Turnkey Inspection report - here we go again!

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Turnkey Inspection report - here we go again!

Constance Kawa-Small
Rental Property Investor · Pittsburgh|Detroit · Member since 2019 · 75 posts · 39 votes

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?

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Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
6y
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 ~

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  • Scott Passman
    Rental Property Investor · Batavia, IL · Member since 2018 · 452 posts · 672 votes
    6y

    @Constance Kawa-Small  I had a similar situation when I worked with a turnkey company earlier this year.  My inspection report was significantly longer than I expected and when I went to visit the property (which was 3 1/2 hours away) there were even more things like counter tops unsecured on cabinets, baseboards missing, pieces of flooring that were already pulling up, some water damage in one of the bedrooms etc. While it was initially very concerning, the operator was quick to apologize and we did a walk through of the property and made a list of everything that needed to be fixed/finished and they took care of it.  The reason given to me for the issues was that he hadn't walked the property in a couple weeks and while the construction crew (third party, new company they were trying) told them they had just finished up he hadn't been out there yet to verify and check their work.  Now, there were a couple things that were left unfixed that I learned I should have pushed for because several months after closing guess who paid for it....me.  

    All this is to say that I wouldn't necessarily write the company off based on the inspection.  Bring up your issues to them and state your concerns. If they respond well and are quick to get things taken care of then perhaps it is still worth following through on the deal.  If they don't have a good reason why there were so many issues on the report (construction delays, hadn't visited the property in a bit prior to inspection to confirm work was done well etc) then you may want to ask if you trust them to actually do a good job fixing what you will bring to them.  Good luck!

    1Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    6y
    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. 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?

     Well, as we all know properties are never perfect. I understand a leak or so that may have started recently, or could have been missed. The floor is a red flag for me. If it is a Turnkey, then at the least the cosmetic items should be new and completed before you even get to this stage.

    The other big question is how did they respond? Is the Provider willing to repair or replace all of the items? If not, I would be concerned. Also, will there be a tenant in place before closing? If not, it is not a Turnkey. 

    2Reply
  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    6y
    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 ~

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    11Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    6y

    my question is: are you not able to buy closer to home where you can put hands and eyes on what you are spending your money on?  Turnkey is a gimmicky way to upsell properties that are not generally worth what they sell for. Also OOS buyers destroy the local markets so local folks can no longer afford to live in their town/neighboorhood, etc 

    Unless you have the available funds for the repairs (and water damage as described is expensive to repair) i would suggest finding a different property (and real estate agent). Maybe buy closer to home and find a newer product in a better area. 

    1Reply
  • Clayton MobleyPro Member
    Birmingham, AL · Member since 2014 · 875 posts · 947 votes
    6y

    I agree with @Tom Ott and @Chris Clothier, I don't think this is truly a turnkey. As Chris said, the term is overused a lot. Some companies advertise a property as turnkey meaning that it is "ready to move in". A true turnkey does all of the work on their time and dime. The turnkey company has
    networks and systems in place to find the best properties and rehab to a high standard and
    quality. This also means that you won’t have to worry about vacancy risk during the rehab
    process.

    Closing happens after the rehab is finished and inspections are passed, this means that you won’t have any risk during the rehab stage. The turnkey company benefits from the spread between what they put into the property and the market price they sell to you. The price you purchase the property at should be market price, a reputable turnkey company won’t inflate their values and third-party appraisals should back up the prices. 

    Best of luck

    3Reply
  • Constance Kawa-Small
    OP
    Rental Property Investor · Pittsburgh|Detroit · Member since 2019 · 75 posts · 39 votes
    6y

    @Tom Ott thanks for your reply. The property is tenant occupied. 
    I haven’t brought the report to the provider yet, but as @Scott Passman, @Bob Prisco and @Chris Clothier suggest, I see that their reaction should be my queue in deciding to move forward or not. 
    @Mary M. I wish I could invest in my market, but Hawaii is way out of my price point. 

    thank you all for your inputs! 

