Help with different turnkey business models?

Question

While looking into out of state investing, I've noticed two types of "turnkey" companies. One presents fully rehabbed properties ready to rent and others find you a property and use your money to finance the rehab. Obviously, there is inherently more risk with the latter type. However, I'm just curious as to how common the second type is in the real estate community.

I guess along with that, is there anything in particular I should pay special attention to when vetting the latter type that wouldn't normally be an issue with the former?

Eric Baum · Answer

Hi All and @Eric T.

Unfortunately, the answer like many thing is usually is not black or white.  In the right circumstances both paths could be rewarding in their own way, and in the wrong circumstances both paths can be poor investments.  A lot of it is about the specific situation, the structure of the deal, what your goals are, how well or long you have worked with the operations, etc.  Essentially the whole discussion is about risk and who takes what portion of it.  If more of the risk is on you, you should expect to be compensated for taking it and similalry if someone else is taking more risk they will build that into their returns.  In a way, if done right risk allocation / apportioning should be close to a zero sum game .   However, real estate is full of predatory operators as well as good ones, surprises that will happen, and requires a lot of extensive thought and due diligence.  If you are more likely to skip that or are new to investing, then I would more often than not stick with the first path as there are more safety catches in the process like most have said.

With that said, there are situations where the second path can make a lot of sense too depending on what your goal is.  if I was going to be laying out the capital to do the rehab and take some the risk than I would expect there to be a compelling reason to do so. As @Charles Worth @Dawn Anastasi  @Jay Hinrichs @James Wiseand others have mentioned this path is not truly turnkey and your participation is futher down stream. As such instead of paying a price in path A, for the same property I would expect to pay a lower price in path B (e.g. have a greater degree of potential equity in the deal) in order to compensate for some of the greater risk.  So if path a and path b essentially modeled the same all in price at the end, then there is no benefit or reason for path B  - You are taking more risk for no additional return.  However, if path B (at least from your initial projections if all things go smoothly) places you in a reduced overall cost basis that could pay off over the long haul depending on your strategy and risk/reward perspectives.  You just need to be very careful about accessing how likely you think things will go smoothly, what structure / safety points you have included in the structure in case they don't, and how long / deep of a working relationship / trust you have with the group.  I certainly would be more cautious if I hadn't worked with the team for several deals or if I didn't have a lot of insight into their operations, reputations, scopes of works, etc.

Cheers,Eric

Josh Caldwell · Answer

on the latter the big problem is the quality of their work.  Actually I can say that same about the first, but in that case you can have the property inspected prior to purchase.

If you buy the property and have the selling company rehab it, it could be years before you find out that they did crap quality repair work.

I hope that helps

Josh

Dawn Anastasi · Answer

I'd like to think I'm pretty unique ... no additives, no preservatives, just 100% pure Dawn.  :)  lol

What Jay's trying to say is you have to be careful what you're getting into and make sure you don't run in with scammers.  As with any industry especially one that promises to help people make money you get scammers and/or people that are less than ethical.

Derrick Craig · Answer

@Eric T.

I agree the 2nd scenario is a little bit riskier...

I don't think it really is a Turnkey Property as Jay stated, I think if you do invest in a property like that probably need to interview several contractors as well as the agent/provider that helps you find the property.

You need as many quotes from reliable people you can get.

Jay Hinrichs · Answer

@Dawn Anastasi

there are few Dawn's in the US.... keep that in mind vis a vi safety.

Dawn Anastasi · Answer

The second type is not "turnkey".  I help out of state investors with the second type.  I help them find a property by being their eyes and ears on the ground, as well as scrutinizing the property to ensure it's good, and knowing a ballpark for what it would take to rehab, so the total costs can be taken into consideration.  Then they buy the house, they pay to rehab it, etc.

In scenario #1, you're paying a marked up value for a property, but it's already done for you.

In scenario #2, you're paying cost for the property and rehab, but you do need to factor in extra time/risk for the rehab.

So neither is inherently "bad" or "better", it's more about your goals and objectives.

Larry Fried · Answer

@Eric T.

On the latter type of "turnkey" you should be able to safe some money on your all in. But since you are essentially prepaying for the rehab, you can consider that a return on your invested money.  It might even offer the opportunity to get the completed house appraised and financed at a considerably higher price than you paid, thus taking all or nearly all of your cash out with that financing.  Yet, like others have said, you are taking a much greater risk, and you never know what the appraisal will come in at, until it happens.  Even then, the lender can push back on the appraisal if they think it is too high.  These risk factors should be carefully weighed, especially if is your initial venture into REI.

Jay Hinrichs · Answer

@Eric T.

your second scenario is really not turn key by the definition. Your taking on the roll of a rehab financier when you do the second scenario.. and by and large that is a fairly risky event for someone who does not have experience in lending money and running rehab contractors... a lot can go wrong.

Although some of my clients do the second scenario but they are generally doing it for hedge funds or more institutional buyers.. it can be a royal pain for someone or company to rehab a home for an absentee investors who really has no experience with it.. they can drive the poor rehabber nuts, by bugging the heck out of them.. etc.  everyone is different of course..

However in scenario two.. one needs to exercise normal home buying protocol.. just like you were buying a home in LA to live in.. you would and or your agent would request the normal inspections for you.

James Wise · Answer

Whichever model you prefer the most important thing IMO is to get a feel for the company and the neighborhoods they operate in.

Help with different turnkey business models?

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