Real Estate Q&A Is Airbnb Trouble in Paradise?

This Real Estate Q&A column was written for the upcoming Christmas/New Year’s edition of The Sheet

Q: Paul, you’ve been talking plenty about the growth and popularity of Airbnb and how it is driving the rental business in Mammoth for condominium owners. While there are many good aspects, what are you seeing as potential problems for the local property owners??

A: The nightly or vacation rental business has never been perfect for property owners in Mammoth. But all things considered, most of it runs smoothly. Droughts and seasonality certainly don’t help. Below freezing temperatures and party-minded guests can cause mayhem too. But overall, despite all of the variables the end result is quite successful.

Today, to proactively own and operate a vacation rental is a classic small business operation. And product and marketing are key. It hasn’t always been that way. For decades many owners brought up secondhand furniture and discarded decor and equipment to outfit their condos and left the whole rental operation to one of the local reservation companies. Much of it simply muddled through. The demand was sufficient to make adequate revenues. There are many old-time condo owners who are still stuck in this mode. They are famous for saying “What’s wrong with my condo?”

Two big forces converged on Mammoth and the nightly rental business in local condominiums. The Intrawest period (1996-2008) brought the true condo hotel concept to Mammoth for the first time. Existing condo owners and reservation companies had to now compete against this level of accommodation and service. And the units were brand new.

The blossoming of the Internet happened at the same time. And the self-renting and digital marketing concepts have exploded in all directions. This has all led to the near chaotic state of the industry today. Many things have changed

Meanwhile the face of the Mammoth condo owner looking to do nightly bookings has changed dramatically too. For many it is a game face. It is all business; with the goal to create a property that generates high revenues with minimal expenses in addition to leaving some precious time for the owner to come to Mammoth and get their own play time too. And the recent era of low interest on bank savings (ZIRP) has made a vacation rental business an attractive investment alternative for many. Especially if there is some quality recreation time worked into the scheme. And oddly, many of those old-time condo owners are now at-or-near retirement and are making zero interest on their savings and are now becoming motivated about changing their ways.

Many successful operators are from the younger generations; they want to run a small business enterprise on the side and they are Internet and social media savvy. They also crave having their own place to come to that is home base for their outdoor mountain activities. And often the smaller Mammoth condos, many selling for less than $200,000 and financeable, make the perfect little arrangements for hitting the sweet spot of revenues, expenses and owner usage.

Many years ago Vacation Rentals By Owner (VRBO) launched ahead from a myriad of similar website enterprises to capture a commanding share of the “self renting” vacation market. But then came Airbnb. The model is slightly different and it really isn’t specific to resort/vacation areas. But it is working here in Mammoth and worldwide. It is reporting 80 million bookings for 2015.

A substantial part of the Airbnb (and VRBO) success lies in the personalization or “sharing” of the property. The “guests” find it appealing to rent from other people (the “hosts”), not rental companies or hotel chains. They believe the person-to-person experience is special. They see the host as a person with a headshot and a profile (and a life), not a company logo. Airbnb believes this leads to higher conversions. And obviously 80 million guests (and their hosts) believe it.

But there are problems with the arrangement (and understand Airbnb is a very young company). The biggest problems are basic health and safety issues and general cleanliness of the host’s accommodations. The next is insurance. And the bottom line; some of the hosts aren’t really good hosts, they just need the extra money.

All of this has spurned new education programs and counseling from Airbnb, and also entrepreneurs offering online educational programs to become the most effective host. And of course websites like airbnbhell.com that feature uncensored stories from hosts and guests.

Airbnb provides “Host Protection Insurance.” It is primary liability coverage for claims up to $1 million. It has plenty of normal exclusions. But it also has built-in limitations. Claims must be reported within 24 hours of the guest’s departure or else they are denied by default. And Airbnb will apparently do very little if there is theft of “difficult-to-prove” asset like cash (why is it even there?). And purportedly if the host doesn’t have receipts for any damaged item, they’re simply “out of luck.”

But ultimately it isn’t Airbnb’s liability, it is the property owner’s liability. Owners need to have an appropriate discussion with their insurance agent. Airbnb recommends you discuss commercial umbrella policies. The insurance and liability are murky areas. The right insurance is critical.

The “health and safety” issues of self-renting have become a paramount concern. Just look at Mammoth’s new Quality of Life Ordinance passed just months ago. Rental properties are now required to be inspected for these concerns. In a previous writing I reported on the recent national news story about an Airbnb guest who was sitting down on a rope swing suspended from a backyard tree. The tree limb broke and fell on the man and eventually killed him. There are other horror stories.

Airbnb is taking this seriously and now counseling their hosts on liability issues. Here in Mammoth, it would behoove a property owner to have the inspection. It might be a pain-in-the-ass to rectify some things, but who needs the liability? But hungry hosts/landlords are tempted to overstep. And apparently in Mammoth some are willing to rent “illegal” spaces to guests.

Some of these illegal spaces are lofts that were built into the 1960’s and 70’s condos. These lofts were red-tagged by the local fire department back in the 1980’s. They basically don’t have adequate ingress and egress in the case of a fire. Most became “storage lofts.” Local reservation companies were prudent not to let owners change the usage. But now aggressive rental owners are apparently trying to use them. Talk about liability.

Other items an inspection might discover include inadequate smoke and carbon monoxide detectors. Or lack of fire extinguishers. But there are tons of other things that owners “simply don’t see” in their properties that are potential hazards. A professional inspection is a great idea.

Owners on Airbnb type programs also need to take extra security measures so that their units can’t be illegally rented. Many owners have turned to “ResortLock” brand entry systems and other punch code keyless entry systems. Owners with $10 Home Depot lockboxes are asking for trouble. An owner needs to be able to control codes for different uses and be able to record how those codes and persons have entered the property. And have different codes for different guests. Why?

There have been all sorts of abuses. The Airbnb program has opened the door (literally) for unscrupulous people to rent other people’s property. All they need is access and to know the property is vacant and likely to be vacant. Many Airbnb guests are typically 1-3 night stays. Many Mammoth homeowners are very predictable in their own usage behavior so a short, light-handed stay is low risk for the dishonest people involved.

Think I’m crazy? There’s an ongoing criminal case right now here in Mono County that alleges this type of activity. And I suspect it is going on in other places. Owners need to better monitor their properties. A ResortlLock type system gives owners much better security and control over unauthorized entry. While Mammoth is relatively crime free there is no reason for a distant property owner to literally open the door of opportunity.

Eventually the traditional “key pick-up” model that has been used for decades in Mammoth will go away. The guest will simply use their mobile device to direct them to the property AND open the door. It can’t be that far away. But what problems will that bring? We’ll see.

The Airbnb and VRBO systems are both great for Mammoth property owners looking to “self-rent.” Various Mammoth companies are also offering additional services to make the process easier and more manageable. Some even provide a menu of “luxury” add-on services. There is real evolution taking place. And many guests are now looking on both websites and trying to find the most cost effective deal. Many are finding it preferable to deal directly with the owners like the VRBO model. Other prefer the immediacy of Airbnb.

And last month it all became even more competitive with the popular travel site Expedia purchasing the parent company of VRBO. Imagine the benefits that will now accrue to the guests and hosts using VRBO. We’ll see where we are in a year after this significant takeover.

So the challenges for these “self-renting” property owners in the future will include keeping up with all the new regulations, staying relevant to all of the changes in internet marketing, managing entry and security from a distance, and keeping liability to a minimum. Basically, the biggest problem will be staying competitive in an ever changing and increasingly competitive marketplace.

Happy Holidays!

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