Would you think scam??

Question

We have a friend who uses a wholesale/turnkey type company for his property investments. They sell you the property for about 10k more then they bought it, then they have construction teams to renovate for you, then they turn you over to third party property management. They help you get lenders and set up your llc’s and trusts. Our friend is happy with them and he has other friends working with them too. We spoke with them for a long time on the phone and the guy was very smart and showed us their dashboards with impressive information about their properties and all the numbers associated with it and that market. Going off that call and our friend, it would seem legit.

however, we keep seeing alot of red flags. Crap website and goes under a couple names both of which are names or separate companies with bad reviews. There’s next to nothing about this company online. they did podcasts but stopped a year ago. They’re asking 5k upfront for costs that go toward setting up your legal stuff and becoming a ‘member’. And that deal goes up to 10k after 7 days. They’re emails are marked spam and suspicious and look like phishing emails.

Is it possible for our friend to own houses through this company and have renters and everything running normal on that front, while in the end being a scam?

Chris Clothier · Answer

@Rachel Mellies,

I think you are right to see red flags.  High quality companies never race to the bottom of the barrel and asking for membership dues, up-front money to get on the list and even limiting your own profitability are all major red flags and in my opinion, poor sales tactics.  Contrary to belief of some very poor business people, limiting your profit is not in the best interest of a future customer.  What is in the best interest is providing exceptional value and pricing your product or service accordingly and properly.  I would be skeptical of any company that asks for money up front and that money is equal to what they say they limit their profit to.  In a scenario like this, the psychology is to get the buyer to focus on the fact that you are being so "fair" with your pricing that a buyer never focuses on what they are actually getting.

Throw the turnkey word out of the equation.  The above response fits with anything you buy from an investment property to a new suit to a car.  A sales tactic designed to make you feel exclusive (joining a club) and a pitch that leads with we limit our profit are both red flags.  I'm not aware of any companies who have tried this approach in the past still in business today.  As for friends using them and being happy with the process, that is not the same as knowledgable investors vetting and knowing exactly what they are getting for their dollars.  Because someone you know is happy is a poor reason to make an investment.

Lastly, I give you a lot of credit for going online and doing a search.  When you dug in, you uncovered even more red flags of different names, poor exposure online and bad reviews.  I think your gut has already told you what to do and I give you huge props for already understanding that if you are going to invest passively and let someone else do the heavy lifting, you really have to protect yourself.  You are the only one truly looking out for your hard earn investment dollar, so treat it like gold and make someone truly earn the right to do business with you.

Best of luck

Seth Young · Answer

@Rachel Mellies If your friend is having success, it doesn't seem like it would be a scam. However, I would be concerned about the online presence of the company and asking for money upfront. In my opinion, you want to work with a company with years of experience and a trustworthy and reliable reputation. When investing out of state, the most important aspect besides the market is the team you work with. I would recommend trying to talk to other clients and continuing to do research. Nevertheless, there are more established turnkey companies that have had systems and processes set up for years. I'd be happy to connect

Nathan Gesner · Answer

Yes, it's possible. Maybe your friend gets a kickback for every person he refers to the company. Maybe he's been lucky and has had a good experience. Maybe he's not real bright and doesn't know what's actually happening.

Turnkey can be a good option, but it is also a great place for a scammer. They buy below market, and make money. They use their own contractors to fix up the property, and make money. They sell it to you, and make money. They hand it to their property manager, and make money. They can have 3-4 separate companies all owned by the same people, giving you the impression of checks and balances when it's actually incestuous.

I've heard great things about Memphis Invest as a turnkey company, but I've never worked with any of these companies and would personally steer clear of them. Find your own REALTOR to buy the property, your own contractor to fix it up, your own PM to manage it. Each one of those should be working for your best interest and giving you the honest scoop about the others.

Jessica James · Answer

Go with your gut, or try and get referrals of people he's already worked with!

Shane J. Renard · Answer

Does seem suspicious. Tread lightly. What does your gut tell you?

Tyler Tapley · Answer

I do not own a turnkey company, but I would be very suspicious and cautious.

Drew Sygit · Answer

@Rachel Mellies sounds like the standard justification for every Ponzi scheme out there!

Everything is great...until it implodes.

We've been in the industry 22+ years and have seen the majority of Turnkey companies implode, or change names to stay in business. Memphis Invest, now REI Nation, has been around a long time and seems legit.

Here's our standad response on this topic:

The biggest challenges with Turnkey providers:

1) Terrible renovation work - we've taken over many properties that investor bought turnkey and they were shocked to learn the true condition of their property from our TakeOver video.
---So, get a GREAT property inspector NOT recommended by the turnkey company to avoid bias.

2) Misrepresenting Property Class - have seen many turnkey providers in Metro Detroit area sell OOS investors Class C properties as Class B. 
---So, learn the neighborhoods where you plan to invest and use Google Streetview to virtually explore them.

3) Poor Tenant Screening - they typically can't sell a property until they place a tenant. So, they have a conflict of interest in waiting for the right tenant.
---So, insist on them providing the rental application and supporting docs for your review. This means YOU need to learn how to evaluate a rental application!

4) Poor Property Management - Where do you think a turnkey provider will put their best staff, on selling properties and making $5k+/transaction or on property management and making $80/month transactions?
---So, ask about their standard operating procedures and make sure your management contract has an easy termination clause.

What are your options if you experience one of the above? Everyone thinks they can sue to solve the problem.

Do you realize how much it will cost to hire an OOS attorney to sue the turnkey company?

Unfortunately, the majority of investors that experience terrible service from turnkey companies, figure out that it's not worth spending tens of thousands of dollars suing their turnkey provider and just move on - which allows the turnkey provider to not change their ways and stay in business:(

You should also check out this BP thread about the topic:

https://www.biggerpockets.com/forums/88/topics/976647-turnkey-company-suggestion?highlight_post=5648876&page=1#p5648876

Would you think scam??

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