Turnkey investment value

[RI N.]

I've read many pros and cons of turnkey esp for out of state or country. In summary, the pros is for maximizing the "passive" portion of rei vs the cons of paying more to do it all yourself (cash or diff to access financing for purch distressed property, rehab, holding costs, and lack of doing this all efficiently etc). I think it all could be a fair trade off. However, I also think it's a fair ask to get a good price at or below MLS prices (assuming in good shape, not talking about foreclosure/shorts). I am not counting the turnkey's company money- I can care less their profit margin! But I should be able to turn around and resell my property on the open market for at least my purchase price- otherwise I am overpaying! I look at these turnkey companies- norada, hipster, memphis invest, ohiocashflow etc (no knock of these companies- I just seen you post and looked at some of your properties- and their cash flows are attractive but the purchase amts seem higher than what I see on MLS for what appears on surface to be comparable (I use this term lightly as I am not familiar with all their areas) properties.

First question, would you expect to over pay for turnkey? Secondly, assuming you agree with me, how could we protect ourselves to be sure we are getting a fair deal and not a provider taking advantage of a naive investor? An appraisal would be one tool but what many of us know is that it's not an exact science and many appraisals come in unexpectedly significantly higher or below without rhyme or reason- it's one tool but not the sole one I like to support for/against my purchase. 

Lastly, I believe in win win. The TK people can make good profit while offering a fully TK property at or below retail. The TK providers scale allows efficient rehab (cost/time/experience) and selling to investor which is much faster (and typically repeat business) than retail transaction allows for a win win that doesn't take advantage of anyone. 

[Jacob Anderson]

Hello, Katrina was bad, I'm glad you were able to recover, many weren't.

[Rashad Jones Jennings]

Great info. Sounds like a tight run ship. 

[Michelle Smith]

Good info.  Thank you Todd.  I may be interested in what you have available in New Orleans in the next few months.

[David Faulkner]

Originally posted by @Jay Hinrichs:

@Charles Lemelle  repectully disagree with your statement that PM's Lenders and home warrenty companies give kick backs.

So lets run the numbers:

if we have a wholesaler  they made 2 to 5k generally

contractor is going to make 2 to 5k profit ( you pay this even if you were doing it yourself)

HML or funder is going to make 3 to 6k depending on the size of the deal and it could be more if the projects takes a long time as time is money.. and with investors using loans again closing get delayed for lender reasons so holding cost go up.

Marketing fee 3 to 10k lets use 5k as average I think that fair.

Now turn key company putting this all together for you wants to make a fair profit so say 7 to15k and some do quite a bit higher I have seen it up to 25k and more.

But today I see 7 to 15k which you MUST make other wise why be in the business.. I mean I build new homes and I am not going to do it take all the risk and we want to make 15% of gross as profit.. turn key does a little better but I am selling 400k homes so 15% is 60k per home and we close 30 plus a year... so it adds up.

    3k ( wholesaler)  contractor ( 4K) finaincing ( 5K)  marketing 5K  turnkey profit 15k

 3 + 4 +5 + 15 =  27k  added to actual costs.. and this would be minimum so if property is bought in its as in condition for 40k and 20 to 25k rehab... + 27k  your at 87k for the turn key product.

This is an excellent breakdown ... thanks for sharing the insider view from the other side of the transaction. What I personally don't get is why the heck the CA promoters would choose to make 3-10k per transaction when they could essentially do similar work as a realtor in their home market for 3-5x that per transaction ... different strokes for different folks I guess ...

I still bet the PMs are getting all kinds of kick backs on marked up repair invoices, though ... the others maybe not, but I've seen way to many suspect repair bills for 3x the market rate for the work to believe that many PMs aren't getting a piece of every repair under the table.

[Jay Hinrichs]

@David Faulkner  there Is no question that maintance is marked up.. good PM discloses this.. PM needs this other wise they could not stay profitable.

[RI N.]

@Chris Clothier

Thank you for a very thorough and honest reply. Overall, my takeaway in this thread is the expectations. Realistic expectations combined with desired returns will facilitate the proper TK investment. Prior to this thread I didn't know enough to align my expectations properly. Thx to everyone

[RI N.]

@Todd Wetzelberger  

Thx for your reply. Should you have anything outside NOLA let me know but I'm not looking at nola ft now. Anyhow, thank u for all the info 

[Jay Ritchie]

@Todd Wetzelberger - Would love to get your thoughts on risk mitigation insurance-wise in NOLA. As an investor-to-be in the land between NOLA and Mobile, I have heard the stories about the struggles with the insurance companies following Katrina -- I would assume that the pattern would continue in future events.

How would one factor that risk into the investment strategy/planning? Do you count on a complete write off every 20 years? Anyway to mitigate the insurance issue?

[Todd Wetzelberger]

Normal and customary prop. mgmt fee to handle repairs is "cost plus 10%"  That is typically what we charge if managing property for others (like when we sell turnkeys and retain management).  The invoice will have the fee for the repair and separate management fee for 10% so there is transparency.

Newer investors should get a few quotes from the PM if it's over a few hundred dollars so you learn what typical repairs cost. After a while you will know if you are getting jacked or not.

Jay- "risk mitigation ins". Like most investors I never read my policies until there was a major event. The best risk management is to read every word and have discussion with ins. agent "what if they don't pay or offer less than the actual repair amount?  do I get my premiums and your commission back?   That is a candid conversation everyone should have.

Also- research "public adjusters" I never knew about them until one rented our house in New Orleans after Katrina hit. If not for him-- we probably would have lost everything. We burned through $300,000 servicing debt to banks writing checks on vacant damaged properties for 2.5yrs while ins. cos refused to pay "FEMA claim-- it's not water damage, it's wind damage...." "Hazard claim-- it's not wind damage it was water damage....."

When we filed complaints with LA Insurance Commissioner-- the last 4 out of 5 were in jail for bribery, extortion and corruption-- no luck with crooked "regulators"

public adjuster took 10% of the cut of what he got above what ins. co was willing to pay on a claim. He made sure we got what the actual repairs were-- not what the ins. co wanted to pay-- often not enough to even make repairs.

Lessons--1) read policy and ask "what if" to ins. agent, 

                2) research public adjuster ahead of time-- the good ones usually chase storms and disasters like contractors do and set up shop in the area that was affected-- often times they put up bandit signs like they did in New Orleans. 

               3) listen to your wife when she says "we need to stop paying on vacant damaged properties until the banks bleed us dry-- just give them back to the bank and let them deal with the problem.

The last lesson was the most important. When the money ran out all the bankers I thought would "work things out..." tried to f... us in every way they could.

Lesson learned-- we are stronger because of it and I deal exclusively in private money and joint ventures with no recourse-- that is probably the biggest take aways-- 

Unless we really are desperate-- I'll never deal with a bank or sign a personal guarantee ever again-- If the deal doesn't stand on it's own, it's not worth doing and signing my life away.

[Jay Ritchie]

Thanks @Todd Wetzelberger  Great information to have.