…and the Due Diligence Questions You Should Be Asking to Avoid Them.
For the first time real estate investor seeking the path to wealth, there is an overwhelming world of options out there. Stories of sudden riches from overnight successes, horror stories of people losing their shirts, and real estate gurus contradicting each other abound. To further complicate matters, real estate is an industry with constantly changing regulations, rules, rental rates, and property values.
Nonetheless, we all know it to be true that real estate, when carefully and thoughtfully invested in, can be the foundation for true wealth, security, and a healthy return on investment. So how does one navigate this jungle of real estate investing? What do you look for and whom do you trust?
This report aims to give a comprehensive overview of how to shop for turnkey investment property, no matter the market you’re investing in. If you avoid the pitfalls outlined here, you will be well on your way to being one of the success stories that attract people to this business.
Before making any investment decision, you should educate yourself as much as possible on the details and nuances of the deal. Investigating and educating yourself about an investment is referred to as due diligence.
This report provides 20 due diligence questions that you must ask anyone and everyone that you’re considering purchasing turnkey investments from. Beyond that, we provide all the details behind why it’s important to ask these questions, and which answers signal a good deal… or a potential investment nightmare.
First, a basic definition of what a true turnkey investment is:
A turnkey real estate investment is an income producing rental property that has been completely renovated and is cash flowing at the time of purchase, with a tenant and property management already in place.
Investing in turnkey real estate is much like investing in the stock market, as your initial capital investment is made with the anticipation of future monies earned.
A true turnkey experience provides cash flow from the day of purchase, is completely hands off, and is a an entirely passive investment. You’re never asked to coordinate repairs or receive phone calls from tenants, you simply watch your monthly returns while building wealth through real estate.
My hope in writing this report is to provide you with a detailed understanding of turnkey real estate while giving you the confidence to pursue your investment goals. If you have any questions, feel free to drop me an email at firstname.lastname@example.org and I’ll get back to you as soon as I can.
Ok here we go…
1. How long have you been a full time turnkey investment provider?
Typically, the longer someone has been in business the better the business will operate. The main thing you want to be sure of is that your turnkey provider is a full time professional. There is no way to run this type of business well while working another job.
2. I see that the property at 123 Elm Street is located in Memphis, TN. Do you live in Memphis, and if so, how long have you lived there?
It’s impossible for a turnkey seller who lives in a different market as the subject property to be as capable as a local turnkey provider.
If a seller is marketing themselves as a turnkey provider, but doesn’t live in the same city as the property they are selling, you need to keep looking. In this scenario, all signs point to the possibility that you’re talking to a middleman.
On the off chance that the long distance seller is actually able to purchase, renovate and manage properties from a different city, they will be highly inefficient compared to a local provider.
There are many components of being a turnkey rental provider. A turnkey seller that doesn’t live in the market where they are buying, renovating, selling and managing property will ultimately suffer from lack of competence in every step of the process. Their inability to manage their business in person undoubtedly increases the cost of production, the cost of the product, and most importantly, diminishes the performance of management after the sale.
3. How many rentals do you personally own?
You want a turnkey seller that walks the walk, not just one that talks the talk. If a turnkey seller believes in the product they’re selling, they will own a lot of rental properties themselves. Beware the cook that doesn’t eat his own cooking.
4. Are you the owner of the property or are you just marketing it for someone else?
This question is important when trying to determine if you’re talking to a middleman. When researching turnkey sellers, you’ll quickly find that many don’t actually own the properties they’re selling. These sellers act as middlemen between the buyer and the true owner, simply marketing the property for others. While there’s nothing wrong with this concept, but it’s your job to try and find the direct source. By doing so, you cut out all the fat out of the deal, which gives you the best possible return on your investment.
Finding the true owner of the property can be difficult, as middlemen are experts at disguising themselves as the actual owners of the properties they’re selling. Not only that, they’ll often imply that they are principals of the management company that will be managing your property. Be careful that you’re not being referred to a management company that is one of their affiliate providers. If a seller refers to a person or company as one of their “partners” or “affiliates” in regards to the purchase, sale, renovation or management of a property, then you must know that the middleman has limited, or in most cases, no control over that aspect of your investment.
If you buy a property from someone who doesn’t own it, you’re buying from a middle man. Most middlemen mark up the price of the properties they’re marketing between $5,000 and $20,000. It becomes your job to find out who actually owns the property you’re interested in purchasing, and work the deal with them to the best of your ability in order get the best return on your investment.
The most important thing to remember about middlemen is that you won’t know you’re dealing with one unless you ask the right questions.
Middlemen don’t own the properties they’re marketing and get paid in 1 of 2 ways :
1. They get a large kick back from the true owner. A typical example: A seller wants $60,000 for his property. A middleman comes along and says “Hi Mr. Owner, if I can bring you a buyer that will pay $70,000 for your property, will you give me $10,000 at closing?” Mr. Owner says “Sure, why not, what do I have to lose? I suck I’m terrible at marketing anyway.” Mr. Middleman says, “Hey, do you mind if I take pictures of your property and put some details on my website?” …you get the picture.
Tip: Always Google the address of the property that you’re interested in. Find out if the property is listed anywhere else and who the true owner of record is.
2. The second way that middlemen make money is by finding rental properties that are cash flowing, putting them under contract with the owner, and marketing them at a higher price. Once they have a buyer on the hook, they do what’s called a simultaneous closing. This means they purchase the property hours, if not minutes before you do, usually without your knowledge. The middleman makes a handsome profit and you’ve received no added value from the increased sales price.
Many reputable turnkey sellers pay referral bonuses to agents who bring buyers or clients who refer family and friends. This type of transaction should not be confused with a those of a middleman, as the price of the property is not marked up.
Even though all middlemen are not dishonest, you should be on the lookout for misleading statements of ownership such as “We’re so proud of our renovations” and “The quality of our property management is so high.” While they may be marketing a quality product, they’ll have to do so at a significant markup if they want to make money on the transaction themselves. You’ll do much better if you purchase from the same source they do, the actual owner of the property.
5. I see that your business model is selling properties that are in distressed condition, promising a quality renovation after my purchase. How can I be sure the renovations will be done in a timely manner, with a high level of quality, and without going over budget?
BUYING DISTRESSED TURNKEY PROPERTY
There are some turnkey sellers that specialize in selling distressed property promising renovation and management after your purchase. Although there are good deals out there that fit this description, they call for a lot more due diligence than purchasing property that is already cash flowing and has no deferred maintenance.
If you purchase a distressed property from a seller that promises a good renovation after you purchase, please get very serious on your due diligence. Unless you are a very seasoned pro, I suggest you spend a few hundred bucks and hire an inspector to give you a detailed report on the condition of the property and an estimated cost of the renovation. This is how I bought my very first house. Armed with the inspection report and an estimate of the cost to rehab the property, I revisited the seller with a much lower offer. I saved about $10,000 and a lot of heartache.
TO BE CONTINUED
About the Author…
In addition to being a husband and father of two, Terry Kerr is a full time real estate investor and the president and founder of Mid South Home Buyers. He owns 60+ investment properties and has provided premier turnkey investments to repeat buyers around the world since 2002.
He is also the owner and founder of Absolute Property Management, one of the most sought after management companies in the Memphis area and a key component of his turnkey investment business.
He loves to discuss all components of real estate investing with both seasoned and new investors. He genuinely welcomes your thoughts and questions, or if you have opposing points of view, your comments.
Please contact at 901-859-4520 or Terry@midsouthhomebuyers.com