Turnkey purchase price vs comps and LLC

[Warren A.]

Hi , I am new to real estate investing.  I am drawn to turnkey for many of the reasons mentioned on this forum (spouse and I have full time jobs, kids, not interested in DIY).   I have spent weeks reading many BP blog posts and forum posts on this forum.  It's been very educational. I am now trying to do some due diligence on on our first property purchase in Dallas (Everman, TX) from a very reputable turnkey company that is frequently mentioned/ contributes to this forum.

The purchase price of the property is $143K ($82/sq ft).  Net cash flow ~$400 /month.  It is going through $51K in rehab costs (new roof, more).   One thing that made me pause is Zillow comparable values are $90K-$100K .  I know Zillow is not the most accurate.  So I also checked Realtor.com and saw similar comps + median $63/square foot.  I don't know where I can find the actual sale price.  Redfin states last list price was $72K.  

I asked why and the response was, "As we talked about, Zillow has algorithms that take into account not only "normal" sales, but short sales, bank owned properties, and foreclosures. They are also not taking into account the $51K I'm putting into ("property A")... What these online firms are doing is looking at a property "right now" not once I've put all the money into the property.  This is why I will include an appraisal range with every property. Because of the volatility in the investment market, it's kind of impossible to say what value an appraiser, or a Zillow, will give a property."  The lowest appraisal expected is $120K per this turnkey company.

The explanation makes sense I guess.  $72K+$51K = $123K..  $20K difference vs selling price to me for the overhead I suppose?  The turnkey company emphasizes that they don't simply do lipstick on a pig which I think is great.  Although I am still wondering if purchase price (taking into account rehab) should be close or below comparable values in neighborhood?   I think what it is is that I watch a show like Flip or Flip here the couple will buy a distressed property , perform the rehab but sell it at or slightly above market value but it is still within market value.   So I still can't help but feel like the asking price is too much?  Am I missing something still?

Also another question. As you build your portfolio, is it common to establish an LLC .. in case a tenant sues you or other liabilities?

[Alex Craig]

Very interesting thread. On one hand you have a Realtor with very little experience saying one thing, then a TK provider saying something else.  TK provider has skin in the game and Realtor does not whose motives may be to be the "you are paying to much, come with me and I will connect you with a better deal." I have always felt that a Realtor working with investors that do not personally own property or even TK providers too would be like picking out the kid to manage your money portfolio who has $1,000 in their 401(k). I would go with TK provider here.  Why would any experienced TK provider be "all in" for more then what a property is worth.  

[Warren A.]

@Chris Clothier Thank you for taking the time to comment and articulate Memphis Invest's value proposition. Please note that I only mentioned Memphis Invest with respect to Calculating After Repair Value property thread talking about ARV. It has not been my intent to write anything defamatory about Memphis Invest or any TK company. Maybe what we can all agree on is that not all TK companies are ethical but not all TK companies are unethical. I don't necessarily believe that $143K is highway robbery but it seems relatively high to me on the surface. I guess I am just seeking transparency and setting my expectations accordingly from a TK. I think @Patrick Ellis summarized it well. Do I go in knowing,

Pros: Turnkey, X% ROI from the get go (in most cases), no near term cap-ex surprises

Cons: Limited exit strategy in short term  <--- ??  

Also to your comment about showing me properties outside of my comfort zone. Possibly but possibly not. If I know that annual ROI scales linearly (ideally) or logarithmic, etc then I may not mind paying for a home that costs more. I think there are pros and cons to that as well. i.e. One less home to maintain vs one less income stream.

@Alex Craig I suppose that could be the case .  It might be that my "ulterior motive" sensor is not operating at 100% but I did not sense "come with me instead" at all.   Besides, non realtors have contributed to this thread expressing their concern stemming from their experiences.  My take so far is that people on either side of TK are pretty passionate about their views and it's just not a one size fit all.

[Alex Craig]

@Warren A. Turnkey vs Non-Turnkey/Realtors is kind of like Trump or Clinton. No matter what the case is for either side, you are either one or the other and both sides are passionate for their model. 

