Long Distance Turnkey Investing...Not So Turnkey

[Darren Winslow]

Need some wisdom.  Invested with an out of state turnkey real estate company.  Four months in, we get notified the rehab of the property was completed.  Looked over the limited photos provided and observed some of the paid for projects were incomplete.

Inquired with the company contact and we were redirected to the contractor, who oversaw the rehab with our questions and concerns; such as the need to install missing siding panels noticed in completion photos, what repairs were done to the rusted water heater with the scalding hazard because of a missing valve, or what repairs were made to the roof and chimney with the missing chimney cap since the roof will not be replaced.

It's been over two weeks and the contractors have not responded to our questions or concerns (all via email) nor have they answered the companies email to respond to us.

The company now suggests we hire a third party local inspector to see if the work was done.  This added verification was not in the original agreement.  The turnkey company is basically telling us they are sorry we are not having "any luck" connecting to the contractors.

If you were us what would you say or do?

[Chris Clothier]

Originally posted by @Darren Winslow:

Paid $48k for the property, which included a $5k rehab.  Purchased the property in December 2017 and received a notice two weeks ago that the rehab was complete.  After writing our concerns and questions to the company is when we started experiencing this less than turnkey experience.

 For everyone reading this post -

$5,000 to renovate a property is an absolute joke!  That is hardly enough money to do the basics of any clean-up and basic repair on a property.  This needs to become something that investors look at and take as common-sense in the future.  

Darren, I know this is your first deal and believe me I have made some crazy bad investing mistakes so this is process of living and learning as you go.  There is no judgement.  These junker properties are being sold by con men and you were conned.  They took your money and made a fantastic profit.

You have to understand that the economics do not work on a house being sold for $48,000 Turnkey.  There is not enough money for everything that needs to happen.  The house has to be bought, renovated, borrowing costs paid and profit cleared and all of that has to happen for less than $50,000.  I have been doing this for 15 years and there is not a single class of house that allows for this Turnkey. 

A typical company will want to make $10,000 to $15,000 for their time and work.  Lets take the bottom number and say its $10,000.  That leaves $38,000 in the deal.  Cost of money will probably run between $3,000 and $5,000 of this time period so lets say that leaves $34,000 in the deal.  

If the home is 800 sq. ft. because it is a junker in distressed parts of the city (because those are typically the houses that will sell cheap), a typical renovation will cost between $20 and $25 per square foot.  That allows for flooring, electrical, plumbing, roofing, all mechanical systems, pulling permits (which you will find that many companies choose not to do because of costs) painting and general clean-up afterwards.   Let's say a company spends $20 per foot and does a decent job of renovation.  That is $16,000 for a renovation and I can promise you that does not even come close to bringing a older, cheap property up to proper standards.  

For smaller houses, it costs more per square foot because the materials cost the same no matter how big the job is.  It costs what it costs and there are fewer feet to spread the cost over.  So a 2,000 sq. ft. house may be $10 a square foot and a 1,000 sq. ft. house may be $20 a square foot.  Same cost for same job, but different calculations based on size.

That leaves closing costs, which will run between $2,000 and $4,000.  Again lets take the middle number and say they are $3,000.

If my math is correct, that leaves a purchase price of $15,000.

If a property is selling for $15,000 today, that means it is in the worst of the worst areas where there is absolutely ZERO demand for housing.  If there was any demand in major cities, then there are local buyers and hedge fund buyers buying everything they can get to build portfolios.  Where there is home owner demand, you will never find houses being sold this low.

In your case, they say $5,000 in renovation with means roughly $4 per square foot if it an 800 square foot home.  Less if it is bigger.  This was a dupe job from the beginning looking for out of state buyers who would pay in advance and hopefully never come visit the job.

These price points are best left to local investors who are able to be in the middle of their renovations and management.  They are tough to make money and virtually impossible if you  think you are buying Turnkey.  

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Your best option right now is to assess where you are with a 3rd party inspector.  Hire a third party management company (not whomever was recommended, but someone else who has no part in your deal) and find out what it can rent for and how much true demand you have.

In the end, you may be able to keep the property and make money with it or your best bet may be to dump it.

What you hopefully learn in the process is to evaluate the numbers you are being given and do the math backwards.  Low cost housing is low cost for a reason.  There is low demand and very high risk.

Hopefully you can pull out of this and get your money back or keep it and get it set straight to make a profit.

Best to you ~