Is This a Great or Terrible Deal?

Question

I was looking to buy a turn key rental property which lead me to Matt Bowles and Maverick Investor Group, but after speaking to him, he mentioned that they are now offering turnkey Buy-Then-Renovate properties as well which sounds even better.

I'm out of the U.S. most of the year but I love the idea of the BRRR model after hearing it on the Biggerpockets Podcast and think this  would be the easiest way for me to get in while living overseas.

What do you think the downsides and potential downsides are of buying a deal like this one at West Atlantic Street Philadelphia, PA 19140

Details:

What do you think about deals like this? What are the possible downsides?

Looking at the property, neighborhood and comps, it looks like I'd be overpaying, but with the builder guaranteeing they'll buy back the property if it doesn't appraise for $80,000 or more ARV and guaranteeing the rent and numbers, it looks like the cash flow is great.

I love that it's turn key. I love that I can refinance and repeat. And the model seems perfect on paper, and I'm okay overpaying a little for the convenience as long as the cash flow makes sense like this one.

Should I do it? Would you if you were in my situation?

Thanks for your help!

Mike H. · Answer

I don't see the estimated repairs on that house nor do I see the estimated ARV for that house so I can't even attempt to do an analysis on the deal.

That being said, here is what I would expect:1) A true turnkey rental is typically where the turnkey company buys, fixes up and gets a house rented and then sells it to an investor at retail. They then manage it. It requires the investor to put down the 20 or 25% down with no way of getting the money back out on a refi because there's no equity capture on the purchase. But the returns on the down payment tend to be decent to still make some sense to do as its better than sticking your money in a cd or even in the stock market - when you factor in appreciation and principal paydown.

2) To buy from a turnkey as buy, rehab and rent seems a bit different. How is the transaction being setup exactly? Are you putting down 20 to 25% of the purchase so you can close on the house? And then having to come out of pocket for the rehab?   And then trying to get some of your money back on a refi?

Who is taking the risk should the rehab go over their estimate because they find something new when they open the walls? What is the estimated all in price after you purchase and rehab? 80% ARV? 90%? 100%?

I'm just not sure how they're structuring that kind of deal. When/what you're actually financing. And how much value you're gaining/losing.

If you're purchase and rehab is still coming in at 100% of the ARV, then why deal with that? Just buy one already done and rented? If you're at risk if the rehab goes up, then why do that? Even if they estimate an all in price at 90% ARV, you may end up going way over rehab and having it come in at 110% of the ARV.

Just seems like too many risks - at least it does knowing how these turnkey companies like to guarantee their profits at the expense of the buyer and without knowing the actual terms of a transaction like that.

Lana Lee · Answer

I don't know if I'm in a place to give you an advice, since it looks like you have more experience with buy and hold. Just interesting to analyze this deal for myself since I am from Philadelphia.

1. By looking at the comps for 19140 the median price for similar homes is 55K. Do you also have to pay for renovations?

2. Check out Hotpads for 19140 and there are like 6 pages of properties for rent ( talking about competition) with median price of 900-950 for 3br. Comparing with let's say 19115 zipcode that has like 1 page of for rent properties.

3. It is a bad school area, where schools ratings are 1 or 2, comparing to 6-8 in 19115

4. Looking at philapropertysearch

the market value of similar property on that street is 36k . You can check out what is yours if you know the address. This numbers sometimes are somewhat  lower then actual comps sold,  but still, you get the idea.

5. What I would personally do with 80k, I would use it as a down payment and clothing costs for a duplex somewhere in NE Philadelphia, maybe. As a new investor I try to stay away from such areas with cheap property and bad schools.

But that's just me. Would be interesting to learn from more experienced investors out here in Philadelphia.

James Wise · Answer

Best way to avoid a situation like this is to get a 3rd party inspection as well as an appraisal prior to closing. Also a good move to buy with a loan instead of cash, especially when you are just starting out. By buying with financing instead of cash investors can utilize OPM (other peoples money) & be forced to get a bank appraisal. Bank isn't going to let you run wild with their money.

James Wise · Answer

I don't see this being a big risk. You can simply hire another property manager. Every major city in the U.S. is flush with Real Estate Brokerages.

Clayton Mobley · Answer

@Johnny Chen in the turnkey industry we call this 'pay to play'. It's a system where the investor who wishes they could be more hands-on but doesn't have the time or experience gets the 'privilege' of taking on the risk of the rehab (and all that vacancy time) in exchange for feeling like their getting their hands dirty. In truth, the selling company knows what they're going to do for rehab, they have streamlined processes and suppliers (economies of scale like this are how turnkey companies keep costs low and make money), so the buyer doesn't actually get a lot of input on what happens to the property. The main difference between this and true turnkey (where you don't close until the rehab is complete) is that the turnkey company gets to pass on some risk to you since you close on the distressed prop and then foot the bill for the reno.

I think you're right to pass on this. If you want something that is done for you, just go full-service turnkey and let the company take on the risk of rehab surprises. If you want to DIY and force some equity through buying distressed and then upgrading yourself, refinance, rinse and repeat, then you'll need some more feet on the ground and a bit more research under your belt. You're in the right place either way!

Best of luck,

Clayton

Yuriy Skripnichenko · Answer

@Mike H. great points!

@Johnny Chen

I'd say the rent in the area is about $950-1050 for a 3br. However, on the company website they do not say anything about the condition of the property and what kind of renovations needed. From my understanding they want to sell the property to you and then use your money to do repairs?

I also looked up the area comps and saw this property as well. Feel free to reach out and I can give you some insight

Larry Turowski · Answer

@Johnny Chen Appraisal and what you could actually sell the house for are two different things.  Theoretically they shouldn't be far off, but they can be.  It might be that the house would appraise for $80K, but you'd never be able to sell it for more than $70K.

Also, you'll likely need to leave at least 20% equity in the deal after refi.  This may limit your rinse-and-repeat.

Finally, you say you don't mind overpaying a little.  I assume you mean for rehab and not for the final product.  Otherwise, just buy something already done.

Account Closed · Answer

What's your contingency plan? The turnkey company goes out of business and shuts its doors how are you going to re-coup your investment?

Is This a Great or Terrible Deal?

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