Turnkey real estate is a term that presents a significant problem for investors. Why? There is no set industry standard for rehab or renovations for a turnkey rental property. What this means for investors is that they can fall prey to unethical and dishonest turnkey real estate companies that sell subpar investment properties in undesirable locations. This is one of the reasons why we created our own turnkey standards.

To help you avoid buying investment property from shady turnkey property companies, we’ve rounded up the top eight red flags.

While there is a gray area regarding the level of renovations for turnkey rental properties, a turnkey property is defined as a real estate investment that has been fully renovated or built to rent and is ready for immediate occupancy.

Turnkey real estate investment properties are typically offered by turnkey real estate sales and management companies that specialize in acquiring, renovating, and managing rental properties, allowing investors to own property without the usual hands-on involvement.

Property types could be single family rentals, multi-family rentals, or new construction properties. The turnkey investing strategy is an excellent method for investors seeking a more hands-off approach to building wealth through real estate.

You don’t want your turnkey real estate operator learning on the job with your investment property. Find out how long the turnkey property company has been rehabbing, building, and managing turnkey rental properties. If they are worth working with, they will have a demonstrable track record and be willing to connect you with references and satisfied long-term clients. If they don’t, walk away.

There is much more to this business than simply buying a property and renting it out. To be successful, turnkey real estate companies need to acquire properties in the right neighborhoods, renovate or build them properly, sell them at the right price point to investors, have a well-developed screening process to find qualified tenants, and manage the properties and tenants with finesse and thoroughness. All of this is crucial for success in the turnkey real estate sales and management business.

When vetting a potential turnkey real estate investment company, they must be able to articulate what they do and why they do it clearly. If they cannot, that’s a big red flag. If you are not sure what to ask, here are some questions to start:

• How long have you been in the turnkey real estate business?
• Why did you choose this area, and what neighborhoods are seeing the most growth?
• How do you source your properties?
• What is your renovation process and standard?
• What is your tenant screening process?
• Do you personally own rental properties in these areas?
• What locations and neighborhoods do you invest in and why?

Good turnkey real estate companies have a proven system that they consistently replicate, ensuring quality and consistency in rental properties and turnkey property management. Ask about the system and software they use. This question applies to both the renovation team and property managers.

Another red flag is a turnkey real estate sales and management company that is growing and successful, but unwilling or unable to scale the business. Sometimes this happens because management is afraid that bringing in new people will mean a loss of control. Other times, it’s a failure to innovate and adapt to modern-day technology and practices. Failure to adapt to rapidly changing technology in this space results in operational inefficiencies and an inability to retain the most desirable tenants, as well as manage the costs associated with property maintenance.

Either way, the result is the same. They try to do it all themselves, from service slips to clients’ notices. Their consistency and quality slides, and they start losing business. Always ask the property team and the turnkey property management company how they handle client load and at what point they bring on new people.

Be very careful if the turnkey real estate companies you are vetting operate predominantly in a C or D neighborhood. Here’s why: C and D properties can look great on paper with great return on investment (ROI) and cash flow. But reality is a much different story, which could put your money at risk.

A perfect example is Kansas City. There’s the nice part of Kansas City, and then just a mile away is the worst part of Kansas City. During the day, it photographs pretty well, but at night, the scene changes dramatically. In this part of town, vandalism is almost guaranteed. If you can find a local person willing to live there, they will be terrified. For you, that means a loss of income and ROI.

In addition, more sinister turnkey property companies prey on out-of-state investors as they are unfamiliar with specific zip codes and lack local insights on areas to avoid. They lure these overly trusting investors in with low price tags and promises of high cash flow returns. If you are presented with a deal that sounds too good to be true, it most likely is.

How do you know if a turnkey company is not fully renovating the properties they sell? How can you tell if they’re just trying to make a profit, overcharging you, and leaving you with costly repairs? When investing in turnkey properties out of state, it can be more challenging to monitor the renovations and ensure they are completed to the desired level of quality.

The best way to protect yourself is simple—hire a licensed third-party home inspector to inspect the property and provide a comprehensive report with photos. It’s the home inspector’s job to identify issues that buyers should be aware of. This could range from a simple issue, such as a broken tile in the bathroom, to more significant problems, including electrical or HVAC system issues.

Take the time to review the report carefully. If you have questions or are unsure about anything, please don’t hesitate to ask the inspector. Here are some questions to get you started:

• I don’t know what this means. Can you clarify?
• What’s the condition of the ? (fill in the blank here, like roof, HVAC, plumbing, foundation, insulation, drainage, etc.)
• If this item isn’t fixed now, what should I be mindful of as time passes?
• Do you see any major red flags?
• What’s the costliest repair needed?
• What repairs would you consider absolutely necessary if you were buying this home?

We always recommend having the property thoroughly inspected to ensure the upgrades are done, especially if you don’t live there.

Ethically challenged turnkey real estate companies might try to overprice their properties significantly above market value, knowing that to a Seattle chiropractor, any price will seem like a bargain.

This markup is not only a sign of shady practices, but the higher price skews the comps above a realistic price point. This means that when you receive a comparative market analysis or appraisal for your property, it may not be 100% reflective of reality and could be lower, as the comparable properties have not been sold at an inflated, artificial rate.

Unfortunately, this does happen. Property appraisers, for the most part, are pretty accurate; however, this does not prevent many unscrupulous turnkey real estate companies from attempting to influence their market in this manner.

Always order a home appraisal. If you are financing a property, your lender will order one automatically. If you are purchasing a home with cash, you will need to arrange for a home appraisal independently.

When we bring on a new turnkey real estate sales and management team at RealWealth, we always do our due diligence. We always conduct criminal background checks and searches of local court filing records. If we uncover a history of mortgage fraud or any other suspicious activity in the real estate world, we typically conclude our due diligence and refrain from proceeding.

However, if it was a long time ago, we ask them if there’s anything we should know about them before we proceed. If they don’t tell us what we already know, we end things right there. If they explain what happened and the checks and balances they have in place to prevent future occurrences, we will continue with the next step in our vetting process.

That wraps up our list of the top red flags to be aware of when dealing with turnkey real estate companies. Use these signs as your guide to avoid getting scammed or having a subpar real estate investing experience.

What can you do to invest wisely and smartly in turnkey rental properties? Here are some tips to help you vet a potential turnkey real estate sales and management company.

We’ve been in the real estate investing industry for more than twenty years and have seen it all, so please take these red flags seriously. 

Travel to the market to meet with the team and see their operation firsthand. Visit a few properties and observe their operations, including rehabilitation and property management. You may be reluctant to do this as it is an extra expense, but it is well worth the effort if it saves you from working with a shady turnkey provider.

Every person on the turnkey team is an opportunity to screen their business. You’ll also want to obtain outside references, as they can be the most telling if something is amiss. Once you feel good about screening the references they provided (operations, rehab team, property management team, and the overall areas they invest in), you are in a good place to proceed.

When it comes to investing in turnkey rental properties, you don’t have to go it all alone. RealWealth saves our members time and money by thoroughly vetting our recommended turnkey real estate companies. We evaluate everything they do, including their rehabs, new-build projects, track record, background and reference checks, management practices, and property offerings, to ensure they align with our commitment to quality and investor success.

Learn how investing through RealWealth works.

At RealWealth, we help people just like you invest safely and wisely in turnkey real estate. If you want to belong to a real estate investing club that makes your success a priority by thoroughly vetting turnkey real estate companies and providing you with support from a seasoned investment counselor, join RealWealth today.

Membership is 100% free and provides you with access to educational resources and recommended turnkey teams selling off-market properties.