How Negotiable Are Turnkey Properties?

Question

Hi BP Community,

I have a quick question. I have the goal of purchasing my first turnkey property OOS by the end of 2020. I am still learning as much as possible right now and came across a question. I know that turnkey companies sell their properties either at or above market value because they need to make money on the deal, so my question is: Can you negotiate the purchase price of a turnkey property?

If you've dealt with or invest in turnkeys, your advice/experience on the subject is very much appreciated! Thanks!

Chris Clothier · Answer

@Tanner Shore,

I'd like to share some additional questions for you to ask actual turnkey companies or management companies as you go forward. Add the question about negotiating prices and costs of services to the list and you should have a pretty good start as you head down the RE investing road. Best fo luck -

Here are some questions that I have posted many, many times here on BP that you should be asking a property management company and absolutely asking any Turnkey company you are going to do business with. I'm happy to give what I think are the best answers to these as well. Again, I made this list based on my own experiences and published them in a book and trademarked them as the Turnkey Checklist.

Two important things to remember.  One, if they don't have time to spend with you and answer your questions in detail and discuss them, in my opinion, move on.  Two, a key about asking questions is to ask a mirror question.  Many companies have learned how to sell and how to market and certainly how to answer questions like this.  Often answers are scripted and your job as an investor is to ask the right questions in the right way to answer for yourself whether you can trust what you re hearing.  It is also important to remember that investors like myself always advise meeting who you're going to do business with.  That is important because it allows you to see for yourself if the answers you heard match what you see on the ground.  A mirror question is where you ask what is the average vacancy rate each month.  Write down the answer.  Sometime later in the conversation you ask the mirror question of what is your average occupancy each month.  Write that answer down.

A high quality company will be on top of their KPI's and their numbers will match.  A 3.5% vacancy number will match a 96.5% occupancy number.

Lastly, after you have their numbers research what you were told.  I'll never forget a conversation with an investor who was amazed that a turnkey company had a 1.5% vacancy rate and a 98.5% occupancy.  It sounded amazing.  He asked how many properties they managed and the answer was roughly 1500.  He then went onto their website online and researched their property management online and was shocked.  Their website listed 198 properties for rent.  They had an ad online for prospective tenants advertising 200+ vacant rentals.  Their true vacancy rate was roughly 13% not 1.5%.  But they felt like they had to market a low rate to "keep up with the Joneses".  So ask your questions, get your data and do your research.

Are you an investor?

Do you own in the exact neighborhoods you are selling?

How many investors do you work with?

Do you own all facets of the operation?

Do you offer rental or maintenance guarantees? If they answer yes, ask them why. Then ask them if they will put the guarantee on year three.

Do you defer maintenance?

How many properties do you manage?

Do you own the properties you sell?

How long have you been in the business?

What is your average vacancy rate?

What percentage of expiring leases will renew their lease each month?

What percentage of signed leases fulfill their full term?

What is the average number of days a property is vacant between residents, move-out to move-in?

What percentage of billed rent do you collect each month?

What is the cost of an average repair bill after move-out?

What are your management fees?

What percentage of collected rent goes to yearly maintenance on average?

What is your average number-of-months occupancy per property?

What is your average occupancy rate?

What programs do you have in place to keep residents happy?

What customer service programs do you have in place?

Will you call me every month with an update on my portfolio?

How many team members are dedicated solely to providing service to your clients?

What has been your biggest mistake as an investor? How do you protect your clients from making the same mistakes?

This last question is a biggie.  It is hard for some to answer because recognizing mistakes is hard enough as it is compared to admitting them.  Again, happy to provide answers to some of these that you should be listening for.

Chris Clothier · Answer

@Tanner Shore,

Here is a bit of advice before you get inundated with the messages about who to buy from and which cities are best and inevitably the messages about how bad Turnkey real estate is.

First, be cautious of the posts about buying from investors about buying from companies.  So long as the person posting discloses whether they are being paid for referrals or for posting, then take them with a grain of salt.  You will absolutely see posters on here shortly telling you to go with this company or that if you want a great deal and many are paid for those promotions or for direct referrals.

Second, wrap your understanding of passive investing around this concept.  The word Turnkey does not mean anything today.  It has become over-used by everyone on all sides of the equation including those that don't really have a turnkey property to sell, but now the word is a great marketing tool. So, it essentially means very little today when you are trying to ask a general question that you would think applies to an entire niche or way of investing.

As for buying a passive investment virtually, the answer to your question is maybe.  Some companies will be open to negotiation and others will not.  How the property is marketed or who you are buying it from does not dictate whether or not you can negotiate a price.  You can always ask and should always ask if you are not comfortable with the price and want to convey that to the seller.

