Turn-Key or not Turn-Key, that is the question...

[Matt R.]

Anecdotely speaking, it appears the turnkey operators are taking advantage of the uneducated investor. I have no stats just my impression.

Do you think a turnkey company that could JV in the deal would be a superior business model? Why has no one started such a model? Is syndication basically that model for multiple investors?

Thanks again,

Matt

[Chris Clothier]

Hey Matt -

It has already been tried by at least one company that I am aware of and I am sure there have been others. I think the model you are talking about was tried by True Wholesale Houses. What I know about the outcome was that it was a good fit for some investors. I think they got a set rate of return, not sure but I think it was paid monthly. The drawback was the investor does not own the property. They have a partner in ownership which means you do not have a deeded piece of real estate. Other issues arise when an investor may want to sell. They have a partner who then has to find another investor to purchase their share of the equity.

I want to be real clear that I do not know the full model that they used, only that it has been tried and as you noted, it is a good fit for some investors. And it will be a model that some investors see as more advantageous as opposed to buying the property far from whether it was turnkey or not. They will simply want a partner because they think it will bring them more security.

Companies that operate in the Turn key space face the same issues that any other business owner faces. The ones with little or no business background and experience struggle with basic concepts like communication and organization. IN that case, it does not matter if they do the house selection, the marketing, the renovation or the management right, they are going to have problems. Just like many franchisee owners struggle, no matter the franchise, if they do not have a good business foundation.

Turnkey investing in itself is not to blame. The problems you hear about usually fall into two categories. An inexperienced person(s) starting a Turnkey company and not understanding all of the basic business concepts and they get themselves into trouble. They do not understand that marketing and deliverability need to match. The other problem actually falls squarely on the investor and that is a failure to be good stewards of their money. They don't do enough quality due diligence and take too much at face value.

In the end, you get a messed up situation where the expectations are not met and no one is happy. But the turnkey model, whether it is the one you described or not, can be a good investment for the right investor. That is my take on it after having been involved as an investor for a while now.