5 Questions You Need To Ask to Avoid Getting Soaked on a ‘Turnkey’ Real Estate Deal
If you aren’t a professional real estate investor, the phrase ‘due diligence’ might just sound a little too much like lawyer language. However, with more and more non-professionals entering the real world’s estate markets every day, phrases like due diligence have to start entering the common person’s lexicon. As Unreal Estate feels strongly about giving purchasing power back to the individual and eliminating the professional investor’s monopoly on good real estate practice, we feel you should know this too.
This article is designed to help by explaining five less-than-obvious questions you absolutely must ask about a potential real estate purchase before you make it. Of course, any investment is a risk and no set of questions can completely insulate you from the possibility of making a bad deal… but as they say, forewarned is forearmed.
What is ‘due diligence’ then?
Due diligence is the amount of ‘diligence’ that is ‘due’ – the amount of effort and care you are legally expected to take, before making a large purchase or investment. If you don’t do your ‘due diligence’ and get surprised by a bad deal, well, there is a good chance that it’s your fault, at least legally. If, however, you fully educate yourself about an investment before you make it, then you are considered to have made your due diligence. If the seller still sneaks a ‘fast one’ through, the courts are more likely to decide they were deliberately hiding the problem and to find the seller at fault.
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.
Here we discuss five due diligence questions that you must ask anyone and everyone from when you’re considering purchasing turnkey investments. 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.
OK. So what is a turnkey investment?
A turnkey investment in real estate terms is where the buyer comes into possession of a property that is already producing income. The buyer steps in as the new landlord, owner, etc., and they don’t have to set up anything. It is already running, they just have to ‘turn the key’ and walk in the door.
As a real turnkey real estate investment will begin producing its ROI essentially the same day it was purchased, these types of properties tend to be highly sought after.
These five due diligence questions should help you spot at least a few of the trickier fakes.
1) How long has the seller been providing turnkey investments full-time?
The longer someone has been in business, the better they will have become at it. Also, the longer someone has been selling dodgy real estate, the more likely they will have been caught at it and forced to stop. Therefore, the longer someone has been in the business of selling turnkey real estate, the more likely it is to be a) the real thing and b) a well-structured deal.
It is important to ask about the ‘full-time’ part as well. Someone who turns one questionable deal on the side every three or four years and being in business for 20 years means a lot less than it would for someone who sells 50 units a year.
2) Does the seller actually live in the same city or market as the property, and for how long?
Simply put, if the seller lives and works in New York, they can’t know as much about how a rental or business property in Arizona works as someone who has lived and worked in the same city for 10 years can.
Ideally, you’d prefer a seller who has visited the property many times, knows about the business side of its operation, and can personally speak about its short- and long-term profitability.
3) How many rental properties (or businesses similar to the property in question) does the seller currently own and how many have they operated in the past?
This is important for very similar reasons to question two. A seller who knows about this type of business, as well as this market, in particular, is more likely to understand the problems it faces, the threats it has to overcome, and what makes it profitable. If they don’t, how much can their assurance that ‘the business is healthy’ or ‘the renters are a great family’ mean?
4) Are you actually dealing with the seller, or an agent of some kind – or worse, a marketer?
There are a lot of middlemen out there, and few of them actually add any value to the deal from your point of view. Now, buying through a middleman isn’t necessarily bad, nor does it mean the turnkey property is a bad investment.
It does mean, however, that the person you’re dealing with probably doesn’t know the property well, and cannot speak in as much depth to its profitability. It also means you are probably paying at least 5% more than the seller is getting, perhaps more. Try to find the actual seller, if possible, and strike up a deal with them.
5) If the deal is for a ‘distressed’ turnkey property that will be renovated after the sale, can they reliably guarantee that the renovations will happen quickly, effectively, and within the proposed budget? If not, the price should reflect that.
Buying a distressed turnkey property can be a minefield. As with many higher-risk investments, it can sometimes be very profitable… but other times it can be a total loss. The riskier the deal, the more diligence is actually due. In the end, if the investment is so certain, why aren’t they doing it themselves and selling it for a higher price after being refurbished?
Once again, these aren’t magic spells to recite to protect you from bad deals. You have to use your eyes, your mind, and your experience to do that. But asking these questions might make the job a little easier for you.
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