Quick tips for Due Diligence on Turnkey Companies and their Data!

[Chris Clothier]

I speak a few times a year at different real estate industry events and even a few entrepreneurial conferences.  For the past couple of years, after noticing a really disturbing trend in the marketing practices of Turnkey companies, I've started focusing my talks on how companies can use good marketing practices and how investors can cut straight through the crap and eliminate companies that deliberately lie in their marketing.

I am going to give every out of state investor looking to buy Turnkey properties or even looking to hire property management two quick lessons and five tips on good due diligence.

First, ask questions.  Ask a lot of questions.  Here is an article I wrote that is still one of the most frequently emailed articles I receive when investors have questions.  I know this is an important topic right now.  Too many investors are being misled by Turnkey companies and their shoddy marketing and management.

https://www.biggerpockets.com/renewsblog/2014/03/1...

Follow that list of questions and then ask the mirror opposite of those questions and see if you the two answers line up.  

Example - What is your occupancy rate?  A little later in your conversation, ask the company what their vacancy rate is?  These are mirrored questions and the answers should line up.  

Then, ask the company how many properties they are managing?  After you get your answer, go to the companies website and get a list of their available properties.  You now divide the number of properties available by the number under management and you have the actual vacancy and occupancy rates.

Real life example:

Today, I opened an email from a local Turnkey company advertising for more rental agents.  They said they had over 200 local vacancies in Memphis and had immediate income opportunities.  Then on the same day, I opened a marketing mailer from the company congratulating me on a recent purchase I made in Memphis and inviting me to use their property management services.  Now follow me here...

The letter said they manage 1,800 properties.  A big selling point in the letter, highlighted no less, was that their owners loved them because they have 97% occupancy and they invite me to move my management and buy from them.

I re-read the email advertising for rental agents to rent their 200 vacancies.  I looked at the letter saying they were managing 1,800 properties.  I did the math.  I didn't work out to 97% occupancy.  It worked out to 89% occupancy.  That is a BIG difference!!!

So, I went to their website just to see what it showed figuring surely this was an innocent mistake (yes, that was typed sarcastically).  The website showed 174 properties currently available in the Memphis metroplex.  WOW!!

Again, I did the math.  

It showed an actual occupancy of 92.4%.

That is a respectable number.  Not great, certainly not something to parade around as the best of the best, but respectable none the less.  So why advertise a lie?  Especially when the same company is advertising for investors to meet face to face when they travel to California - the land of the out of state investor!  The answer is easy.

Companies know that if you give specific data, you are less likely to be questioned and challenged on the veracity of what you are saying.  I am in the industry masterminds and have one on one conversations.  I understand the thinking - even the stinking thinking!  Giving very specific answers is often enough to satisfy out of state investors...truth be damned.

What a low hurdle for a company to get over!  

Investors must do better if they want to protect their investments and make solid, informed decisions.  The data is right in front of us most of the time.  

You Must Question Everything!!  You cannot take anything marketed to you on Faith!  That includes my company.  You must always verify what you are being told.

Second, in today's environment, you must be a patient investor.  There is no need to rush.  You must use every advantage given to you to make informed investment decisions.

I see a lot of investors choosing to rush into investments.  Many paying all cash without any third party assistance in reviewing the property or assessing its value or inspecting the renovation work and permits.  These are basic mistakes.  Here are 5 additional tips and advice that will help you patiently make your decision on who to do business with: 

1.  Order an inspection with a third party.  Perhaps, a company can and will earn your trust, but make them earn it first with their performance.  Even those with the best reputations can make mistakes, so inspections help investors to verify.

2.  Make sure permits are being pulled for work requiring permits.  First, ask the company if they pull permits.  A vast majority, especially here in Memphis, avoid the permit office like the plague.  The answer you will get is that they are expensive and time consuming.  The answer you will hear from me is that they are required!  Even the best can miss a permit here or there.  It happens when the trades (plumbers, electricians, etc.) are pulling the actual work permits. But, not pulling permits at all as a policy due to time and costs is a reason to walk away from doing business with a company.

3.  Take pause when you are REQUIRED to use cash.  A company that requires you to use cash knows something that you don't know...  that most likely, a bank wouldn't finance this purchase to begin with.  If that is the case, those properties are usually best left to the local investors who understand and want to take on their own risks.  Banks avoid risk for a reason.

Paying cash is perfectly fine - I do it all the time.  Being REQUIRED to pay all cash is a red flag.

4.  Speak with multiple companies.   Even if you know you are not going to use them, interview multiple companies.  Use the questions from the article above and put multiple companies through the test.  Compare your answers.  Get used to detecting when the answers are not quite adding up and then get used to verifying the data online.  

5.  Go visit whomever it is you are going to deal with.  Who you do business with when buying and owning out of state is WAY more important than the properties themselves.  You can always say no to a property that does not fit your needs.  But once you say yes, if you have chosen a company that uses bad marketing data to attract clients - you could be in trouble!  

[Jay Hinrichs]

@Chris Clothier  Nice post Chris..  as you said turnkey as its thought about is simply a rehab flipper.. that usually  owns PM..  I mean I am turnkey I was the number 24 new home builder out of the top 30 in the Portland market.. and all of are product are TURNkey I suspect  they are brand new homes.. just like the buys I fund here in the PDX metro area they are flippers.. they just NEVER sell to investors its all home owners.. and homeowners want fresh new modern rehab.. 

so investors same thing they want fresh new rehabbed rentals.. and if you can bring the management component that helps them.. but I bet Memphis has their share of flippers that sell to home owners.. they are turn key in a sense.. IE the buyer does not want to do any rehab or updating work..  just like we see on all the HGTV flipping shows Not a one of those is targeting investors its all home owners..

So for those looking to buy rentals there Is more to it than a fresh rehab especially in renter dominated markets.. where PM is KEY to success.. house is of course important but PM is critical..  Vacancy is a fact of life in the rental industry people move on.. I don't know what a good vacancy rate is as opposed to a bad one.. but if your managing 2k to 10k houses I suspect your always have some manner of vacancy.. 

the main take away for me is you simply cannot buy property in the "cash flow markets" were your buying in the lower third of the economics of a given MSA.. those are just tough for whatever reason history has proved this.. most of the buyers have only them selves to blame here.. they are all mesmerized about COC returns and take risk they just don't understand.. then they blame the tenant and the asset.. when in fact its their own choices that lead to the inevitable in low value asset or bottom third in price point in a MSA.. I don't care how well you rehab the house and if U pull all permits if your tenant base is abusing and transient your goose is cooked before you ever started..