Memphis Invest and General Turn Key Question

[David Pierce]

So I have been researching Turn Key companies for about six months (most of the more reputable ones). I like MemphisInvest and their markets, not to mention everyone seems to have a good opinion of them. I talked to one of their employees yesterday and became quite concerned when I was introduced to their model. Everything seemed fine except when I was told about how they do ARV and appraisals. If the house doesn't appraise at what they are selling it for, it apparently is on the investor to come up with the additional cash (downpayment) to meet the asking price... This seems crazy to me, as in my opinion, this should be the responsibility of the seller (not the buyer). Am I missing something here? This may put the brakes on me working with them, as it doesn't seem like a sound business practice (heavily favors company vs. customer).

Someone please help me understand this,

Thanks

[Charlie Fitzgerald]

PM and Ill give you some insight and options

[Ivan Z.]

I had the same question and was told the same answer by one of their representatives when I spoke with them on the phone. Unsatisfied with that answer, I decided visited one of their meet ups down here in Orange County. I asked the same question the Chris C and his answer was that, you always have the option to say no to the deal if ARV doesn't meet the appraisal, but I am also assuming that there a fees that come with the appraisal etc that will be out of pocket.

[Gurudev Hiremath]

I recently bought a property from them and didnt like the idea of coughing up extra cash (which I did). You cannot back out or else you lose your earnest deposit. It was my first property investment ever. Other companies I am working with are super flexible on this part!! Customer service had been awesome with MI so far!! For more info PM me. 

[Jay Hinrichs]

@David Pierce  it was very common for fully rehabbed homes  and their new values to not have caught up with local comps.. Especially in Texas

I have had this happen to me personally with several retail flips.. all our comps and such say one price and the appraisals come in low a few days before closing.. so your just stuck and because the buyers are usually FHA they simply don't have the funds to make up the difference even if they wanted to... for those reasons I am no longer keen at all on Texas as a market to flip in..

So I can see MI getting ahead of this.. especially in Texas...

[Chris Clothier]

 @David Pierce I obviously wasn't on the call, but I am fairly sure at this point that Taylor walked you through the fact that we always talk about worst case appraisal scenario.  We want an investor to be comfortable with their investment and not surprised if the numbers come in low.  In the end, we determine the sale price based on value of the property and return of the investment.  At the same time, on almost every house, we know there is a chance it will be appraised lower than the sell price.  Why?  The biggest reason is opinion.

We know after having between 2,000 and 3,000 transactions close with financing, that in today's environment, some appraisers are not going to appraise our properties as arms-length transactions. They see the fact that an out-of-state buyer is buying a property most likely sight-unseen and hiring a management company owned by the seller as disqualifying for the property to be arms-length. Doesn't matter whether we agree or not, that is the approach and we have learned to deal with it. Every property is listed on the MLS and detailed scope of works are also delivered on every property, so we do what we can to make it easier for an appriaser to get to full value.

I also want to make it clear that a small percentage of properties miss our price.  Most do appriase either at full contract price or at the top of the range that we advise.  We are not wrong very often on what we expect properties to appriase for.

However, out of caution and really because we do not want to waste anyone's times especially not our teams time, we are going to make sure an investor is ok with a low appraisal before signing a contract.  The point is to prevent a contract from ever being signed if an investor is not comfortable with the appraisal environment.

Before any property is sold, an investor is advised on what we feel is a low-end and high-end that a property will appraise for.  Regardless of other comparable sales, we show a worst-case scenario so investors are not surprised.  It is up to us to be transparent and honest with investors that we have a sale price and no investor has to move forward with putting a property under contract if they are not comfortable with that low end.  Regardless of how good it can be or how high it can appraise, we are always going to give advice based on what we fell will be the low end.

@Ivan Z. - that may be part of the problem, but I really feel it is the nature of the investment that is keeping values low.  At times, we have seen appraisers pick the worst comps possible and refuse to include higher comps because they do not feel the transaction is arms-length.  Now, that is not always the case, but it can happen.