    1Reply
  • Kiera Underwood
    Real Estate Agent · Oklahoma City, OK · Member since 2019 · 956 posts · 600 votes
    6y

    @Chris Clothier hit the nail on the head! The definition of turnkey really varies. You've got ask what the condition of the property is. Has it been fully ripped to the studs or just kept in rentable condition along the way? There isn't a wrong answer here. Almost every investor I know would rather snag something that's cash flowing higher and has a better equity position.. so they prefer a hoe that hasn't been fully flipped. However, some people really want the security of a completely remodeled home and will pay for that clean inspection report. 

    The wrong answer is a provider who doesn't help you understand exactly what they're helping you secure you upfront. 

    2Reply
  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    6y
    Originally posted by @Constance Kawa-Small:

    @Tom Ott thanks for your reply. The property is tenant occupied. 
    I haven’t brought the report to the provider yet, but as @Scott Passman, @Bob Prisco and @Chris Clothier suggest, I see that their reaction should be my queue in deciding to move forward or not. 
    @Mary M. I wish I could invest in my market, but Hawaii is way out of my price point. 

    thank you all for your inputs! 

    Good luck with it.  Feel free to come back to the community if you are not comfortable with their response.  Hopefully, everything goes as you expect!  best - Chris

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    6y

    @Chris Clothier hit the nail on the head and said everything I was going to say....at that price point, you are simply going to have a property with a lot of issues in todays market.   Cheap vs quality is going to have a battle. If you want to be more on the quality side of things, youve got to be at higher price points than that.

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  • Bob Prisco
    Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
    6y

    @constance k

    @Constance Kawa-Small simple offer a lesser amount 

    0Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    6y

    @Constance Kawa-Small You’re smart to have gotten a 3rd party inspection. Although there are a few trustworthy TK providers out there, my suspicion is many of them are selling chaff to OOS investors who just don’t know any better because they don’t know the market intimately (block by block, house by house) and they simply aren’t there to verify what they’re being told is accurate. Think about how employees behave when they know the boss is on vacation. Imagine how they would behave when they know the boss is literally ALWAYS on vacation. You’d have to have the best employees ever to trust them in that scenario. There are trustworthy people in RE but in my experience they’re the exception. Know that this is a dog eat dog industry. I would recommend backing out of these “deals”. My personal maximum distance from home to invest is a 45 minute drive, but if you must invest remotely, I would at least start by purchasing just one property to test the waters. If that goes well after a few years, then consider buying more. I would also at least go with a property in the $150-175k price range that rents for $1500/mo. minimum as lower-end, low rent rent properties are going to be hard to make enough gross profit off of to cover the base costs of maintaining a property, even if you’re doing all the maintenance yourself. The price to rent ratio may be higher, but if the gross rent isn’t sufficient to set aside enough to pay for things like new appliances, windows, roof etc. when you need to, then you’ll be negative on that property over time. Remember cheap is expensive and being far away from your property makes every step of the process not only much harder but also much more expensive because you’re paying others to do every little thing. I know it can be done and works for some, but it’s definitely high risk especially when dealing with cheap properties and “turnkey” providers. Good luck!

    2Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Constance Kawa-Small there is no such thing as a true turnkey property. You can buy a rehabbed property, but the idea that you just buy property and sit back and collect rent is absurd and does not exist. You will always have to be active in owning rentals to some degree.

    What’s the rents on these properties? I am guessing they are 650-750, which in paying someone to do everything for you, will make it hard to make money long term

    2Reply
  • Anthony Rosa
    Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes
    6y

    @Constance Kawa-Small - What a disappointment! I understand with that price range there are things that won't be perfect but it looked like the TK company didn't do anything. Keep in mind, if the TK company picked up the property for 25K-35K then there should be no excuses & you should have a decently rehabbed place. How do they miss flooring? Whether the boss was on vacation or not, this is no excuse and it probably gets worse. The leak could of happened at anytime but considering the other items, i doubt it.  How old is the heating equipment? condition of the roof? windows?  They took your trust for granted and wished you didn't get a third party inspector.  I'd back out fast!  If you can see what they bought the house for, you can find the same deal elsewhere on your own and rehab it yourself.

