have questions and quite often have regrets because they believe they can do better. It literally takes two completely different mindsets and approaches depending on if your are going to be active or passive.

The biggest difference comes down to trust. An active investor has to be able to reach the conclusion that they have done the proper due diligence on the COMPANY they are working with, to trust that the investment they make will meet their expectations.

Lastly, I talk a lot about expectations because too often, especially here on BP, commentators judge other investors’ properties by their own expectations. In my opinion, and again after talking to many, many investors through the years, every investor has to set their own expectations. I have met many active investors who are able to let go of certain pieces of the process for passive investments and their expectations of those passive investments are very, very different than their active investments. They are a great example of how to approach these investments, because they are able to show how a total portfolio performs. They don’t expect low returns, but in a majority of the cases, they expect a lower return with much, much lower risk and a higher probability of a return of their investments. In order to hit those expectations, their due diligence focuses on the companies they work with, not on the property they own. If their due diligence is done right, the companies will make those properties perform to the investors expectations.

I wold love to hear other thoughts and even differing opinions. I’m open for discussing the best ways for passive and active investors to hit their expectation!

There is a difference and a different approach that passive and active investors should take when performing due diligence.  After 23 years buying and selling real estate, 18 years owning and operating a passive, turnkey investment company with my family and having made every mistake an investor can make, I feel comfortable in voicing my opinions on this topic, some would say, rather forcefully.  Passive investors must take a different approach to their investments than active investors.

First, so we are clear, I define a passive investor as one that truly takes no active role in identifying, renovating, marketing for sale or lease, or managing an investment property.  By definition, most long-term buy and hold investors are going to be passive as few investors seek to flip houses or move in and out quickly in a passive way.  So, for this forum post, I speak about passive investors as those that are looking to limit their role to oversight of the people or companies they are relying on for their success.

And, I am going to focus heavily on the turnkey niche, since it is one of the most popular topics here on the BiggerPockets forums and the word is so heavily used that in many ways it has lost its meaning.  I prefer to use the marketing term “passive investment” but since turnkey is more popular, those operating in my niche are forced to keep using it.  I define turnkey as: 
- an investment where an investor is buying a property from a company or individual that owns the property.  
- They have recently completed a full renovation. (In my opinion that means no deferred maintenance, but that is more about standards than definition)
- There is active management representation in place and that is provided by the same company doing the renovation.  (Again, this is more about standards than definition)  

Those three standards are how I define passive, turnkey investments.  The company owns the property, they have completed a recent, full renovation, and the property is under management when you purchase the property.  Anything short of those three standards, and in my opinion, it is not a turnkey property.  Those are the three identifiable ‘heavy-lifting” areas.

So, how does the due diligence that a passive investor does on a turnkey property differ from an active investor?

This is the order in which passive investors must do their due diligence:
1.  Identify the expectations. The exact results that you expect in order to call your investment a success.
2.  Identify markets that you believe align with your expectations and have the highest probability of your success.
3.  Identify existing companies or teams in those markets that give you highest probability of hitting your expectations.
4.  Interview those companies and referrals of those companies to determine if what they offer and how they offer it give you the highest probability of hitting your expectations.
5.  There is nothing wrong with going to visit a market at this point, but go with your eyes wide open.  In most cases, you will have no idea what you are looking at or if you can trust what you are seeing.  The biggest factor in visiting is to meet the company you are possibly going to do business with.  If you have already built trust, then you are verifying if everything you have been told, if the very reason you think they give you the highest probability of success, matches with what you are seeing on the ground.  The be very clear, you are doing your DUE DILIGENCE on the COMPANY!  Are they all smoke and mirrors or do they actually match up with the story they told you on the phone.  How big is the team?  What systems are they using?  Do you feel safe looking at the example houses?  Are they trying to get you to sign on the dotted line right there on the spot for a house?  Are they requiring you to put down a deposit to even come visit or get on a list to see houses?  All of these questions should factor in to your due diligence on their professionalism and if you truly believe that houses you purchase from them and are managed by them will actually meet your expectations.  It is easy to use paper returns and great marketing messages to be convincing, which is why looking people in the eye is your best way to do Due Diligence on a company.
6.  Then and only then should you even consider a property.

You see, in my conversations recently, there are a lot of investors who want to do the same due diligence that active investors do, but they are making passive investments.  Active investors are responsible for the purchase price of the property they are buying.  They are responsible for the negotiation of that purchase price.  They are responsible for understanding neighborhoods dynamics and knowing how certain renovations have certain effects on the mindset on residents.  They are responsible for every facet of their investment and ultimately if that investment hits their expectations.

