VRBO & AirBnB

[Terrel L. Shields]

Please be aware that when dealing with short term rentals you are dealing with 3 characteristics - the REAL estate, the PERSONAL PROPERTY, and the BUSINESS ENTERPRISE VALUE (BEV). Banks generally are only loaning on the Real Estate.

No short term rental is renting a vacant home. They are renting a furnished house. The enterprise - if profitable- produces a surplus income that is attributed to the BEV. It is like a hotel or resort. I know there are appraisers who 'fudge' and use VRBO income for a substitute for 'rent' and come up with a number that captures the contributory value of the personal property as well as any surplus income.

But again. The number includes 3 elements and as such should be separating the BEV and PP from the total property valuation - and banks OTOH, cannot capture that BEV nor PP value. They want to know one thing. The value of the REAL ESTATE.

This came up as I am in "communication" was an agent who has a seller willing to make changes to the house to accommodate additional guests as a VRBO. Since I am an unwilling participant in these email blasts, I simply pointed out to her that she was complicating the appraisers job and if they do it right, then they have to either separate out BEV and PP or using traditional rental numbers - neither which is going to help maintain the price the owner is asking from an appraisal standpoint. I did not say the property was over-priced, but obviously she isn't getting much attention to the listing or she wouldn't be trying to "sell" to the other agents.

 

[Terrel L. Shields]

Another interesting point she made. 7 of 10 of her buyers were cash buyers - selling somewhere and then moving (often retiring) to cheaper NE Oklahoma site commonly. But some buyers are pre-planning to retire at some point in the future - so they want to buy several years before retiring, then rent VRBO their new lakeside home to generate income while they remain in their jobs yet have use of the facility when they want to spend the weekend or a week in their new home, until they opt to retire, and then they will update the property, etc. and sell off their old home. Also, she noted the difficulty of getting an appraiser scheduled when the property is a VRBO as the most popular houses are the most popular VRBOs too.

I wonder if that phenomena is common elsewhere - I'd think Florida, Arizona, etc. comes to mind. I cannot imagine why anyone would retire to Montana or Wyoming considering its 9 months of winter and 3 months of late spring but perhaps so....but I guess it could be a phenomena considering Jackson Hole, etc. But as I got older my skin thinner - cold is not my favorite. It's been a few years since I've seen much below zero except a couple of rare days here in the Ozarks.

 

[nachocheesefries]

Please be aware that when dealing with short term rentals you are dealing with 3 characteristics - the REAL estate, the PERSONAL PROPERTY, and the BUSINESS ENTERPRISE VALUE (BEV). Banks generally are only loaning on the Real Estate.

No short term rental is renting a vacant home. They are renting a furnished house. The enterprise - if profitable- produces a surplus income that is attributed to the BEV. It is like a hotel or resort. I know there are appraisers who 'fudge' and use VRBO income for a substitute for 'rent' and come up with a number that captures the contributory value of the personal property as well as any surplus income.

But again. The number includes 3 elements and as such should be separating the BEV and PP from the total property valuation - and banks OTOH, cannot capture that BEV nor PP value. They want to know one thing. The value of the REAL ESTATE.

This came up as I am in "communication" was an agent who has a seller willing to make changes to the house to accommodate additional guests as a VRBO. Since I am an unwilling participant in these email blasts, I simply pointed out to her that she was complicating the appraisers job and if they do it right, then they have to either separate out BEV and PP or using traditional rental numbers - neither which is going to help maintain the price the owner is asking from an appraisal standpoint. I did not say the property was over-priced, but obviously she isn't getting much attention to the listing or she wouldn't be trying to "sell" to the other agents.

I stay away from known VRBO condo's because it simply cannot be anything other than a bubble.

The Branson MO market is over saturated with six plex looking buildings and high end lake cottages that are used exclusively for nightly rentals. Most are in the $650k-1.1mil range. The nightly rent is so high that 2-4 families have to go together just to be able to afford one for the week. There are hundreds of them. All new construction that sold for cash.

What do you think happens when families don't have that much discretionary income? It seems like all these out of staters cashed out all their equity in their primary residence and overpaid BIGGLY for these 'mini hotels'...its gonna be bad. Couple that with people being sick and tired of Air/VRBO and no skill hosts requiring you to clean the rental before you leave AND charging a $250 deposit.

Took my family to the UP last summer. One of the houses we stayed at, which was really nice, had an $850 non refundable cleaning deposit and we had a 'chore list' before we left, could not wear shoes in the house that had all hardwoods, no smoking anywhere on the property, on and on. I stood in the driveway and smoked every night wondering if there were cameras in the trees watching me. Didn't take my shoes off once.

I will never use VRBO again. Property manager insisted on meeting us at check in and harassed me for two weeks to write him a review....no thanks man.

At least when you go to the Marriot you don't have to worry about the CEO leaving YOU a bad review. No sympathy for these people, at all.

 

[Overimprovement]

I doubt many residential only appraisers have done enough assignments to properly deal with the issues Terrel brings up. What he mentions is essentially adding an income approach value TO the SCA value, at least partially--and then adding to all that the value of the PP.

I do not run across these in my area--not much demand as a tourist locale. But to me, it is similar to a duplex or other rental property. What is its value as a rental (income approach)--how much of THAT income is because of the PP present? What is its value as a standalone live in home? Then you reconcile.

One other increasingly big issue is local ordinances concerning short term rentals. Many cities in particular have or are considering enacting rules about these. If a rule change affecting short term rentals is pending, that needs to be brought into the analysis as well.

One thing to consider too for part time rentals--for every day someone is earning income on their home by renting it out--that is a day they are not getting the use of their home personally. It is not a leasehold estate, since they can stop at any time, but looking at it as a series of short leasehold estates every month may bring a different perspective to its value add. I mean if I have to live elsewhere 2 weeks a month, doesn't that offset any income earned?

 

[Terrel L. Shields]

ecause of the PP present?

You also have an element of the intangible - BEV. Plus developing the Net Operating Income statement would be a nightmare. As the franchise takes 20% or so - payment to VRBO - plus your insurance is higher than a mere residence, clean up is higher as you generally will want to use a professional service. Insurance here makes a vacant house (be it rental or not) a real problem. You basically pay double. The homeowner policy won't cut it. Also, if you provide snacks, food, etc. you get into the B & B problem of exposure to damage and what happens if a guest gets food poisoning, falls, etc. I'd never consider such as rental property.