What is crazy is when we have a low appraisal and do not make an investor move forward and then, after re-listing on the MLS, we get an owner-occ contract. At least 6 times this year already in Texas, we have had properties appraise well below our range for an investor. In those cases, we cancel the contract. Since we list everything on MLS for transparency, the properties go back out and demand is so crazy in Texas we have received full price and over-list offers. Every single time the exact same property appraised at full contract price. The discrepancy in two instances was over $40,000 on the exact same property less than 30 days apart.

To be fair, it is the environment we are in.  For our part, we simply tell investors on the front end what the worst case scenario is on an appraisal and given the transparency, if they move forward we want them to be comfortable with that and be ok with closing.

Hope that helped a little bit David.  Best to you ~

[Jay Hinrichs]

@Chris Clothier  totally agree in Texas.. and you have the latitude to do that.. when we are flipping houses to homeowners and have gone all the way to close only to have to do it all over.. it just becomes take the money chalk it up and off to the next one... Texas to me is a tough place.. but that's my experience.. for one thing the tax's on the property are so blasted high 60 days to resell east up a good 3 to 5k in holding costs.. and we just don't have that much margin on these in the first place.

[Alexander Price]

@David Pierce

Something to consider when buying turnkey is that you are purchasing a revenue stream. The house is the asset that generates it. Particularly in Memphis, appreciation is not going to make you your money. So house value is not a huge factor. That said, if the purchase price and rental numbers work out for a reasonable COC return, then that is what matters. If your plan is to try and sell quickly (i.e. less than 5 years) then maybe turnkey is not the best choice. If you plan on owning a turnkey investment for ten years with a good management company, you'll make your money back on COC alone if the return is 7%. I think most good turnkeys can do better than that.

Food for thought. 

[Gurudev Hiremath]

@Chris Clothier, There is no question/doubt about the superior services offered by Memphis Invest!! During the initial  purchase process, I was informed by the sales consultant about the worst case scenario for down payment. I still went ahead to purchase my first rental property. It is great to know that you stand by your product and willing to purchase it back!! Again, your customer service is what sets you apart from others! I had no issues with the extra payment. I was just sharing my experiences so far that I had with MI and other TKs. 

[Chris Clothier]

Originally posted by @Gurudev Hiremath:

. I was just sharing my experiences so far that I had with MI and other TKs. 

 I appreciate your kind comments Gurudev.  Thank you for the honor of helping you with your investing needs and I hope we can help you to continue to grow your portfolio.  

What you said above it what makes this site so great ~ I love that you are willing to share your experiences with others!

[David Pierce]

@Chris Clothier I was in no way attempting to attack your company - in fact, my conversation with Taylor was very pleasant and he was a good guy to work with.  In my research of turn key companies, I had never come across this as a contingency in the contract.  I understand the problem with appraisals, and I guess that is how companies have to get around potential problems.  I think you have a good thing going for you, just trying to find the best fit for my investment options.  The biggest problem I foresee is if I have a set amount of money for down payment/closing, and then the appraisal comes back low (but within your "range").  At that point what are my options?  Lose my earnest money and appraisal cost?  Just want to ensure I totally understand what I can expect if we move forward. I want to ensure all sides are happy with the transaction. Whatever company I end up choosing, I plan to do multiple deals with, so I like to fully vet prior to choosing.  Thanks for your time.

[Cory Tuck]

@David Pierce 

I think your intuition is correct on being concerned on the requirement to bring more cash to closing based on appraisal.  Having to bring significantly more cash to closing can dramatically change the economics of the transaction.  

I think Memphis Invest is definitely honest and upfront about this.  I appreciate their candor and understand their position.  Appraisers can be wishy-washy about appraisals values.  Many appraisals do not reflect the reality of the true price.  With this said though, this policy is the exactly reason why chose not to work with Memphis Invest.  It introduces a level of risk and rigidity that I am not comfortable as an investor.