Joseph Crunkilton · Answer

@Tanner Shore

If they're trying to sell the property above market value, don't buy. Any good turnkey company will be selling at or slightly below market value. It's the cost of doing business with turnkeys.

You can try to negotiate but I doubt they will move much. You give up some immediate equity for the amount of support they're giving you. They provide the renovated property, the pm company, good cash flow and most likely the tenant. They take most of the risk out of the equation for you.

Lane Kawaoka · Answer

If you can negotiate I would be wary of the product. Most TKPs I know say they are flush with new buyers because of the latest stock market refugees due to COVID.

Account Closed · Answer

@Tanner ShoreIf you find issues with the properties upon inspection, you can try to negotiate. But most of the time, turnkey companies will try to address the issue themselves rather lower price. @Chris Clothier has some great pointers. I would also emphasize that you do your research on the neighborhood. The quality of the area and your tenant pool can make or break your investment. Ideally you would visit the property yourself, but if not, the best way is to connect with a few property managers. I also collect a ton of neighborhood level data that provides very good insights. Feel free to message me if you'd like access. Good luck!

Matt R. · Answer

Not much wiggle room on those I hear. As far as advice, if you wanted to scale,  call Chris he has 1000s of homes in multiple markets. Good luck with your search.

Cj Powderhorn · Answer

@Tanner Shore I believe once you ask all of your questions and feel like you have valid answers you should take a step back and decide if you are willing to trust the operator.

True TK operators like Chris Clothier above will (usually) price homes fairly based on what they have put into the property.  I assume that they will make more on some properties and less on others. However, their goal, especially now, seems to be multiple properties for each investor, investor satisfaction and referrals. They have a vested interest in helping you achieve your goals unlike some other arenas based on commission only.Make sure that the price reflects what the rent actually is - not projected! I mention 'is' because many reputable TK companies will not sell the home until there is a renter in it. Some companies, will offer a 3-6 month 'rental compensation' if the home isn't rented. Is this a good deal? In my opinion, no because you don't really know what the true rent will be, the home will probably sit vacant and there is no way to see how your chosen PM will do. Plus, WHY buy that home instead of one that is rented (other factors being comparable).  Sometimes you can find a better deal on these sites but if you are OOS, you will need a solid team from day 1.

Many of these 'Marketplace' vendors have entered the TK arena(if you are unsure of these companies, just search the forums). They are not TK operators.  To me, there is the 'holy trinity' of True Turnkey all under one umbrella - 1. The TK company actually has possession of the home and it's OWN rehab/mx crew has rehabbed the home and a renter is in it with a signed contract and actual monthly payment   2.  The PM is under the same umbrella and you agree with their policies as a landlord, as well as how they find/vet/treat tenants and 3.  The same people who rehabbed the home will provide ongoing repairs and mx (within reason). These are all important as is the exhaustive list of questions that Chris provided above.  For example, the TK company I have used in Memphis does not charge an application fee to potential tenants, rents the properties for slightly below market value, and is understanding (both pre-covid and now) if tenants have an issue paying the rent.  This model has worked very well, for me as I have had my renters in my homes for between 5 and 8 years, and have been lucky to continue to collect rents thru the summer.

One thing that I believe new investors seem to miss about the TK system is if you have received solid answers and a few good references (especially from investors with multiple properties) you either trust them or you don't.  You agree with their pricing, once you run your own numbers or you look for something else.  I am not sure how much I have saved from having very limited turnover but I know it is more than the few thousand dollars I may have saved by going with a 'cheaper' home by a provider who doesn't get the big picture.

Finally, ask ask and ask away while you are interviewing a TK company, but once you have made a decision, let them do the job you are paying them a premium to do!  If you want to pick flooring, paint colors, landscaping, be involved with vetting tenants and changing contracts, setting rent, etc--you should do it yourself!  You are paying for THEIR expertise in how to rehab the home for the area, how much to charge and THEIR experience in picking tenants. If you really want to be involved in everything, you probably should consider something other than TK. I have not ever been inside ANY of the multiple homes I have purchased thru the TK provider I choose to work with.

I'm just an investor but I am surprised by the time and patience many of the TK providers show on this site. They are really trying to educate us about the process and we can support them by listening and understanding what their role is as compared to some of the more recent options. Neither option is good or bad but as a new investor you may want to decide ahead of time just how passive you want to be.  Good luck :)

Shane Wolf · Answer

@Chris Clothier

Great insights and list of questions. Thanks for sharing.

Steve Morris · Answer

A lot more negotiable if you're the only bidder and they're motivated - Why?

Tanner Shore · Answer

@Lane Kawaoka that is a great point. Thanks for the insight!

How Negotiable Are Turnkey Properties?

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