How do you know of a scam?

[Mark Resnick]

Hi,

I am new to real estate investing. I never bought any properties. I am looking into a turnkey inestment place where I can buy the property and they will manage it for me. How do you know if they are legit company? How do you know that they are not trying to Scam you?

[Jon Holdman]

I think most of these companies are not flat out scams.  I do think many of them offer really, really bad deals.  You must do your own due diligence just as if you were buying from a non-turnkey seller.

1) Verify the price.  Many times turnkeys are being sold at prices right at or above anything else in the same area.  What houses sell for where you live is absolutely, totally irrelevant.  Many of these sellers target buyers in expensive areas hoping they will think "that would sell for 5X the price here."  Maybe that's true.  Its absolutely meaningless.  Figure out what it will sell for where it is, not where you are.

2) Verify the rent.  I've seen turnkeys offered with rents that have no basis in reality.  Check craigslist, rentometer.com and other ads in the are where the house is.  I've seen some of these where I'm sure the seller is guaranteing an above market rent.  I suspect they tenant is paying less and the seller is making up the difference from the profit they made on the deal.

So, combine those two and after a year you find out the real rent is not anything like what you were promised.  Your new tenant is paying much less.  "Heck with it" you think, "I'll sell."  Oops, the only way to sell is to take a big loss.

3) Verify the rehab.  Many posts here talking about ongoing "repairs" on turnkey properties.  Really an indication of a shoddy rehab where you get to pay for it for years to come.

At best you will pay a higher price for the convenience of buying a turnkey.  Maybe that's OK.  But assume everything seller tells you is a lie (assume this on all transactions) and verify EVERYTHING yourself.  Go see the area.  Talk to agents and PM's in the area.  Drive around.  During the day and at midnight.

You will get replies from folks extolling the virtues of turnkeys.  Be sure to have a look at peoples profiles and see what, if any, involvement they have in this business.