@Alexander Price

I agree that the expected value of the transaction will come from discounted cash flow for the most part.  However, it is unwise to dismiss purchase price compared to value from the calculations.  Life never goes as planned.  Unfortunately in the single family real estate market you cannot sell cash flow.  You can only sell at the values the market will bear.  There are numerous items that can come up in 5 years that would make the selling the property necessary or advisable.  Purchasing significantly more than market value and adding closing and selling costs on top of this can be a recipe for large losses or dramatically reduced gains.

[Chris Clothier]

Originally posted by @David Pierce:

@Chris Clothier I was in no way attempting to attack your company - in fact, my conversation with Taylor was very pleasant and he was a good guy to work with.  In my research of turn key companies, I had never come across this as a contingency in the contract.  I understand the problem with appraisals, and I guess that is how companies have to get around potential problems.  I think you have a good thing going for you, just trying to find the best fit for my investment options.  The biggest problem I foresee is if I have a set amount of money for down payment/closing, and then the appraisal comes back low (but within your "range").  At that point what are my options?  Lose my earnest money and appraisal cost?  Just want to ensure I totally understand what I can expect if we move forward. I want to ensure all sides are happy with the transaction. Whatever company I end up choosing, I plan to do multiple deals with, so I like to fully vet prior to choosing.  Thanks for your time.

 Absolutely agree!  Never thought you were attacking ~ I understand that this is a huge investment and one made from such a long distance.  For us, as I am sure you understand by now is to make sure we are not pushing you to take action or trying to "sell" you a property or our company.  We really want you to understand and I am a huge fan of BiggerPockets.com so, by all means, ask away.  

As to your question, we always work with an investor who decides to move forward.  Some investors are simply not comfortable at all with the idea of a low appraisal and for them, we simply wait longer to find a property where there is no possibility of a low appraisal.  They do exist!  

Like I said, I never want to be in a scenario where an investor is worried about his/her earnest money.  In those cases, it never makes sense to have an investor walk away mad.  We try to aviod that, so to be fair, we will always work with an investor and in the end, chalk it up to lost time.

For my part, as an owner, I just need to make sure my team is answering questions up front and transparently because it is my name and integrity untlimately on the line!  Thanks for the questions and feel free to reach out if I can be of service.

[Chris Clothier]

@Cory Tuck - This is the exact reason we go through that process and try to be slow.  You did a great job of determining what you were and were not comfortable with and deciding not to move forward was absolutely the best decision for both you as an investor and us as a company.  It helps everyone involved to really focus in ~  

All the best to you and I hope you are having great success as an investor.

[Cory Tuck]

@Chris Clothier - There are plenty of ways to be successful in the real estate industry.  From the reviews I have heard about you all, you guys have a great business with a lot of happy investors.  With my current goals and comfort level, I chose not to go in that direction right now.  Goals and experiences definitely change, and you all have a good record.

[David Pierce]

@Chris Clothier  I have emailed Taylor back to see if he can put me in contact with a portfolio consultant.  I definitely would not be comfortable with a large margin of uncertainty with appraisal value, but if you can minimize that in some properties, I would definitely be interested.  Hope to hear back soon.

Thanks

[Allison Karrels]

I have bought several houses with MI.  A few months back I was under contract on a home in Houston.  The appraisal came in very low and I no longer felt comfortable doing the deal.  MI let me out of the contract and returned the escrow payment.     A few weeks later I got into a new house with them this time in Memphis,   This one appraised fine and we are set to close this Saturday. 

[Andrew R.]

Hi  @Allison Karrels 

Can you add anything to your deal in Houston, do you know why the appraisal was low? Do you think MI had overpriced the house, or was there outlying circumstances with that particular house?  

Did MI offer to reduce the sale price when the appraisal was low? Thanks and best luck. I'm looking at MI for my next purchase. 

[Allison Karrels]

When the appraisal came back low their first response was to officially challenge the appraisal showing them comps of their own and the scope of work that they did with the rehab.  I think they would have been willing to come down on the price some but I told them I would rather leave this deal and find a different house.  They were fine with that and willing to find me another property. 

Not sure the exact reasons why the appraisal came in low, its been a few months now and my brain is a little foggy :)