Financing Turnkey Properties

[Rob Hakes]

Hello All-

I have been looking into buying some properties with a turnkey company.  From what I see, correct me if I am wrong, most of these turnkey outfits are selling their rehabs for quite a bit over 'retail' value.  It seems that they are valuing the property based on potential income rather than market value.  Though it limits an exit strategy, I can swallow that.  

In your experience, how would the lender handle the appraised value? Would they look more at the retail value or the value based on income potential? Would I be required to pony up a bigger down payment to bring the LTV to where the lender needs it?

This would be my first turnkey investment so any input and direction would be great.

Thanks

[Clayton Mobley]

@Rob Hakes I definitely second @Larry Fried - you shouldn't be paying much (if any) higher than market, even for turnkey. Any TK provider worth your time will have the property appraised and the purchase price should be at market or below. You should be able to see the appraisal and ask any and all questions, and get solid, prompt answers. 

I also agree that sometimes you'll want to get your own inspection done, and if a TK provider you're considering balks at that, it's time to walk away. As much as it's true that a good TK prop should provide reliable passive income for many years, you shouldn't be paying upfront for the privilege of having an investment that *should* produce returns.

Yes, Tk providers put in a lot of work on rehab, marketing, research and deal hunting etc and will make their cut by buying a distressed prop and then selling it fully rehabbed to the investor at a fair market price - that's how we make our money, that's the business. That being said, a good TK provider shouldn't be tacking on another 20%. If they need to do that in order to make a decent profit margin, then there's something else in their business model that isn't being done well enough (not finding good enough deals, not maximizing economies of scale to minimize rehab costs without sacrificing quality). If the difference between their costs and FMV is so small that they need to charge the investor extra to make up the difference, I'd be worried about what else they aren't doing very efficiently. If the difference between cost and FMV is pretty big and they tack on extra anyway, well then that's just greedy, and you don't want greed to be the defining characteristic of someone you're going to be partnering with for 10+ years.

I suppose in markets with rapid inflation, like Southern California, such pricing might make some sense, but I'd still be wary - even in the priciest markets like CA, NY, HI, further appreciation isn't guaranteed, so paying extra in anticipation of increasing values seems...iffy. Plus, good cash flowing turnkey props aren't often to be found in those markets precisely because of the high values - the PITI eats up the returns.

On rare occasion, of course, even a good TK provider may need to charge a sales price that's a tad over the appraised value, but not by $20k. Maybe $1-2k, nothing that it would take years solid appreciation to surpass. You shouldn't start an investment with negative equity.

Anyway, just my two cents from the provider perspective. If you're looking at TK and thinking the numbers don't add up, they probably don't. Give the provider the opportunity to provide you with the info you'd need to determine whether the price is fair (look at the appraisal etc), but know that you can and should expect to be able to buy a great turnkey property at market value +/- a couple grand.

Best of luck!

Clayton