Top 5 questions you would ask a Turn Key Provider

[Nathan Nance]

Hey guys I am looking to invest remotely into out of state properties and was curious how to develop a trusting relationship with a "Turn Key Provider"?

Has anyone done this before? Any advice?

Thanks!

Nathan

[Todd Crippen]

@Nathan Nance

Important Questions to Ask Turnkey Providers

Last year, Forbes published a great article about how to screen turnkey companies before you decide to partner with them. I was very excited to see this article published, because of the increasing popularity of the industry over the last couple of years. Here is a brief summary of the article. At the end of each question, I will add my opinion as a real estate expert.

1. What is their track record?

Forbes Advice: Ask for references, and call their previous clients to ask what they wish they would have known before partnering with them. Also, ask if they would partner with them again.

My Take: Some turnkey providers might have a privacy policy in place to avoid such communication. This should be a red flag. Although clients’ privacy is very important, if the turnkey company has a good track record, they should have at least a few clients that are more than willing to be contacted on their behalf. Also, take the time to look for references and testimonials on the turnkey provider’s website.

2. Do they offer maintenance warranties?

Forbes Advice: “Turnkey providers are all over the map in this regard. As an investor, you’ll want them to stand behind their work, but to the appropriate level. If they offer maintenance warranties to shield you from the ups and downs of investing, like tenant issues and unforeseen problems, they are doing you a disservice. You need to be prepared for the full cost and responsibility required to own and operate an investment property. If you take a maintenance warranty, be sure to have a detailed understanding of the costs your provider is agreeing to cover. Things break, even the best tenants have issues and there are many uncontrollable costs that come with owning a rental property. As the owner, it’s imperative that you have full transparency into what is going on at your property and a clear grasp of who and how maintenance is being handled.”

My Take: I quoted this in full because of its importance. I think the tone is somewhat negative, but I agree with the overall approach. I think it is important for turnkey providers to provide a warranty over what they repaired or improved on the property, but I agree that there should be a limitation on what they cover, and if there is not, then this should be a red flag for the investor. Turnkey companies that have experience and a good track record should never warranty tenant caused damage. It is irresponsible for the company to do so. They would be risking going out of business for unforeseen events that are impossible to track. This is not a smart way to run a business. Acts of God and tenant caused damage should not be covered under the warranty for good reason: companies would not be able to adequately forecast the company’s performance and overhead costs, which would impact not only our owners, but their employees as well.

A turnkey provider that follows this approach is more likely to be experienced and built for longevity.

3. Do they offer rent guarantees?

Forbes Advice: Forbes states that rent guarantees are a disaster. They mention that investors have several rental insurance options. They also go on to say that companies go bankrupt for such policies. They state that it increases the turnkey company’s chances for failure.

My Take: I agree in part and disagree in part on this particular subject. I think that rent guarantees can be tailored to fit both parties in the transaction. They also say that one bad “crack in the system” could lead the company to go “belly up.” I interpret this to mean a decline in the market. During a market decline, I would agree. But, I also am of the opinion that if there is a strong rental market, and the company feels comfortable tailoring a rent guarantee based on the company’s tracked performance in the past, it can help the investor sleep at night. If there are substantial changes in the rental market, then the company can adjust their policies to reflect the change. How many times do you get policy update notification from various companies in which you’re involved? I bet a lot. I think being able to have the expertise to know when the company can provide such peace of mind, there is nothing that should raise a red flag about this one, but make sure it is not “too good to be true.” A total rent guarantee until a tenant is placed should be a red flag. What is their average leasing period?. Understand that this is an average, not always the case. That is why some have a tailored grace period and account for seasonality before a rent guarantee is available. This is because they should be experts in the industry and know how important it is to find a quality tenant. If the rental demand is affected, which they should research frequently, they can adjust this policy and send out a notification to their clients with an explanation. It should be a partnership.

4. Will they manage your property in-house or leverage a third-party expert?

Forbes Advice: “Property management is tough business and isn’t usually the main revenue stream for turnkey providers. It’s usually something they take on as a necessary evil given its nature of importance for out-of-state investors.” Forbes continues by providing two main reasons to not outsource property management: 1. “The firm may not have a trusted third-party partner…”, and 2. “The firm may be overly tied … preventing them from establishing a process to outsource property management.”

My Take: There seems to be a lot of differing opinions on this subject, but I have a firm opinion on this one. I think that if the company has a good track record and adequate experience while providing in-house property management, it is the best case scenario. I believe this for a number of reasons: 1. It holds them accountable for their product, 2. Not being in property management for their primary revenue stream reduces the chances for inflated fees and trip charges, 3. It is, in my opinion, the only true turnkey experience. I am not saying it’s an automatic red flag if the company does not provide in-house property management, but it does add an additional step to the due diligence process.

5. What systems do they have in place to ensure you have transparency into your investments at all times?

Forbes Advice: Ask the firm how the handle communication with their clients. It is difficult to stay on top of a rental property investing out-of-state. Ask the turnkey provider about the procedures they have for client communication.

My Take: I agree 100% with this question. This is the most important factor when choosing your turnkey partner, and that is how investors should look at it. As a partnership. If an investor can’t frequently get a hold of their turnkey provider, or is always talking to a different person, this should raise an immediate red flag. This is a good indicator about whether the turnkey company is in it for a volume play, or a quality play based on superior customer service. You should always be able to get a response from your turnkey provider within 24 hours at the latest. If it takes more than 24 hours to in contact with the provider, this is a red flag situation.

Finally, I want to touch on the heart of your investment: Property Management. Get information on these bullet points, and look out for these red flags.

Key Bullet Points:

• 1.Is property management the company’s primary revenue stream?
• 2.How many doors do they manage?
• 3.How many employees do they have?
• 4.How is their response time?
• 5.What software do they use?
• 6.Do their fees seem fair?
• 7.What is their average leasing period?
• 8.Do they talk negatively about other property management companies or turnkey providers?
• 9.Do they offer routine maintenance programs?
• 10.Do they have good reviews online (be fair in your judgement)?
• 11.Are they avoiding providing references?

Is the property management to provide an additional service to clients, and do they only manage clients’ property, always answer the phone, and avoid marking up maintenance costs?

Lastly, I think it is important to choose a company where it is readily apparent that the people love what they do. The turnkey business is tough, and it takes a lot of passion to be good at it and be fair.