Would you buy a rental property sight unseen?
It might sound like a terrifying prospect, but it’s actually much more common than you’d think. Thanks to technology and the Internet it’s now easier than ever for investors to research and buy turnkey properties in the best cities for real estate investing in the country. Visiting and seeing these properties in person is nice, but hardly mandatory in today’s world.
Can you take turnkey operators at their word when they say the property is rent-ready? (No.) Do you need to do your own market research and due diligence? (Definitely yes.)
The truth is, it’s very possible to buy a turnkey property without seeing it in person… if you know how to spot the red flags of dangerous turnkey operators and know how to determine if a property is a good investment.
In this article we’ll explain how to do both.
What Does “Turnkey” Mean?
The word turnkey gets thrown around a lot in the real estate industry, but what does it really mean? According to Investopedia, “[a] turnkey property is a fully renovated home or apartment building that an investor can purchase and immediately rent out.”
This sounds great, but in reality this definition doesn’t always apply. The term turnkey actually means nothing. Why? Because there’s no set standard for what a turnkey property is, and therefore every company has its own definition. For some, it’s new paint, new carpet and outsourced management. That would be very minimal, in my opinion. For others, it’s a complete renovation and the hiring of an experienced property management team.
So how can you know what you’re really buying when it comes to turnkey property? You have to do your own due diligence and be able to spot turnkey property scams. When the product doesn’t line up with the alleged offer, there’s a good chance you may be getting scammed.
Here’s an example:
My husband Rich and I once met a couple of turnkey sellers in their 20s. They were really good salesmen who had the email marketing thing down. They took great pictures of the properties and used language like, “this is turnkey, which means you don’t have to do anything.”
So we thought, great, let’s go check it out. I liked the city; I knew from experience that it was a good market and area. But when I got there and actually saw the properties it was a completely different story. I actually said to them, “This is not your turnkey property, right?” I thought it must have been right off of foreclosure and they hadn’t started renovations yet. But no, it actually was their turnkey property.
What their amazing marketing and beautiful pictures didn’t show was that all of their properties were located in incredibly dilapidated neighborhoods. They didn’t show the bars on the windows, the graffiti next door or any of the other huge red flags.
As you can imagine, I was shocked when these guys told me that the “turnkey” property I was looking at was already sold! They also said that they had a long list of investors who buy this stuff, without ever coming out to see it in person.
After all of my questions they pretty much pushed us out the door, because they could tell that our standards were MUCH higher for turnkey property than theirs were.
Consider it a lesson about how important it is to define what “turnkey” means to you, and to make sure the company you’re buying from has the same standards, especially before buying a property sight-unseen.
How to Define What Turnkey Means for You
After coming across countless turnkey providers, like the one in the example above, I decided that I needed to create a turnkey standard for myself and for the real estate investment club I founded with my husband.
We created the following turnkey property standards, which many of the operators we work with have since adopted.
We call them our R.E.A.L. Income Property Standards:
R – Renovated (to R.E.A.L. Income Property™ Standards)
E – Examined (through inspections)
A – Appraised (purchase price at or below market value)
L – Licensed property management
We ask all turnkey property teams on our referral list to adhere to these standards. This must be verified through 3rd party inspections before closing, as mentioned above.
I strongly recommend that you also create standards like these for yourself, especially if you’re considering buying a turnkey property long distance, sight unseen. Below you’ll find even more tips to help you make a strong turnkey investment.
Please note: As property values continue to increase, it is becoming more and more difficult for turnkey property teams to meet high standards like these, if they hope to make a profit. Some providers we work with have returned to the broker model, where they help investors find properties that need little work.
If the turnkey company you’re working with is selling properties that haven’t been fully renovated, it’s even more important to get a full inspection. This will help you to better understand what repairs may be required in the future so that you can adequately budget for them.
7 Tips for Buying Turnkey Properties Sight Unseen
As you can see from my example above, buying property sight unseen can be really dangerous. This is why you MUST do your own due diligence. Never trust. Always verify. The following are 7 tips to help you buy turnkey properties without seeing them first.
Tip #1 – Ask for a Full Scope of Work
If you’re buying a property that has already been renovated, get a complete list of the scope of work that has been done. Have an inspector verify that list.
If you are buying the property before renovation, be very clear on what repairs will be covered and pay only a deposit upfront for the work. Pay the full amount only after completion, with photos and/or verification by a 3rd party inspector.
