Turnkey Inspection report - here we go again!

[Constance Kawa-Small]

Hey BPers!

I'm tackling a couple of strategies to diversify my investment knowledge and I am currently in escrow for 3 turnkey properties from the same provider (C neighborhoods, SFR between $65K-75K, projected numbers were looking good). I received the inspection report for the first (non-biased inspector, not referred by them) and the "deficiencies" list was quite longer than I expected. Now, I know, I was not expecting a perfect TK. I have been digging into forums, posts, articles and reading a TON of information and opinions on the matter. @Ali Boone 's article (https://www.biggerpockets.com/blog/2015-02-08-property-inspection-important-get-the-most-out-of-yours) was SO enlightening! I am also aware I should focus on the major issues that have to deal with durability, safety, or dependability of a rental home. A hand picked items from the report:

- quite a few minor electrical issues (determined safety, will ask provider to fix)

- leak from upstairs bathtub going to the downstairs kitchen ceiling and 2 other rooms with visible current water damage (quite concerned)

-insulation on only 25% of the roof (how do tenants keep warm?)

- no flooring in one of the bedrooms (wait, what? I know it's cosmetic, but I just got SO disappointed that a turnkey DID NOT have flooring at all in that bedroom??? Or should I not worry because tenant's deposit will be held for damage at some point?)

So tell me, my fellow TK investors, when is it worth going through and asking for the repairs and when is it just too many, making it not worth closing the deal?

[Chris Clothier]

Originally posted by @Constance Kawa-Small:

Hey BPers!

I'm tackling a couple of strategies to diversify my investment knowledge and I am currently in escrow for 3 turnkey properties from the same provider (C neighborhoods, SFR between $65K-75K, projected numbers were looking good). I received the inspection report for the first (non-biased inspector, not referred by them) and the "deficiencies" list was quite longer than I expected.

 Hi Constance,

I think this first line is where the issues start.  Remember that the word Turnkey is just a marketing word and it is severely overused today on BP and elsewhere.  Investors, unfortunately, have attached too much meaning to it and find too much security in the word itself.  I should know considering the length of time we've been in this particular niche and how large the portfolio is that we manage.  I've seen the ups and downs of the industry and the dangers that today's investor faces.

I think a few of those dangers are outlined in what you described.  A price point of $65k to $75k is going to be very, very difficult for a company to delivery a high quality, highly desirable and high demand investment property when it is being sold Turnkey.  The math simply does not work to allow for the property to be purchased, properly renovated with permits, holding costs covered and then sold with a profit margin.  And in today's environment, it is even harder.  Everything costs more.  The price of housing is up.  The price of materials is up.  The cost of labor is up.  You simply cannot expect a property to have real 'value' when it is being purchased so low.

Second, neighborhood classification is incredibly difficult for passive investors.  It is so easy to say a property is a particular class of property and 'C' class is the most popular because it sounds inexpensive, middle-class and a few a few nicks and bumps are excused.  In reality, letter classifications are easily manipulated and used to sell properties  easier. 

The advice you've already received is all good.  The reaction of the seller is going to be very telling and should go a long way in your determining whether to move forward or not.  I don't know enough to give you advice about moving forward or backing out, but my 30,000 ft advice would be to back out of these, reduce the number of properties you are buying to two and move up in price point.  Again, without knowing the city itself, I would advise to check the median price point of the area and look to invest closer to that price. 

Either way, hopefully, you find some good advice on here and do great with your investments!  Best to you ~