Passive, turnkey investors have zero input in each of those areas.  They don’t pick the neighborhood that a turnkey company works in.  They do not pick the renovations that a turnkey company does or how good they do them.  They don’t decide the standards of how a turnkey company operates their management company.  They get to pick the turnkey company they work with, and that about sums up  the decisions they get to make outside of saying yes or no to a property.

A passive investors #1 job is to do their Due Diligence on the Turnkey companies!  Now, don’t misread anything here.  Every investor gets to decide when they say yes to an investment.  You can still decide which neighborhoods you want to avoid or which types of homes, prices, rental prices you want to focus on from a turnkey company.  You can still say to no to any properties that don’t fit your needs.But the fact of the matter is, no amount of due diligence a passive investor does on an individual property, can make up for a failure to do proper due diligence on a company.  Bad companies with poor business standards and practices can ruin a fantastic investment property in a very short period of time.  And unfortunately, history tells us that there are more poorly run companies than there are good.

Too often, in my opinion, passive investors are focusing on details that they have no control over.  Those details are controlled by the company they are buying from.  I’ve actually talked a lot of investors OUT OF doing business with my families’ company because I recognize in them the traits of active investors.  Perhaps they start with one or two passive investments, but I know they really want to be active.  They are asking the right questions and digging in and doing research that will have no effect on the success of their passive investments.  In reality, investors who have the patience and stamina to put in the extra work it requires to be really good at active investing are never going to have their expectations met with a passive investment.  They will always have questions and quite often have regrets because they believe they can do better.  It literally takes two completely different mindsets and approaches depending on if your are going to be active or passive.

The biggest difference comes down to trust.  An active investor has to be able to reach the conclusion that they have done the proper due diligence on the COMPANY they are working with, to trust that the investment they make will meet their expectations.

Lastly, I talk a lot about expectations because too often, especially here on BP, commentators judge other investors’ properties by their own expectations.  In my opinion, and again after talking to many, many investors through the years, every investor has to set their own expectations.  I have met many active investors who are able to let go of certain pieces of the process for passive investments and their expectations of those passive investments are very, very different than their active investments.  They are a great example of how to approach these investments, because they are able to show how a total portfolio performs.  They don’t expect low returns, but in a majority of the cases, they expect a lower return with much, much lower risk and a higher probability of a return of their investments.  In order to hit those expectations, their due diligence focuses on the companies they work with, not on the property they own.  If their due diligence is done right, the companies will make those properties perform to the investors expectations.

I wold love to hear other thoughts and even differing opinions.  I’m open for discussing the best ways for passive and active investors to hit their expectations!

Hey Troy, good post.  I think when you write that you’ll be light years ahead by doing the work yourself, you mean that from a financial standpoint and not necessarily a knowledge standpoint.  Is that right?  I would say those are reversed.  You will understand, hopefully, more about real estate and the inner workings of deals and some of the minutia, but not necessarily ahead financially.  In your post, there are a lot of assumptions that I think are a bit off and I’ll simply give a few of my thoughts for conversation. 

Turnkey is just a marketing word.  It has a different meaning to just about everyone using it and different meanings for just about everyone reading it.  That is unfortunate, but it is the environment we have to deal with, especially here on BP.  So, when we read about Turnkey posts here on BP there are usually really broad assumptions that are not accurate.  For example, you can buy an investment property where a local professional or company has purchased the property, renovated the property and has the property under management in just about any market.  There are no “turnkey” markets out there today. There are certainly markets that get a lot of attention and ads and discussion here on BP, but there are many more markets out there where turnkey companies operate and passive investors can achieve their expectations.

To assume that you can be ahead financially by doing things yourself rather than with a Turnkey company would also be an off assumption.  There are companies out there that use the word Turnkey to market themselves and they are small, single-person operations with big marketing.  You can beat those companies all day long.  There are brand new companies that started marketing themselves within the last few years and again, they’ve operated in the greatest real estate boom and their marketing is ahead of what they can actually produce as far as results are concerned and again, you should be able to beat their results on your own.  But, there are a number of well established companies that have been in the niche industry of providing passive investments and using the word Turnkey to describe their companies for a long time.  The relationships they have and the volume they produce is going to be impossible for an individual to match or even come close to beating.  From negotiating material and labor costs, to borrowing costs and time frames for completion, there is simply no way to compete against those efficiencies and use of market force.

