Working with a real estate agent

[Lauren Brown]

I am new to the Memphis, TN area as well as real estate investing. What are your thoughts on working with a real estate agent? How would that benefit the agent and the investor? Does anyone know any real estate agents, attorneys, title companies and contractors in this area? Any suggestions are greatly appreciated.Thanks. Lauren from Memphis

[Alex Craig]

@Lauren Brown here are the differences as I see it. 

Working with Turnkey: Seller owns the property, thus has skin in the game. A good provider will fix up the home in a manner that will reduce maintenance and vacancy. By this I mean, a turnkey provider may put vinyl plank flooring in high traffic areas instead of carpet, which saves you thousands over the lifespan of your investment. Something simple like that will put more cash flow in your pocket through less maintenance.  To reduce vacancy, a TK provider could rehab the house to make it look new (new countertops, ceramic tile, new vanities, cabinets, etc), so that it makes your property more attractive to prospective renter instead of a landlord whose home looks like it has not been updated in 20 years. Basically, they are addressing all the things on the front end for you to be successful on the back end.  Some TK providers will provide a warranty so that your cash flow is not going in the wrong direction after your purchase.  When you order a home inspection, a TK provider will fix most everything on the report--again, making it right on the front end to cash flow more on the back end. With all of these benefits comes a cost, which is paying more for the property.  You would want to make a decision, what is more important equity or cash flow.  If you are going to buy in the Midwest or SE, cash flow will be more important as most are linear markets.  You need to hold those for a longer period of time.  Equity in the Midwest & SE for a long term buy and hold does not do much for you.  For example, if you buy a $85,000 home that is worth $100,000 and you have to replace the carpet 2 times, roof and HVAC in the first 7 years, you will probably have not made any $ on your property. Another advantage is typically the TK provider and PM are owned by the same company, thus creating accountability. 

Working with Realtor: Main advantage is getting a deal with equity. Keep in mind, there is going to be a reason why a seller who is an owner occupant is leaving equity on the table.  Likely the reason is condition of home. A seller may not fix but a few items on an inspection report.  Remember, if they are leaving equity on the table, they probably do not have much money to fix items that would show up on a inspection report.  Another scenario is the home is in great condition, but out dated, which could impact the rental amont and time on the market it takes to rent out.  In todays market, ther are to many landlords offering great looking homes for a tenant to settle on a outdated home with zero curb appeal. In this scenario, the seller will likely not fix all the issues. If you buy a foreclosure through a Real Estate agent, then that would be your best shot at equity as maybe they have contractors who can fix up the home.  If you go this route, you may be looking at all cash purchases as a lender will not loan you money on a distressed house.  Even if they did, there are to many cash buyers to compete with to make an financing offer. Again, upside here is best shot at equity and cash flow. Downside is the cash up front and the amount of time you are putting into a deal.  You may make 15 offers before you finally get one. Imagine the time to evaluate a home and not get it. Also, the offer may be time sensitive, thus you are having to drop what you are doing to evaluate the deal and again, might not get it.  The other downside I see is managing the rehab, even though your Realtor may be helping, from out of state. You could give away a lot of your equity plus some if a rehab goes wrong or contractor walks off your job with your money. I have seen that over and over again. I would say at least once a month we get a call from someone where we are asked to clean up a mess. Unless the Realtors owns the PM company, there is no tie back after the sell. Realtors get paid off commissions and only get paid with a sale.  Those goals are not aligned.  You can say the same thing about a TK provider, but they control their own inventory and selling a home should not be an issue for a good TK provider and again, they are tied back to a property.

Short answer: 

Realtor is your best shot to gain equity, but I think a higher risk and certainly more time.

Turnkey: little to no equity, but accountability and good chance of better long term cash flow because it should be a better product with large capital expenses addressed on the front end, plus most all the items on a inspection report.

The bottom line, regardless of how you are buying a home, you will be buying a home from someone selling a home, whether it be a TK provider, bank or owner occupant. You may want to try both and see whose gives you better customer service, who can offer a better product, who has the better management, then weigh all of that and see what is right for you.