Low Appraisal for a Turnkey Property

[Ron James]

As a new real estate investor, I decided to ease my way into SFR ownership through turnkey companies. After vetting companies, I settled on two in markets I decided to invest in (1) Memphis Invest, and (2) Memphis Investment Properties. Yes, I confused the two at the start. However, as I selected properties that I wanted to make offers on with each, I learned that the two were very different in at least one important way – at least for me.

The PSA I was sent from Memphis Investment Properties (MIP) had an appraisal contingency that gave me several options if the property didn't appraise for at least as much as the purchase price, including allowing me to cancel the contract. As it turned out, the property appraised above the purchase price and I closed on my first rental property.

However, the PSA I got from Memphis Invest had no appraisal contingency. When I brought this to the attention of my Memphis Invest Portfolio Advisor, she explained that I would have to go through with the purchase even if the appraisal came in lower than the purchase price. She said that appraisals occasionally came in low and that I should be prepared to bring additional funds to closing in case it happened to me. Because Memphis Invest wouldn't negotiate on this point, I didn't commit to buy the property. 

As a newbie, I'm wondering which of these approaches to low appraisals in purchasing SFRs (MIP or Memphis Invest) is more common among turnkey companies. Also, are the any circumstances in which an investor should be prepared to make up the difference out of pocket for the gap between the appraisal and the purchase price? Although this doesn't seem prudent to me, I'm open to learning about circumstances beyond my limited knowledge about real estate investing in which this might make sense.

[Jay Hinrichs]

@Chris Clothier  well Clayton Morris comes to mind of the worse of the worse I have witnessed.

those that give inferior product usually don't last to long.. so longevity in the market place is a key indicator.

right now I see the TK  industry if we can call it that somewhat stressed.. to do full renovations like your company does you simply have to move up in asset class and price points.. you cannot do a full rehab on a 75k exit property MOST of the time.

so something has to give.. 

The wholesaler community has not helped this at all.. with everyone and their brother jumping in.. then wanting to make 10 to 20k or more on a wholesale flip this drives up prices as well and when that happens renovation budgets get paired back. 

The other thing I see happening frankly is the investors themselves they all have this saying  ( My Criteria ) and basically they read on BP or other places about your failing if you don't get a 10 or 12% return or more etc etc.. we see this on BP as well Hey why are you buying there when you can get double digits here.. .. And again with those ( especially turn key ) as they are new they just don't know the risk they are taking for those returns..  I know many companies realized this long ago and moved up and out of certain asset class's as it just not sustainable for the investor or the TK company. 

I mean really what's the difference in a 150 cash flow and a 200..  its a whopping 600 a year.. but to those that are focused on % returns they just look at that with no context to the risk they are taking.. 

and what kills landlords   ???    Turn over  Cap ex  and tenants that are under the median income of an area.

But median income or median price point houses in most MSAs are not the highest returns out of the gate but have the stability and the ability to raise rent and you can do a much nicer job on the reno to cut down on major expenses.

so bottom line we are talking about 30 to 60 year old homes generally speaking.. and most of the componants are beyond useful life.. so to get a home that is going to treat you well over the next decade you need.

1. new roof  6 to 10k

2. New Hvac  4500 to  6k

3. upgraded panel and electrical and all wall sockets etc  3k or so.

4. A real paint job and calking  3 to 5k 

5.  And this is a big one new energy effiecient windows..  5k and up.

6. new doors and trim packages 3k or so.

7. new cabinets and appliances 3 to 4k

8. new water heater and vented properly  1k

9. and this is a big one  NEW Sewer line to the street if its not PVC already.. 2 to 5k  this one catch's many flat footed.

10. Flat work replaced or repaired..

11. little bit of landscaping

12. new light fixtures.

13. tenant proof flooring.. 

And so to buy a rental that your going to have a solid 10 year run on.. there is no way your doing 10 to 15k renos  So U simply get what you pay for.. 

And of course I stole this one from you.. there is a vast difference in a 1200 to 1500 dollar renter than a 600 dollar renter VAST.