Lastly, the appreciation angle.  I’m not sure about every market, but I can tell you that too often we use market appreciation data and then make too much out of it.  That is for both good and bad.  For example, four particular markets that run the gamut from “old turnkey markets” to “new turnkey markets” are Memphis, Dallas, Houston and Oklahoma City.  Memphis and Oklahoma City are often described as low cost markets and you can read a lot of posts on BP about how there are no deals left in Memphis or it is an old, picked over market with no deals or appreciation.  Dallas and Houston are described as high taxes, bad soil and poor investments.  The reality is that just about every premier, secondary and tertiary market has pockets and neighborhoods where you can find appreciation.  Either forced or natural.  The fact is that most cities continue to have higher demand than product availability.  Memphis is projected to end the year at 6.8% appreciation, Oklahoma City at 5.5%, Dallas at a little over 9% and Houston is on a three year run of a total of 10.3% appreciation.  Does that data really mean anything? In my opinion, no, since you can find all kinds of different and competing data points on every city and it often changes within the city.

As an investor, I think you should focus on your expectations.  If you want appreciation, you need to purchase properties near/at or above median price for any market.  You can find properties that will appreciate in any market, you just have to  buy in the right price points.  Same thing with cash flow.  It is a mathematical equation so it can be adjusted in any market and with different inputs.  As for the $250k houses being worth $350k in 3-5 years, I can certainly see that being the case.  The same can be said right now for suburbs in each of the cities I mentioned above even though they are all considered “cash flow” markets and not appreciation markets.  In my opinion, the higher price points in just about any city give investors the most flexibility to see appreciation that is actionable (meaning you could actually sell the house) and cash flow.

Sorry for the long response, but I am always fascinated how we as investors can fall into traps of broadly labeling markets or ideas.  Love to hear what moves you actually make and if you move forward locally or go outside your market.  Best to you -

There are couple of ways to go about this, but you may be in a pickle on one of them.  You’ve already received a great suggestion on providing the renovation costs in your challenge.  It is not very often that an appraiser is going to find 3 to 6 properties that are exactly the same to serve as comparable sales so simply providing more comps usually does not work.  The appraisal is subjective and most often the appraiser is making adjustments due to different sized properties, different features like br and bath and even adjustments based on renovations.  This is the area that we see as the most advantageous for challenges.  Provide the appraiser with details of your renovation and invoices for those improvements.  Material changes like sq.footage is sometimes missed so that can really help.  They can also consider the life expectancy of a new roof vs. a worn roof on a comparable sale or updated plumbing, electrical and systems - especially on older properties.  I don’t want to discount showing additional comps especially if they are renovated like yours because it helps to focus an appraiser on viewing comps that are updated and not just close or recent or more similar in size.  The updates you provide matter.

The other option is to scrap your financing and start over so you get a new appraiser.  In no way am I speaking poorly of appraisers.  They have a job to do and just about every one I have met is professional, but occasionally I’ve run across some that are not.  I recently had an appraiser tell me that he gets so much desktop business that he hardly ever leaves to look at houses anymore even when he is hired to provide a more in-depth appraisal.  In this conversation, that does not mean much as it’s hearsay, but we see these examples on a monthly basis.  Not a month goes by in the year where we don’t have an appraisal come in drastically below sales price.  A challenge would never help.  Instead we start the process over and invariably another appraiser is hired and the differences in value are staggering.  We have had $40,000 swings on $150,000 properties where the only difference is the person doing the appraisal and roughly 30 days apart.  Sometimes properties appraise extremely low and another appraiser goes over contract.  We don’t always see full contract pricing on that second appraisal either.  I want to be clear, sometimes our opinion is simply higher than an appraisers even after hiring a second, but we’ve never had two different appraisers both bring properties in as such extremely low values. Theyre always being hired by the bank and we don’t mess with giving renovation files on the front end.  Just let then do their job, but we have seen extreme swings in valuations from two different appraisers.

Those are the two best options for you as I see them.  If you feel strongly that your property has the value and your numbers are correct, then I would fight for it.  The cost of a second appraisal is always worth in when you are talking about these types of dollar differences.  best of luck. 

We love the Little Rock market and started buying and managing over there in 2017.  While we are not buying in Northwest Arkansas just yet, we are laying the groundwork for going up there.  We are already in Tulsa, OK. And NW, AR. is right in between Tulsa and Little Rock.  I would keep my eye on that area as well.
For Little Rock, I can tell you that the combination of experience-focused property management and high quality properties is going to allow you to have a higher than average performance.  It will cost more on entry, but depending on your investment expectations, the model is proving out in every city that we operate in and LR is no different.  Residents will pay a higher rent for a better quality property and they will stay longer with higher quality and experienced-focused management.  We had 320 properties under management on January 1 and will end the year with roughly 470 or so under management.  Since 2017 we have only had 41 move outs so that should give you some indication of how the residents in LR will respond.  Like @Alex Craig shared, good management companies will exceed zillow published data and with comparatively low taxes and insurance rates and few HOA's to contend with, Little Rock and it's surrounding suburbs is a very nice market for long-term buy a hold investors.