On December 28, 2018, Massachusetts passed HB 4841, a law that is aimed at regulating and insuring short term rentals. While taxes are always controversial for the professional vacation rental company, in many ways this can be something positive if you are well organized.
Over the last several years those of us in the vacation rental industry are competing more with national portals and new companies. When I refer to portals, I am really thinking about Rent By Owner (RBO). RBO inventory primarily use national portals to generate bookings. We all know that owners discount the services vacation rental management companies provide both in sales and rentals. This levels the playing field somewhat as it adds complexity for owners and painted a red target on their backs. For those of you in the vacation rental business, it does the same, but this is your profession and the Massachusetts Association of Realtors and other local boards are your trade organizations, are already provided you with most of what you need from a strategic and tactical perspective here.
This change not only offers the opportunity noted above, but there are other things to be aware of and I feel that all of these add to your value proposition:
You are now paying your share of the meals and rooms tax and as a result should get better representation with the state tourism office. Use your voice to add to the conversation.
Leverage Your Value Proposition
RBO for most owners is a hobby and with these changes, owners may decide that they want to work with a professional. My recommendation is to reach out to these owners with your value proposition (consider using this list to augment your current list). Also, implement processes that will keep them involved with you. For example, Barefoot has a module that provides owners the ability to offer their own website off the Barefoot Owner Access Portal, so that they can participate and continue their hobby with your professional guidance.
Maximize the Link Between Vacation Rentals and New Second Home Sales
There is great opportunity to re-engage with owners as you communicate about these changes and in the process remind them of the other services that you offer. At the top of the list should be real estate sales. According to 2017 NAR Investment and Vacation Home Buyer’s Survey only about 50% of vacation rental properties are purchased using a real estate agent. That means that there is a disconnect and a lost opportunity because the vacation rental and the reality side of the business are not working in tandem and you don’t have the listing.
More importantly, second home buyers have available assets and money and so the closing process can be simpler and faster. Statistics indicate that 37% of vacation rental homes able to generate rental income (I think in MA this number is much higher). According to a new report from HomeAway and Savills 28% of vacation rentals now make a profit, 40% are breaking even. Moreover, 50% of people who bought a second home indicated in the above report that they will buy an additional property in the next two years. This means that there is a huge opportunity for additional connections and income for your brokerage. Those successful sales drive additional rental opportunities. All of this is market dependent, but everything points to a significant trend that will only drive investment strategies in the future and benefits for those who do rentals. Finally, vacation rentals are no longer something just for traditional resort communities. Anywhere where there is a need for a guest to stay more than one day is an opportunity for short term rentals. Thinking about the five-college area around Amherst, MA. Families go to tour the school, alumni weekends, sport and arts events all create a need for the short-term rental.
Insurance Requirements are Mandatory
As part of this new Bill, homeowners are required to provide a $1 million-dollar liability insurance for each short-term rental that occurs in their home. This may present a challenge for the individual homeowner who has not previously disclosed to their insurance company that they are hosting vacation rentals. I am personally aware of several homeowners who have had their insurance canceled as the insurance industry is starting to pay attention to the use of the property and the commiserate liability. Also note that the insurance company may require a Dwelling Fire policy with additional costs and restrictions associated with this. There is a lot of non-exclusivity in Massachusetts and for the smart agencies who can empower the homeowner to work through them exclusively to do HomeAway, Airbnb, their own network and of course the agency makes a lot of sense.
Home Away and Airbnb both offer a form of this insurance, but there is a lot of gray that would scare me as a homeowner. For example, here are three different perspectives on the insurance offerings for Airbnb:
First, these policies don’t cover family and friend reservations because they are not booked through them. Second, if you are using both or many portals, it can be difficult to track down which portals policy would cover the liability. For example, a guest books the home through HomeAway. They stay at the house and they raise the water temperature on the hot water heater. The next reservation is through Airbnb and those guests stay at the house and someone is scalded. Which insurance product assumes the liability? Unfortunately, there is a good chance that the liability will fall to the homeowner, and when a lawsuit arises, the homeowner is caught between two very large companies who are both trying to limit their liability.
You are already familiar with insurance instruments and likely already carry several. Additionally, insurance companies understand liability and welcome the opportunity to share that liability with you. I recommend that you develop a close tie to an insurance company that can assist in getting your owners the correct policy for the best money. Also, consider this-- several real estate companies that I am aware of have acquired insurance companies.
Leveling the Playing Field
As I mentioned above as part of this Bill, homeowners also must register their house with their town and the state if they are going to offer short term rentals. This means the taxing authority will now be aware of the rental. Let me emphasize that they now know about the rental tax and the income that the homeowner receives. With an agency, you have always struggled to compete against homeowners who did not report their income. that reason has now disappeared. You also will give them a 1099, which in theory drops the chances of a tax audit for owners.
Audits and the Protection of Guest Data
With this new law, the state, local municipalities and other organization will set up the process of audits for both owners and your agency. Note that this audit will be for more than just for rentals-- it will also monitor if you are following the real estate fiduciary process (both for rentals and sales), insurance on the property and MA 201 CMR 17.0 Standards for the protection of personal information of residents of the Commonwealth. These standards are some of the strictest privacy laws in the United States. The vacation rental management professional is way ahead of the game in ensuring that protect occurs. It is not just credit card information, it is addresses, names and if you add General Data Protection Regulations (GDPR) into the mix, it is a process to remove data and communication. GDPR has recently become law in Europe and can affect you if you book Europeans or have European home owners. Eventually the United States will adopted a similar law and it will affect everyone evenly. You might have noticed that popups on websites notifying you that they store cookies or information about you on most web sites-regardless of where the company is located. This is one of the first steps in all following GDPR.
Speak Up About Local Option Taxes
Regarding the local option tax, I cannot emphasize enough that you need to connect with your towns and explain that they should not follow the state tax protocol. The state starts January 1, 2019 and any reservation that checks in after July 1, 2019 must pay the state tax. If the town does not vote for a local option until their town hall meeting, which is typically March, you are going to have to go back to those who book from January 1, 2019 until the option is exercised and get an additional tax. Most guests would consider that confusing at best and bait and switch at the worst. So, try and convince your local authority to start the option after the vote.
Each item listed above should be part of your presentation to those RBO’s that are more confused about this law than you are, and it is a huge opportunity for you to not only grow your rental business but gain real estate listings. Those that move quickest will gain the most.
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Barefoot is a browser-based vacation and long-term software system based out of New Hampshire and Massachusetts. Over the course of 20 years we have focused on the providing the most tailorable solution in the vacation rental industry. Our average client is 250 units. We have the most mature trust/escrow accounting system in the industry. We are also PCI compliant and follow 201 CMR 01.
The author, Ed Ulmer, is the President of Barefoot Technologies, and has his MA and NH real estate license, RSPS and PSA certifications. He sits on the board for NEREN (NH and VT MLS) and the Capital Board of Realtors in Concord, NH. He is the past director of tourism in Plymouth, MA and Bar Harbor, ME.