Turnkey Deal Gone Bad...

[Spencer Sutton]

We had someone come to Birmingham from Miami over the weekend to check on five houses that he bought for ‘clients’.

Here’s a snapshot of the situation:

• He’s owned these properties somewhere around a year
• He’s never seen them in person until this past Saturday
• His current property manager has been less than responsive
• he owns a mix of “D” and “F” houses...one of them is a disaster and another one will become a disaster

As we drove his five properties, we had the opportunity to give this investor a real life education on the low-end Birmingham, Alabama rental market. We were brutally honest about what we found as well as our thoughts on how it could possibly be fixed.

This is what we found:

1. House #1 - In an “F” neighborhood and is currently rented for $400 per month. IF/WHEN this tenant moves out, it’s going to be a mess. The property will be vandalized almost immediately and he will be left with a $10,000 to $20,000 rehab that he’ll never be able to recover from. We encouraged him to do whatever necessary to make sure the tenant is the happiest person in the neighborhood...KEEP THE TENANT!
2. House #2 - In a “D” neighborhood and currently vacant. Just a few things on the outside of the house that we noticed and suggested he repair. He didn’t have keys for any of these houses so we weren’t able to get a look at what was going on inside.
3. House #3 - In a “D+” neighborhood and the tenants were moving out on Saturday. The investor understood that they were being evicted because of non payment. When he saw them moving the washer and dryer out he said we should call the cops and report them because they were stealing….the only problem with that is that he has no idea what was provided in the lease and what wasn’t. Plus he had no proof of ownership so stopping the move out wouldn’t have done much good. It’s not a good situation.
4. House #4 - In a “D” neighborhood and is currently rented for approximately $500/month.
5. House #5 - In an “F” neighborhood and is vacant. We were able to get into this house because it has been completely destroyed. It was built around 1920, has 12ft ceilings and everything has been stolen from the home...including the cast iron bathtub which we’re sure was sold somewhere. Our opinion was that he could probably sell the house ‘as-is’ for 2k or he could put about 25k in it to have it rent ready. Either scenario is not good. He suggested that it be rehabbed in stages...the only problem with that is that it will be vandalized in the exact stages it’s rehabbed.

So what are the lessons?

• Visit and walk the neighborhoods before you buy
• Know and trust your turnkey provider
• Understand and appreciate what it takes to find a good tenant
• Know and trust your property manager

Any lessons I’m missing??