On Real Estate Investment in Philadelphia, Turnkey Companies and Old Wives’ Tales

My grandmother always said, “If it seems too good to be true, it probably is too good to be true.”  Fine, she say exactly that, but if I’d had a grandmother who worked with real estate investment in Philadelphia, she’d definitely have packed up that rule of thumb along with a piece of gefilte fish and the expression “There’s no such thing as a free lunch.”

As with many wonderful people, we found ourselves facing all tempting offers of companies that guarantee yields between 8-10% per year.  They didn’t just promise excellent yields, they also offer an easy, user-friendly solution under the banner “Turnkey Solution,” a managed solution from A to Z.  They would take care of the details of carrying out the transaction, choosing the property, renovating for rental, you name it.  “Just bring us the money and you’ll start receiving a check in your mailbox every single month.”  Just for example, the turnkey companies promise that you give them $100,000, they’ll buy real estate for you worth $60,000, then renovate it for $40,000.  And every year, you’ll make $10,000.  Sounds wonderful, right?

But there’s a catch:  those companies will grind you up just like my grandmother used to do to her gefilte fish.

The monthly income they promise you actually doesn’t sound bad at all.  But that’s because they’re only showing you one side of the story.  They’re only showing you the yield (ROI).  The part of the story they don’t tell you about is the other details that are no less important.

The actual worth of the property

At the end of the day, the house we buy for you is worth the market price and the price of the houses nearby.  That means that, returning to our example, even though you paid $100,000, the property you now own might be worth only $70,000 after renovation.  That means you paid $30,000 more than you needed to for the property.  They do this by purchasing property at rock-bottom prices in problematic neighborhoods and inflate the value of the prices.  Looking at the example again—the same house you bought for a “steal” at $60,000 before renovation, they actually bought for $30,000.  They already wrote themselves a check for $30,000 at your expense and are going to earn more from you through management, overcharging for every single stage of purchasing, renovation, and management.

Artificially Inflated Prices

Leading turnkey companies will often purchase a number of houses on the same street or block, then inflate the prices artificially as a trick, without any connection to the reality of natural supply and demand within the city.  That means they can show buyers higher “comparable” prices (comps), and only a deeper level of investigation will reveal that the comparison is with houses where they’ve pulled the same trick.

I Don’t Care—Why does it matter?

Many investors might say, “Wait a second, I couldn’t care less that the transaction is inflated.  Why would I mind?  I’m still earning 8-10% on my investment, right?”

But that assumption is wrong too.  Because it overlooks the fact that when the investor wants to liquidate the property, the inflated prices will actually act against the investor and they’ll have a hard time liquidating the property without losing money.  Even if there’s a rise in prices in the overall market, investors will enjoy a significantly lower gain than what they could have earned in a transaction that wasn’t based on this kind of trickery and exploitation.

Unfortunately, we’ve had situations where we’ve met with investors who wanted to liquidate their property and sell houses they’d bought from these turnkey companies.  This is where investors are seriously bled dry by the companies with various and sundry expenses for “structural testing,” appraisals, exorbitant broker fees, and more.

No Such Thing as a Free Lunch

Our main difference from these turnkey real estate companies, which promise a worry-free, headache-free deals, is that at Around the Block Assets, we take a different approach entirely.  We encourage our investors to be involved in the details of the transaction and as aware of the process as possible.  It may seem up front like you’re paying a “cost” in terms of your time, your involvement in the details and carrying out the transaction itself, guarantee that nobody’s going to pull the wool over your eyes.  The transaction will be yours from A to Z, and you’re going to be part of the process with full transparency.  Just like my grandma once said—“Don’t judge a book by its cover.”

What do the numbers look like?

Let’s use the example of a real transaction for a client we’ve worked with recently:

Purchase price:                 $75,000

Renovation cost:              $33,000

Closing costs:                    $5,000

Total costs:                        $113,000

Expected net income after expenses:        $12,750 (= 11.2% ROI)

Not bad, right?

But even with those numbers, you’re going to get another wonderful bonus: