Basic questions on Turnkey investing

[Kevin Kraver]

Hi all, I'm new to out-of-state investing and looking at Turnkey as a way to start the process. Turnkey ROI seems good compared to what I can get in my local market (San Jose, CA). One thing I have noticed is that in some markets the offered price for Turnkey investment seems to be much higher than market estimates from Zillow or other sites. Certainly there is room for error on any market pricing tool, but several questions for me remain:

1) How can I get a better understanding of the real value of these turnkey properties to make sure I am not paying too much? 

2) Are turnkey prices negotiated similar to regular buyer-seller market, or it is generally a fixed price from the provider?

3) In cases where appraised value is lower than the asking price is financing still possible?  I would expected that rehab should be reflected in the appraisal value, but other factors such as tenant placement which are valuable to me as an investor, would not show up in the appraisal report. I might be willing to pay more than the appraised value, but I do not want to pay cash and give up leverage. How are other people dealing with this?

Thanks for the insight!

[Caroline C.]

Hi @Kevin Kraver - that is sometimes the problem with TK - in some markets and with some providers, the prices can be high - retail or higher. It happens because the provider feels like they can demonstrate cash flow - but be careful because they can minimize certain expenses to make the cash flow look good, but then unexpected expenses could kill your profit. High purchase price also severely limits your exit strategy if you need to sell within the first years.

I've bought TK myself, and some have worked out fine, but some have had evictions and big turnover expenses. Other than not paying too much, success is based on placing a tenant who pays every month. So make sure you do a thorough due diligence on the property management side, and insist on getting a reference from a customer that has gone through an eviction, because you won't know if your property manager is good or bad until they've navigated you through a problem situation like that - all PM's seem great when your tenant pays on time every month. Also, visit providers to get a good sense of the work they do and where their properties are located. 

As far as I know, TK providers don't generally negotiate on price, but there is no harm in trying. Also, if appraisal comes back higher than price, provider should lower the price. You need to ask provider how they handle that situation, and make sure however they handle it is specified in the contract. But since they often sell many properties in the same area, their prior sales can come back in the comps and appraisal might come back higher than you expect.

There are hundreds of other threads out there on this topic, so take time to search through them. Good luck!