How can you tell if a turn key is not legit?

[Vivian Hernandez]

What are the red flags?

[Chris Clothier]

Hi @Vivian Hernandez,

Here are a few possible red flags to consider when thinking about buying any passive investment, but especially if it is marketed with that really, shiny, sparkly, super-attractive word Turnkey.

Just remember, that Turnkey, in this industry anyway, has no real meaning.  It is often used to attract attention to a property or a company without any clear and defined meaning from one company or property to another.  So do not think that every time you see the word Turnkey, you can evaluate two opportunities evenly.  You really have to dig in and you may find you can, but often you cannot.

Here are some possible red flags and I say possible because these are just things to make you more aware, not necessarily written in stone.

1.  Brand new companies
2.  Short length-of-time in business (less than 5 years).
3.  Services are outsourced - meaning they do not own the renovation company and they do not own the management company.
4.  Guarantees are heavily marketed.  Meaning the guarantee is more important that the product or service itself.  Anytime the guarantee is put front and center and is made to be the highlight of how a company sells property, you should definitely slow down and dig deeper.  Nothing wrong at all with guarantees, but they should be marketed as a backstop and discussed long after the more important aspects of a deal.
5.  The company.individual you are buying from tells you not to include vacancy and maintenance when calculating your return.  Usually a company will say something along the lines of "we have done all of the work and you should not have these expenses for a while so don't include them".  
6.  You are required to join a club or pay fees to view opportunities.
7.  The company is super small, 2-4 employees.  This makes it very difficult for them to be responsive in times of need.
8.  Property prices are very low.  Not for your area, but for the area you are buying.  It is very, very difficult for a company/individual to purchase a property, renovate to a proper standard with no deferred maintenance (especially for an out-of-area passive investor) and make a profit while keeping the property priced low.  
9.  Returns are super high.  It is possible as a passive investor to make a very good return with Turnkey.  Very good is going to be up to you as an investor, but it should be a red flag that makes you be much more aware of everything(!) when you see a return on a Turnkey property of 15-20% cash on cash or 25-30%+ on levered returns. 

Again, this list is not exhaustive and by no means do these things mean you should not buy an investment.  These are the things you look for as an investor before you buy.  There are examples of new companies doing great work.  Bigger companies do not mean they are always better.  More expensive properties are not always renovated any better and more expensive does not mean better quality.  Higher returns do not always equate to deferred maintenance or poor quality.  These are just the red flags that I have seen over the past 12 years and think you as a buyer should be aware of as you move forward.  Red flags mean be cautious and ask more questions - not turn and run.  You will know when you dig deeper if you should more forward or not.

Best of luck -