Tip #2 – Get FULL Inspections Completed by a 3rd Party
Before purchasing a property, it’s essential to order a full third party inspection to verify that the property meets or exceeds your expectations.
Getting the property inspected by a professional eliminates the need to see it in person. Most of us probably don’t know what we’re looking for anyway. A full inspection will make buying properties sight unseen easier and provide a greater peace of mind.
If you go through a turnkey property platform like Roofstock, the listing should include full home inspections. These home inspectors must pass Roofstock’s standards, and are generally trustworthy, but you may still want to order an independent inspection.
Tip #3 – Get a FULL Appraisal Completed by a 3rd Party
In addition to getting an inspection, you need to get a full 3rd party property appraisal. If you are getting traditional financing, you will always receive a 3rd party bank appraisal. If you are paying cash, I still recommend getting a 3rd party appraisal. Be sure to also check out average market prices in the neighborhood and surrounding area and compare it to the purchase price.
Just like an inspection, a full appraisal allows you to get all the information you need without actually seeing and walking the property with your own eyes. An appraiser should provide the property’s value and give you a good idea about whether the investment is a good one or not.
And don’t be afraid to walk away from a deal halfway through if the numbers aren’t working! In fact, this is almost easier to do when you haven’t actually seen the property and become emotionally attached to the cute yellow door or the big bay window.
Tip #4 – Verify Rents From a 3rd Party Service
Never take someone’s word about market rents. It’s essential to verify them through a 3rd party service, like rentrange.com. These types of services offer property reports with a complete rental rate analysis and market metrics that show how different regions are performing. Verifying how much rent to expect helps you run accurate numbers through a rental property calculator.
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Tip #5 – Make Sure All Work Has Been Permitted
Any mechanical or structural renovations performed on a property must be permitted. You should ask the seller for copies of all the “signed off” permits associated with the renovation. You can also ask the city where the property is located for all building permits for the property, and cross reference that list with what is found in the property inspection.
Don’t take shortcuts when it comes to verifying that renovations are permitted. If the renovation work is done without a permit, and you ever need to renovate or sell in the future, you risk the added cost of permitting and inspecting someone else’s work on your own dime.
Tip #6 – Avoid C & D Neighborhoods
C & D neighborhoods may look profitable on paper because property prices are so low, but they can be very difficult to manage if they are in high crime or high turnover areas. Always research crime statistics (I recommend City-Data.com) before choosing a neighborhood. I personally prefer B neighborhoods because tenants tend to stay longer where they feel safe, and the cost of entry is still not too high. Likewise, be careful working with Section 8 tenants.
Tip #7 – Speak with the Property Manager / Management Team
Ultimately, the success of a rental property depends on its management, which is why it’s important to speak with the person or team that currently manages the property.
Ask them how many properties are in their portfolio, and how many of them are vacant on any given month. Other important information to ascertain is how many evictions they have per year across the properties they manage, and the eviction process they use for removing delinquent tenants.
You should also make sure the property manager is properly insured and licensed according to their state laws. It’s also recommended that they have at least 2 years’ experience with a proven track record, and use professional rental management software that allows easy access to your property’s data.
An experienced property manager should also have systems in place that are effective and easy-to-use. These systems should include the following: secure portal for online rent collection, quality tenant screening process, accessible monthly reports on expenses and property income, in-house repair teams and a system for quick responses to tenant inquiries.
It is absolutely, 100% possible to buy turnkey properties without ever seeing them. Remember…you aren’t just buying a house, you are buying an income stream. You don’t have to be an expert on every aspect of buying or renovating a property. Rather than spend your time walking through potential investment properties all over the country, you can rely on licensed third-party services to do the work for you.
Take advantage of the Internet age where proximity no longer plays a factor and information is easily available in formats anyone can understand. While we’ve laid out the seven tips above, make sure to perform your own due diligence along the way. And remember: if the property’s numbers are not up to the standards you’ve created, find another one! These tips will help protect yourself from the risks associated with buying turnkey properties sight unseen and maintain peace of mind.
Have you purchased turnkey property sight unseen? Are you happy with your investment? What would you have done differently? Will you do it again?
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About the Author
Kathy Fettke, the Co-Founder & Co-CEO of RealWealth®, specializes in teaching people how to build multi-million dollar real estate portfolios through creative finance and planning. She is passionate about researching and then sharing the most important information about real estate, market cycles and the economy. Author of the #1 best seller, Retire Rich with Rentals, Kathy is a frequent guest expert on such media as CNN, CNBC, Fox News, NPR and CBS MarketWatch.