5 turnkey manipulations that will end up costing you thousands

[Spencer Sutton]

*BP deleted my post earlier today b/c they felt I was promoting something...so I removed all references to our company just to be safe.  Here's the edited post.

Let me start off by saying that I know there are some really great and reputable turnkey companies out there. We know there are those who provide a valuable service to their clients around the country.

This post is not about them.

As a matter of fact, this post isn’t about anyone.

It’s about protecting real estate investors from making some big mistakes in the turnkey market.

And the only reason for the post is because we continue to see people lose their shirts on manipulative turnkey deals.

I’ve got a friend who buys/sells wholesale here in Birmingham and he just told me about an out of state investor who bought a turnkey house for $45,000. A couple of years pass and ‘yada, yada, yada’, she just sold it for $2,000.

You don’t want to be that woman.

Here are the five most common manipulations we see from ‘less than reputable’ turnkey companies.

1. 1. They rent the house for more than market rate - the problem is twofold:
   • When the good tenant realizes they can get a better house for the same $$, they leave after one year and your chance of getting that rental rate again is slim
• The tenant is willing to pay more b/c they have less than stellar credit - you end up paying for this mistake in slow pay to no pay and possible eviction...then you have to turn the property
2. 2. They underestimate repairs and maintenance - There are a lot of factors that go into a reasonable repair and maintenance estimate...things like:
   • Age of the home
   • Quality of tenant
   • Geographic location of the house
   • Quality of rehab
3. 3. They fail to estimate non homestead taxes - we see this a lot
4. 4. They fail to account for the fact that tenants will be moving out of the house at some point
   • No allowance...just repairs and maintenance
• A silly 5% vacancy...it's more like 2-3 months or 6-9% annualized
5. 5. The rehab of the house is shoddy
6. This is one we come across a lot when investors come to us with their turnkey properties. There is a big difference between solid a solid rehab and putting lipstick on a pig! 

The point is to be careful when buying turnkey properties. Do your homework, use a professional and seek objective 3rd party advice.

Hope that helps!

[Christopher Brainard]

@Brent Seehusen

Homestead is an exemption that you can file on your primary residence to lower your tax bill. This amount varies from state to state and would not be available to non-owner occupied properties. This is available in California, but from what I recall, the exemption is pretty negligible ($7k or so off appraised value?).

@Spencer Sutton

I don't think that Turnkey companies are any better or worse than any 'seller' out there on the market. Every NOI and Cap Rate I've ever gotten from a seller was exaggerated and many of the costs associated with running a property were not factored in. I think the biggest problem most investors face when dealing with Turnkey properties is that they believe what the company tells them and do not do their own due diligence and property inspection. If they did, I have a feeling many of these purchases (which seem to be out of state) would not occur.

-Christopher