Wondering whether or not you should sign up for a fixed rent agreement? Read our explanation of what it entails so you can avoid the pitfalls.
For the last several decades, homeowners have been hiring property managers to take care of their vacation homes. The long-standing, industry-standard fee structure has been some form of commission paid to the manager as a percentage of the gross booking dollars. As more people rent out their homes and vacation rentals become more mainstream, new-gen property management companies have developed alternative business models to appeal to more homeowners while providing a terrific guest experience and excellent home care.
Another new business model that has emerged has been fixed rent agreements. While these agreements almost always benefit the manager more than the owner since the manager generally expects to make a premium on the rent, the promise of steady cash-flow can be a great trade-off for owners. Companies like Rented do an excellent job of providing a clear and fair agreement to owners, but that is not the case with all fixed rent offers.
In one case, an owner signed a fixed rent agreement in a winter destination in the fall of 2015 and began receiving fixed monthly payments shortly thereafter. However in April of 2016, they were notified by the manager that their agreement was terminated. Right after the peak season, where they made far less per month, their fixed rent stopped. Why? Because of an insurance technicality: they agreed to provide the manager with an up-to-date insurance policy naming the manager as an additional insured. They actually had the policy, but they forgot to send it in. Rather than request and update their records, the manager terminated the agreement and the owner was left with an empty home in the off-peak season and no fixed rent. Again, just as is the case with guaranteed rent agreements, make sure you read the fine print and understand what you need to do in order to continue to get paid!
If you are an owner who is not on a fixed rent deal – and you know your manager offers a lot of these – you run the risk of having your guests diverted. Once a manager signs a fixed rent agreement with a home, every single dollar that manager generates at that home stays with the manager. Their commission effectively goes to 100% on that home. If your home is across the street from a fixed rent home, and your commission level is 35%, guess which home the manager is going to want to book. If a $5,000 stay comes in, the manager can either keep all $5,000, or they can keep $1,750. Which home do you think that manager would rather book? If you are not on fixed rent with them, you run the risk of losing revenue and bookings to properties that are on fixed rent.
The vacation rental industry is evolving, mostly in a positive direction. New business models can help get an owner the best property management for their needs. With these new changes come a lot of increased complexity, so owners need to make sure they go into these relationships with their eyes wide open. The long-standing commission model has a lot of benefits – managers only make money when their owners do – and everyone has a lot of motivation to be successful. The new business models can also work well, but the old saying of caveat emptor, buyer beware, applies now more than ever: homeowners need to be more aware of what they are signing up for.
Bottom-line: Read the fine print and make sure you are following the rules required in the agreement so you don’t find yourself with an empty property and no payments! Ask a prospective PM what mechanisms they have in place to guarantee that guests will not be diverted to other properties in your area. Ask every manager how they notify you of bookings or cancellations, and ask them to tell you which properties they have that are on fixed rent and which are not.