Can Turnkey + Landlord-driven Tenant Screening coexist?

[Vik C.]

Hi guys,

I am getting ready to invest out-of-state since I am focusing on buy-and-hold positive cashflow properties and I live in NYC, which isn't good for that kind of thing. I am fully willing to accept a lower CoC return by doing turnkey (higher purchase price, PM fees, etc.), as that is the convenience I am paying a premium for. Would hire my own home inspector/appraiser/lawyer, etc. so not too many concerns there either.

Where I am VERY spooked is in the tenant screening process. I much prefer to do this myself as I have a background in credit risk/finance and am a decent reader of people. I would much prefer lower rent and a more stable, responsible tenant. I am willing to accept lower returns for lower risk in terms of cash flow fluctuation.

However, it seems that all the TK companies I research already provide a tenant. How have you guys dealt with this issue? Do TK companies allow the owner to get heavily involved in tenant screening - if not for the original in-place tenant, then at least for subsequent tenants? 

Thank you

[William Hochstedler]

Just to chime in...

Any pm company worth its salt should have transparent screening criteria that they can give to you.  They need to do this to protect themselves from Fair Housing issues.  Some companies have multiple tiers of tenant screening criteria depending on the micro market (student housing/A-class single family).

One of the biggest problems that good pm companies have is inheriting doors with existing tenants that were not placed according to the pm co's criteria.   So many companies may be reluctant to cede control over this aspect of the business.  For example, I spoke to a property manager yesterday who finally, after two years, got all of his own tenants in a 20-plex.  When he took it over it was running 30+% vacancy with slow payers.  Now it's less than 2% with timely paying tenants.

Also, at least in our market, lower rents do not equal better tenants.  Over the years we have found no correlation between discounted rents and better tenants.  We have found that above average properties in a given neighborhood with above average rent consistently get us the best tenants.  Of course, asking too much gets the highest risk tenants and can have longer vacancies.

I think you should focus on the pm company's policies and performance, not the individual tenant.  If a company is running less than 5% vacancies and is getting a very high percentage of timely payments, they know what they're doing.  I can't see how second guessing that from afar will help you.  Also, may pm companies will have other tricks like risk assessment premiums, higher sd's, or guarantor policies to keep vacancies low in marginal markets.

Finally, if you are paying a pm company a percentage of rents collected, how are your goals not aligned?  A pm company wants to be a rent servicer, not a debt collector.  It is in no way in the pm co's best interest spending resources chasing rent every month.  They very much want tenants who pay electronically on the 1st of every month just as much as you do.

Wm