[Chris Clothier]

Originally posted by @Warren A.:

@Chris Clothier Thank you for taking the time to comment and articulate Memphis Invest's value proposition. Please note that I only mentioned Memphis Invest with respect to Calculating After Repair Value property thread talking about ARV. It has not been my intent to write anything defamatory about Memphis Invest or any TK company. Maybe what we can all agree on is that not all TK companies are ethical but not all TK companies are unethical. I don't necessarily believe that $143K is highway robbery but it seems relatively high to me on the surface. I guess I am just seeking transparency and setting my expectations accordingly from a TK. I think @Patrick Ellis summarized it well. Do I go in knowing,

Pros: Turnkey, X% ROI from the get go (in most cases), no near term cap-ex surprises

Cons: Limited exit strategy in short term  <--- ??  

Also to your comment about showing me properties outside of my comfort zone. Possibly but possibly not. If I know that annual ROI scales linearly (ideally) or logarithmic, etc then I may not mind paying for a home that costs more. I think there are pros and cons to that as well. i.e. One less home to maintain vs one less income stream.

@Alex Craig I suppose that could be the case .  It might be that my "ulterior motive" sensor is not operating at 100% but I did not sense "come with me instead" at all.   Besides, non realtors have contributed to this thread expressing their concern stemming from their experiences.  My take so far is that people on either side of TK are pretty passionate about their views and it's just not a one size fit all.

 Warren, I have no issue with your initial posting or any of your follow-up and certainly don't think you were defaming my company.  You were asking questions and responding to what was being asked or even what advice you were getting.  One of the problems with a forum is that everything is in a vaccum.  No one knows your decision making and often all of us who comment are only commenting based on what info. we have.  So I rarely take exception with what is said, especially when you are simply trying to make the best decision.

Just a little food for thought for you.  You have to remember that the word Turnkey is nothing more than a marketing term.  It does not signify anything anymore.  With many properties that are marketed as turnkey and even companies that market themselves as turnkey, you will still deal with capital expenditures.  Why?  Because it is human nature to compete on price and competing on price means cutting corners.  

The alternative, and part of what I discussd above, is buying the highest quality you can find.  Not just in terms of house, but also in terms of service to not only you but also to the residents of your investment properties.  The highest quality homes, renovations, management.  The highest quality services, technology and a fully-staffed company that can actually offer and deliver on all of those services.  There is so much more that goes into successful passive investing than just buying at the lowest cost possible.  You certainly do not want to over-pay.  But you do want to get the proper value out of your invesment.  

Certainly there are companies other than Memphis Invest that offer a great value for the price you pay.  I have listed on here many times other companies that I personally know and think do a great job for passive investors.  Most of them are selling at a high price point and do extensive, extensive renovations to their properties on the front end.  They may still compete on price to a small extent, but for the most part they value their benefit so much that they simply will not chase a sale.  Companies that compete on price will always chase the price to the very bottom to get the sale and that is never good for the investor.  

You made a great point about one less home to maintain vs. one less home to earn an income.  You have to look at your basket of dallars to put toward your investment return.  If you are choosing to invest in properties, you still have the same number of dollars to spend.  Should you buy one property that is super expensive, yet fully renovated, commanding a higher lease and attracting a higher qualified resident?  Or should you buy 10 super cheap properties that allow you to spread expenses over multiple doors, yet almost certainly will have higher turnover rates, consistent maintenance, longer vacancy and a more challenged resident from the stand point of qualifications?

Both come with different, but high risks.  Yet, you use the same basket of dollars to build your portfolio.  So, what you are looking for is earning a return on every dollar. More houses does not necessarily mean more of a return and neither does buying one expensive property.  What matters is how that return is actually delivered.   

As an investor myself, I always advise other investors to make a wise decision weighing the risks of both strategies.  Most passive investors are going to be safest buying in median price ranges for the markets they are buying and focusing much more heavily on the service they and the residents of their properties are going to receive.  That is where the difference is made.

Now active investing is different, but for passive investing, keep in mind that you only get to put your dollars to work once.  Quality is much more important that quantity when it comes to actually earning the return you expect.  Above all, you want to make sure that your expectations are going to be met by your investment.

As always, best of luck as you move forward and if you want to expand on your expectations, feel free to reach out. 

[John Thedford]

You make your money when you buy. TK companies are in the retail selling business. Check out Jay Hinrichs site on turnkeys. You best strategy will probably be working with a good agent, making offers that make sense, and hiring a good PM company to lease it for you. 

[John G.]

@Warren A. Just read through this post. As I'm in a similar situation. What'd you end up doing?

[Warren A.]

Originally posted by @John G.:

@Warren A. Just read through this post. As I'm in a similar situation. What'd you end up doing?''

I went with a TK based in Memphis.  So far so good.  PM me if you want more details.