02
August
2018

Top 5 Turnkey Red Flags

red flag2

 

The [turnkey] industry has had its ups and downs, and there is never any shortage of people who think they can make a quick buck selling real estate. Therefore, it should come as no surprise that there are plenty of less-than-scrupulous people out there calling themselves turnkey providers, but providing almost nothing of value to their investors. While this is a problem, it’s also a problem you can easily avoid.

 

Of the many scam artists we’ve come across as we built our company, we noticed that the vast majority have quite a bit in common. Below, we’ll discuss are five key things that this type of ‘provider’ does that should serve as huge red flags for any prospective investor. By knowing what to look out for, you can ensure that you don’t fall into the trap.

 

Stumbling Over Stats

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One of the primary things a scam artist will struggle with is statistics, so this will be your first opportunity to weed out the bad seeds. When you ask about things like [maintenance rate], vacancy, move-out costs, and tenant turnover, any provider worth your time should have solid answers at the ready. These statistics are crucial to any turnkey provider’s business, so being able to provide that information on-demand should be like breathing.

 

What to look out for:

  • “I’m not sure, but it’s really good, like 100%”
    • Why: No provider has long-term occupancy of 100%. If the stat sounds too good to be true, it probably is.
  • “I’ll have to get back to you on that.
    • Why: Any good provider should know their performance stats off-hand.

 

A Dearth of Data

 

Regardless of how quick-on-the-draw a provider is with their statistics, it’s crucial that you ask about where those numbers come from - and this is doubly true if those statistics seem... optimistic.

 

A good provider should be able to tell you how their statistics are calculated, what the look-back period is, and what is included in each figure.

 

What to look out for:

  • “Our occupancy rate is like 100%, but I’m not sure the look-back period for that figure.”
    • Why: Anyone can have a 100% [occupancy rate] for one day, the longer the look-back, the more relevant the statistic.
  • “I’m not sure if that maintenance rate includes move-out costs, I’ll need to ask someone.”
    • Why: Again, this should be basic knowledge for any provider, if they don’t know how their stats are calculated, how can they be accurately predicting returns?

 

The Visit Inquiry Drop-Off

 

While we strongly recommend that investors pay a [visit] to their top one or two providers before pulling out the checkbook, there is something to be said for requesting a tour from any provider you’re considering. Many of the less-reputable providers will suddenly be unable to return emails in a timely manner, or have an array of excuses for why a visit isn’t possible.

 

Any provider worth your time will be happy to give you a tour, show you the town, and let you see some of their properties before you invest. If scheduling a visit is an issue, it’s probably time to look elsewhere.

 

At the very least, asking about a visit will give you a great idea of how highly the provider actually prioritizes customer service.

 

What to look out for:

  • “We’d love to have you, but there just isn’t time in our schedule.”
    • Why: While an immediate visit may not be feasible, a good provider will let you know when future tours are available and work with you to find a date that works.
  • Lack of responsiveness: emails or calls suddenly become fewer and farther between after you ask about visiting.
    • Why: This is often a sign that the provider doesn’t actually have an office or representative in the market they’re selling, which is a huge red flag. In worse cases, it could mean they don’t even really own the properties they market, and are therefore unable to show you their inventory.

 

The ‘Sunday Sunday Sunday!!’ Sale

 

Quality products, in real estate as in everything else, don’t need a lot of flashy propaganda. You don’t see Prada or Tesla paying for Superbowl commercials advertising blowout sales - people will buy quality products without all the pushy ads. The same is true in turnkey - if you see hyped up advertising, inflatable flailing-arm tube men, or hear ultimatum-focused messaging, then it’s probably time to look elsewhere.

 

What to look out for:

  • Used car salesperson verbiage, like “HURRY! You’d don’t want to miss out on this limited time offer” or “you won’t BELIEVE the price on this cash flow property!”.
    • Why: Quality products don’t need hype, if a provider needs to push this hard to sell something, there’s probably something in their business model that means they can’t just sell properties the normal way.
  • Forced scarcity tactics like sending a property via email, immediately saying it’s sold, and then sending another with a message along the lines of “better hurry, you saw how fast that first one sold”.
    • Why: This tactic is designed to convince you to cut a check before you run the numbers or get your own inspection. There will always be real estate, and there will always be renters, don’t let a scammy provider push you into pulling the trigger before you’re ready.

 

The Third-Party Handoff

 

One of the most important things to look for in turnkey is the full-service provider. Many companies refer to themselves as turnkey, but that may just mean they sell rent-ready properties. A true turnkey company will do everything in-house - from finding properties to rehab, marketing to [management]. This means you only have one company, one team, to vet. You end up with a smoother transaction and a better long-term relationship.

 

Full-service turnkey means that the company that sold you the property was incentivized to work in the investor’s best interest every step of the way. From purchase to rehab to management, a full-service provider is incentivized to make decisions with the future in mind, because they’re not just selling the property, they’re managing it for next 10+ years.

 

What to look out for:

  • Companies that don’t do their own rehab, live and work in the markets they sell, or have management services.
    • Why: If you’re not dealing with a full-service company, the people selling the property are primarily incentivized to get you to cut a check and then move on. Without a full-service model, each step in the turnkey process becomes its own transaction, and only the property management team is really focused on the long-term success of your investment.
  • Contracts that don’t specify who will manage the property.
    • Why: You should know before you sign who exactly will be responsible for your investment. It should be the same people that sold it to you, with no option for them to foist you off onto a third party management company you’ve never heard of.

 

You Can Start With Us!

We always aim to practice what we preach at Spartan, so we welcome investor questions. If you’d like to pick our brains about what we do, our performance stats, or why we love the [Birmingham market], feel free to [get in touch] any time. We even have monthly investor tours to make sure every potential investor gets all the answers they need. Send us an email, give us a call, or find us on Bigger Pockets to find out about our upcoming tour dates!

 

Links:

https://www.spartaninvest.com/services/investing-in-real-estate

https://www.spartaninvest.com/blog/item/your-rental-investment-glossary-maintenance-rates

https://www.spartaninvest.com/blog/item/your-rental-investment-glossary-vacancy-and-occupancy-rates

https://www.spartaninvest.com/services/property-management

https://www.spartaninvest.com/why-bham/six-big-reasons-to-invest

 

 

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Lindsay Davis
Chief Executive Officer

Categories: Blog

Contact Us

1110 23rd Street South
Birmingham, AL 35205
www.spartaninvest.com
info@spartaninvest.com