Vacation Rental Accounting: Owner Contracts
Updated: Mar 26, 2019
As a property manager, increasing the financial success of your business is essential. One way to do that? Manage more properties. Increasing the capacity of properties you manage immediately adds more to your top line. Expanding your inventory though also means expanding the number of property owners you enter into contracts with, and making sure the contract is beneficial to your business is crucial. When negotiating with your potential owners, here are three ways to make sure all contracts are both simple, and profitable.
1) Perform an Internal Temperature Check
Before agreeing to manage more properties it's important to make sure your business is healthy enough to do so. We recommend going through each aspect you and your staff accomplish in order to successfully manage a property. Then ask, "Would this process work with 100 more properties?". Some of the red flags that indicate that your process is not scalable include multiple manual workarounds, and little details frequently falling through the cracks. If your day consists of dealing with sudden problems or emergencies, ie: double bookings, reservation mix-ups, and so on, it is cause for concern. Perhaps doing that for a few properties is feasible, however it would be impossible were you to double or triple your inventory. Overall though, one of the most important tells is the attitude of your staff. Are they overwhelmed? Do they frequently hit productivity walls? How do they react at the prospect of adding more inventory? If they react unfavorably, or appear stressed at the thought, that is a signal to double check their daily process and make adjustments. That way, they are equipped to handle the influx of inventory without feeling overrun.
2) Limit Contract Versions
Every owner is going to have their own idiosyncrasies. If there's one thing that will simplify your relationship with them, it's having a standard contract and sticking to it. Do not deviate from it except in extreme circumstances. Every exception made breeds additional work for both you and your staff. It may seem easy to adjust from a 60/40 to a 70/30 split, however the process that goes into the differentiation adds up quickly. You will need to update your staff on the new contract, that contract's process (for example how transactions will behave, what costs are shared or not, and so on), while they also maintain the process for the other contracts. By limiting changes, you control how much work you and your staff have to do to be successful. A way to mitigate objections during negotiations is to explain that your standard contract will be more profitable for both parties. Your way of operating will produce higher margins, as it means your internal process remains as efficient as possible. This level of organization will be passed down not only to the owner's properties, but also the owner themselves. They will make more money and be more satisfied with the PMC's service. When they have a question or concern, it will be resolved more quickly as every member of the staff will be familiar with the answers. If, despite the explanation, the owner is still insistent upon changes, only acquiesce if the contract is lucrative enough to cover all costs. This includes the costs of retraining your staff, implementing new process, monitoring its success, and so on. If the profit covers all of that and you are still making considerable margins, then and only then consider it. Overall though, limiting contract versions, and therefore confusion, will leave both parties happy.
3) Negotiate Costs Above the Line
It goes without saying that you want to share as many costs as possible with the owner; the more costs shared the higher your margins. The owner however isn't necessarily concerned about your margins, they're concerned about their own. A way to sway them into sharing as many costs as possible is giving them industry history and context. Currently, there are a myriad of fees and taxes that come with operating a vacation rental. Things like channel commissions, reservation and booking commissions, and so on. If the owner questions the necessity of these various fees, iterate that the industry has changed. Five years ago, OTAs were not the powerhouses they are today. Profits could still be made by people calling and making a reservation. Guests would make a reservation over a year in advance and pay upfront prior to their stay. That is no longer the case. Currently, over 75% of bookings are through OTAs, and that number is only increasing. Expecting to make a profit purely from booking directly is expecting to go out of business. In order to be successful, those commission costs, subscription fees, and so on are simply part of deal if both the PMC and the owner are to be profitable.
By always having a finger on the pulse of your business, standardizing owner contracts, and sharing as many fees as possible, you can ensure the efficiency and simplicity of your process. This keeps you and your owner not only happy, but profitable.
For more accounting insight, make sure to check out the basics of vacation rental accounting, with more posts coming soon!