Turnkey Properties overpriced?

[Michael Sarrail]

Can of worms being opened? Yes, I know ... sorry. But I do have what I believe to be a legitimate question and hope to get some honest feedback.

Now, I know there are lower cost options on buying rental properties. You can buy distressed, rehab then rent. You can find an undervalued property. You can PM yourself to avoid the additional cost inherent in buying TK. Lets say those are off the table because you are starting out and needing to invest in areas outside your local market.

Getting past those options, and others I missed, I have the following question. I read many posters saying that turnkey properties are, in general, overpriced. Some say that they are over market value. I am sure this can be the case at times.

Buying TK and using financing, the lender requires an appraisal. If the appraisal is higher then the selling price would that be evidence that the property is at least at market value if not under ... even if only 5%?

How much weight can one give to an appraisal made during the purchase process? 

[Ken Vingua]

I think @David Faulkner was attempting to mock the claims that many turnkey providers claim. There are bad companies out there that have inflated pro forma, the rehabs are not completed to the standards that they claim, and they use CAP rates as a selling tool on a SFR where the cap rate is irrelevant.

Now to address your post without any cynicism. To call them overpriced would be an opinion based on other methods of acquiring SFR. I recently purchased, 2 months ago, a SFR from a turnkey company and had a good experience. I have a few rentals that I have had for more than 7 years but I stalled and got away from purchasing rentals. I decided to reeducate myself and get active again. What I found was that I had the motivation and the capital but none of the time. In came the turnkey company that made things easy. I did find many of their properties "overpriced", I did not believe they fell within the price range of the comps, the numbers looked off and the properties did not have what they considered their standard rehab completed. I simply turned away from these and over a period of 2 months kept turning away offerings in the areas that I was looking for. In the end I purchased one that had an adequate rehab completed in a B class neighborhood, that is projected to have a 11% cash on cash return after deducting for maintenance, vacancy, and Cap Ex. The appraisal came in 6% over my purchase price which was an added bonus. I would not consider this overpriced but in no way a steal for me. I paid a retail price for a rental property and in this BP world of direct mail, wholesaling, and BRRRRing, retail purchases are overpriced. As long as the appraisal covered my purchase price then I do not think it is overpriced it is market priced. Completing a deal like this leaves me with no added equity which limits my exit strategies and will make it difficult if my situation changes and I need out of this investment.

I walked away from this more educated after analyzing deals, neighborhoods and having someone to bounce my questions to. I never felt oversold or lied to and would recommend it to people who are limited on time and want a package deal investment that can help them to better understand the principals of deal analysis. That said, I do not plan to use them again because I believe I can achieve a better return and have dedicated the time to do so. I am under contract on another home but am going to do some rehab and have immediate vacancy while I find a tenant. This will cause me some added stress and cost to increase my return to 17% CoC. We will see if trying to avoid the "overpriced" turnkey on this property will really get me a better return.