So you know about fixed rent, but how does guaranteed rent differ and what does it truly entail? While 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, guaranteed rent has become a popular alternative over the past few years.
This usually means looking at how well an owner did the previous year and guaranteeing that owner will make as much money after the Property Manager’s (PM) fees have been taken out. This sounds simple on the surface, but it gets very complicated in the fine print. Homeowners need to be extremely cautious about these agreements for several reasons. For example, we have seen some guarantee language – from large national property managers – that only guarantees an owner up to the amount of commission they made themselves! The only real guarantee with this is that the manager will never lose money, but the owner certainly can! How could this hurt a home owner?
Here is an example. Let’s say an owner made $40,000 after commission in 2014 through a local property manager. In 2015, they signed up with a new property manager. The new manager guaranteed the owner would make as much as they did in 2014, $40,000. Let’s say the manager only went on to book $30,000 in gross bookings in 2015 and their commission was 35% or $10,500. The homeowner would assume that they would get paid out the $40,000 since they were told their rent would be guaranteed. How much would the owner get paid? Only $30,000. The owner loses $10,000 because the manager only guaranteed “up to the amount of their commission.” How much did the property manager lose? Nothing. The risk is all on the owner. This is exactly the type of “guarantee” that is not a guarantee at all.
In another example, we’ve seen some property managers require specific documentation submitted at a certain time. For instance, sending in past rental history statements and stay dates within 30 days of signing up with a new manager, something that most homeowners could easily overlook. When it comes time to guarantee rent, if there is a shortfall, the manager can simply avoid paying the guarantee on the technicality that the prior statements were not turned in on time. The same goes for submitting proof of past owner-stays or maintenance days.
The other risk of guaranteed rent is when you sign up with a manager who offers a lot of guarantees in a market – and you don’t get one! If your property is right across the street from a property that a manager has guaranteed, the manager has an enormous incentive to steer guests to the property with the guarantee on it and not your property. Be sure to ask your property manager exactly which properties in the area have a guarantee and which do not. Also ask them what policies they have in place to make sure that they treat all homes equally. We have heard from guests who have booked properties with other managers who were almost instantly moved to similar properties, only to check back again online and see that their original property was showing available again to book! This could be an example of diverting guest business to properties with guaranteed rent since it is much more critical for a manager to fill those properties rather than others. Other examples involve managers emailing guests back with other recommended properties, in addition to the property a guest requested, or steering them while on the phone. Sometimes bonus commissions are paid to employees when they book certain properties!
At TurnKey, we guarantee to our owners that guests who book a property will not be re-booked at other properties. In fact, we send owners an email and text message instantly every time their home is booked or canceled. Owners can see that no guests are moved to other properties. In our phone conversations or email correspondence with guests, we only respond with information about the home a guest requested, unless that home is unavailable or they decide it does not suit their needs. We also never offer employee incentives to book one property over another. We treat each home in our system with the same preferences as the rest.
Bottom line: as an owner, you need to be diligent in reading the fine print included in your management agreement. Many guarantees are simply fluff with no real guarantee involved – they are a guarantee that is great when everyone is making money, but that goes away when you really need it. And if you are not getting a guarantee from a manager who uses them extensively in a market, make sure you understand exactly how bookings will be made on your property so your guests are not diverted to other homes that make a manager more money.