    1Reply
  • Peter Mac
    Rental Property Investor · Irvine, CA · Member since 2017 · 29 posts · 22 votes
    6y

    @Constance Kawa-Small I'd back out of the 3 escrow. Perhaps test with 1 property only. Jumping in with 3 is careless.

    2Reply
  • Constance Kawa-Small
    OP
    Rental Property Investor · Pittsburgh|Detroit · Member since 2019 · 75 posts · 39 votes
    6y

    Thank you all for your time in responding! I'm so glad to be part of this community.

    Yes, price point is low. This is a low entry point market ($150K ish median) and I did look at records of how much they paid (Zillow, at least). @Anthony Rosa, I agree with you and that's why I was even more disappointed. I knew they had added quite a bit of mark up, and this actually added to my expectation that a better rehab job was done...

    @Peter Mac, I'll give you this one. You are right. I got overly excited seeing all the pro-formas and jumped the gun with 3 offers. I will evaluate the other 2 inspections to see if they are worth the deal.

    Thanks again Community!

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    6y
    Hey Constance! Thanks for the shout-out! :) Sorry I'm a little late to this thread and I admit I haven't read anyone else's responses, so ignore me if I'm repeating anything. But most importantly too- I LOVE that gif/picture. It cracks me up every time I see it, and I never thought about it in reference to turnkeys but I'm 100% on board with using it because it can be very applicable. As far as the inspection report items, I say ask for all of them to be fixed. Asking for them is certainly not too much, especially when turnkeys are advertised as being fully rehabbed. Plus anything not fixed later down the road is a potential expense to you, if it's something notable. Basically, what's the harm in asking? Then once the provider has the list, they can come back and say why they don't want to fix certain items, if that be the case. They will likely give you reasoning for that (or if they don't, be sure to ask) and then you can gauge from there whether you agree or not. Worst case, they don't agree to fix the things you think need fixing... you can walk from the property. But make it a 2-way conversation with them and just see how it all goes. Out of curiosity, what market are you getting turnkeys for $65-75k? Thanks again for the shout-out!
    1Reply
  • Constance Kawa-Small
    OP
    Rental Property Investor · Pittsburgh|Detroit · Member since 2019 · 75 posts · 39 votes
    6y

    @Ali Boone Thank you for your reply and input! I'm fairly new to BP but have been following your articles off the bet, so I appreciate your experienced TK investing advice. And FINALLY I got a hit on that meme - I was hoping it made at least one person smile while reading my thread. 

    But yes, I will share the inspection report with the provider, ask for repairs and see what happens from there. I am waiting for reports on 2 other properties from the same provider, so hopefully this one was just a "bad apple" and the other 2 will be better.

    I'll send you a PM to answer your question on location.

    Thanks!

    1Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    6y
    Originally posted by @Constance Kawa-Small:

    @Ali Boone Thank you for your reply and input! I'm fairly new to BP but have been following your articles off the bet, so I appreciate your experienced TK investing advice. And FINALLY I got a hit on that meme - I was hoping it made at least one person smile while reading my thread. 

    But yes, I will share the inspection report with the provider, ask for repairs and see what happens from there. I am waiting for reports on 2 other properties from the same provider, so hopefully this one was just a "bad apple" and the other 2 will be better.

    I'll send you a PM to answer your question on location.

    Thanks!

    Would love to hear how it turns out! Feel free to message anytime if you want to chat, and happy to give opinions if you want. And yay for the meme! Definitely made me smile :)

    1Reply
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