Today, Steven Gesis chats with us about how important accountability is for tenant placement warranties, home warranties, and more when working with turnkey providers.
Find out how tenant placement warranties work and why third party inspections should still be done, even when rehab work is warrantied.
Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Steven: Hey, guys, welcome back. Steven Gesis with Smartland, doing another REI Classroom show for FlipNerd. I’m happy to have you here. All right. So today, I really want to drill down what our topic of conversation’s going to be, and that’s going to be warranties for turnkey assets.
So what does that mean? So all investors out there that are buying turnkey, we really want to make sure that we’re talking about all using the same words that have the same definitions. So everybody uses various loose words and sometimes you may be on the east coast or west coast or somewhere in the Midwest or southeast, wherever it is, people may be using the same words, but they may not mean the same thing. So let’s drill down what it means to have a warranty for your turnkey assets.
So number one, it’s all about accountability. So accountability is the number one thing that we really try to make sure that we’re offering full transparency, so that way investors can really enhance what their ROI looks like on their overall global portfolio within their real estate investment category. So warranties with turnkey should be pretty simple. You should consider that when acquiring an asset, your operator, if it’s a true turnkey operator, is going to give you a warranty on the asset itself because they believe in it, they believe that they’ve done a good job, and they assure you that they want to stay onboard, and they take full accountability for what they’ve done to that asset ahead of your renovations.
So make sure to keep in mind that it’s still important to do third-party home inspections. You still want to have that full transparency, you still want to know everything that’s going on, however, let’s sweeten the deal a little bit. Let’s make sure that there’s a property warranty assigned to the asset. If it’s six months, 12 months, whatever it is, use it for your negotiating power. Make sure that you hold your operator accountable.
The next subject is going to be tenant placement. So anybody can place a tenant, however, your operator should assure you that the tenants that they’re placing are high-quality tenants. So you can use this as a tactic for negotiation if your operator that you’re working with or trying to work with doesn’t have a tenant warranty or a tenant placement warranty. You want to use this as a negotiating tactic because you want to ensure that they have just as much skin in the game for placing a tenant as they told you that the tenant is good. So if they believe that the tenant is good, then they should warranty the tenant placement. Then, it ensures you that you’re not going to get bombarded with a bunch of tenant placement fees, and if a tenant does exit, well, then they’ll replace them for free for you. So that’s an important warranty.
And then, finally, we want to talk a little bit about . . . so then we have our home warranty, we have our tenant warranty, we have our placement warranty, and the placement and the tenant warranty don’t necessarily always coincide with one another so it’s important to understand that a tenant warranty may be something where your tenant gets up and goes and then you’ll get a free tenant replacement. But your tenant placement warranty may be for a longer period of time.
So for example, let’s say your tenant leaves within six months, you’re going to want to hold your operator accountable for at least that period of time and ensure you’re going to be getting at least that much payment when you buy an asset that’s already cash flowing because if your tenant gets up and goes, who’s going to account for that? Who’s going to be responsible? You will. So let’s make sure that we hold everybody accountable and that the property manager or the asset manager or the operator, for lack of a better term, the turnkey operator, is really holding themselves to a very high standard of ensuring they want your repeat business. They want your comeback, and they want to do good for you, that their intentions are your intentions and their intention is an increased return on investment.
So again, thanks a lot for listening today, a little bit about turnkey warranties. Check us out. Happy to be here. I have a whole series coming up.
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