@Jeff Schechter it sounds like you're running a solid operation, here's where we part ways.
The Buyer
My client is a value-add investor in growth phase. Think BRRRR model, continuous value-add, refinance, then repeat until the investor reaches his or her goal.
Your client (TK buyer) is an investor paying retail prices with no room to force equity, and very often paying a premium for a nicely rehabbed and tenanted property. This is generalizing, I know, but still non-congruent with a value-add investor.
The Concept - Room to add value
I'm an investor myself and I value the efficiencies your model provides, but I'm also a realist. Meaning, I see how your model may add value through bulk buying and process efficiencies (kudos to your COO / operations team), but let's get real here.. You mentioned your turnkey markup is NOT felt by the investor, which may very well be true and deserves a commendation, but what percentage of the turnkey providers out there are as efficient and can meet this markup cap? What percentage of those turnkey providers' markups are NOT felt by the investor? And out of that small percentage, how many are willing to leave equity on the table and sell below market value?
Even with the scale and efficiencies, I'm still paying retail prices. I highly doubt a TK provider is consistently taking on the risk of buying the property, rehabbing it, and still reselling at less than market value. Few can carry this out without going sideways, there's still overhead the company needs to cover. Thus, I say, turnkey leaves less room for equity. That's why it's turnkey, it's a done for you operation, investor pays retail for the service, and it's a great service for the ideal turnkey investor, but it's not for the value-add buyer in growth phase.
The Operation - Economies of Scale & Efficiencies
The bulk buying of properties is an ultimate advantage for a turnkey provider, this is the biggest value-add in the entire business model. No one can compete with you here aside from the well-funded investor that can buy in bulk directly. This is an establish investor, odds are they're not buying from either of us, they have their ducks in a row to replace our role of buying, managing their rehabs, and possibly even managing.
The rest of the process efficiencies such as bulk buying of construction materials and passing on the rehab savings is a benefit, but this one is common among most operators and property management companies, not strictly turnkey providers. Our small construction markup is merely a project management and inspection charge to carry out the project and ensure the work is completed up to our standards.
We're a management company first, not a construction operation. The process is no different from hiring a GC, except our cost on materials is lower, and we get the best price from our sub-contractor teams who are carrying out 5-8 projects for us every month. It's fair to say we're in the same ball park on construction savings, this isn't a turnkey exclusive deal. The more efficient a company can become, the more value it can bring to the investor. I would question the system's integrity if these cost savings aren't sought after, or better yet they're being achieved but not passed along to the end buyer. That's both during the rehab, or on maintenance.
Buying Right is Everything
Our investor can buy at a Sheriff Sale, through a wholesaler, right off the of the MLS, direct from seller, anywhere. Our model is not for us to profit on acquisition, that's a losing game especially with a single-family investor. What's 3% on a $45,000 purchase? Our wholesaling connections make 5 times that amount per deal, we obviously would be in the wrong business.
Here's a scenario - investor buys deal on or off-market for less than market value, gets a rehab estimate prior to closing (except Sheriff Sale acquisitions, that's a site-unseen purchase), we carry out the rehab at lower than average rates, and manage the property long-term. We're interested in the long game, not the 1-2 year management contract that disappoints the investor (this is way too common in management).
The model leaves room for the investor to increase their equity in the deal, so long as they're buying right. This is the only way we can do more deals together. Otherwise, the investor would have to be well funded to pay retail every time, and the only way to grow is through their own capital and not real estate value investing.
Is this model always perfect? No, it's tougher to find such deals and it's too much involvement for someone who wants to be more passive. It's certainly more risky than a done for you operation from start to finish. That's normal, more risk, more reward.
The Bottom Line
The same principal still applies, regardless of the model, regardless of whether you're in Indy or Cleveland or any other market. If you're playing the long game, providing real value and your business model is sustainable, you will make it. Your clients are regarded as somewhat of a partner, rather than a one-off transaction.
It's evident your organization @Jeff Schechter is not around to make a quick buck and get out, otherwise you wouldn't invest in the systems and people to make your model efficient and sustainable. I'd love to hear more about it maybe off-line someday, I'd shoot some holes into your model, and you do the same, as it seems we're both on similar paths.
