Why so many Smoky Mountain Sales?

Question

Looking to buy a rental in Smoky Mountains but something bothers me about the history of sales. Even if you remove the last 3 months due to Covid, there are so many sales of rental homes that were "outstanding rental performers". Why would so many people sell their great rentals? I don't have an actual figure, it just seems like a lot when you scroll through the "solds".

Thanks for your input!

Collin Hays · Answer

Ha!  I'm not so sure about well-versed, but here's my take:

Since STRs have boomed in popularity among investors, just like any other investment, there are leeches who figure out ingenious, almost invisible ways to steal from us. In this industry, the leeches are also the gift horse, meaning that the hand that is feeding you is also stealing from you simultaneously. Rent shifting is the primary culprit, and comes in all sorts of forms, but it is essentially the practice by various third parties of shifting guest dollars away from rents, and to various add-on fees that are not shared with the homeowner.

Furthermore, there are few clean hands in this - VRBO and Airbnb are actually the pioneers of the practice.  To effectively demonstrate this, we have to jump in our magic time machine and travel back 10 years.  Assume that you had a cabin in 2010 that charged $200 per night.  Assume that you had a 3 night stay.  On VRBO, this is how that transaction would have looked:

$200 per night

3 nights, so $600 total

$60 tax

$50 cleaning fee

The total cost to the guest is $710.  Revenue to the homeowner was $600 (taxes and housekeeping fees are pass throughs)

Fast forward to 2020.  You should have been able to raise rents over 10 years, but you really cannot, because VRBO has added so many fees:

$200 per night rent

3 nights

$600 total

3% credit card fee =$18

3% advance pay fee = $18

up to a 10% guest booking fee  $60

$75 for housekeeping

$77 sales tax Total cost to the guest:  $848.  Net paid to the homeower:  $540

Bottom line:  While the cost to the guest has risen roughly 20% over 10 years, it is only because of various fees added on by VRBO.  Homeowner revenue on a per-stay basis has actually declined.  In addition to your annual subscription of $600, VRBO is now taking around 14-15% of the reservation for profit.  You might say "well they have to charge me for credit cards."  True.  But VRBO is making as much as 100% profit on credit cards.  They are charging you 3%, and paying about half of that.  So when you are thinking of managing your own STR, you have to consider the fees that you are going to pay.  15% is a pretty good rule of thumb.

Rent shifting is also practiced at a lot of management companies.  They charge outrageous booking fees for your property that they do not share with you.  That puts significant downward pressure on your rents.  If you want to see how this works in greater detail, I am unable to provide a direct link to it, but go to YouTube and search for the term "vacation management companies exposed."  It will be worth your time.

I hope this helps a little!

Avery Carl · Answer

Hi Elaine! On the buy side, the speed of the market and the number of sales is 100% investor-driven. Properties in this market can do great numbers as short term rentals. Why would someone sell a short term rental that is grossing high numbers? The answer is mismanagement. The vast majority of sellers in this market are not what I would call investors, but true second home owners, who just buy a cabin for their family and allow whichever local cabin company they saw along the parkway manage it.

Most of the major cabin rental companies around here charge 30-40% of the gross of the cabin (although I am hearing a lot about dropping to 20% for the first year etc to compete with some of the leaner-managed companies that have popped up over the year few years). On top of that, most of them charge a lot of extra "maintenance" fees and "insert whatever else here fees."

Couple that with the fact that most of the big cabin companies don't utilize many of the major booking platforms (as those are the platforms that will eventually put them out of business one day if they don't adapt), you've got yourself a property that doesn't NET money. It's entirely possible to have a cabin grossing $100k, and for the owner to actually be losing money due to poor management.

Luke Carl · Answer

@Elaine Petty

Here’s my take on it.

Nothing has changed. It’s always been like this. Yes maybe purchase prices are up -but they’re up everywhere and with all the inflation we’re about to experience -they will jump again.

No one lives here. The thousands of people you see in this area are outsiders. Brining in money from other parts of the world. In that respect, and many others, this is a very weird part of the planet.

Can you make money here and does the system work? YES. Is short term rental for everyone? Absolutely not.

Asking “why is this person selling” is not going to get you anywhere. Death, moving, divorce, moving money to another project, sick of property managers (that’s a big one here). It’s more important to ask yourself why do you care why they’re selling? Because you shouldn’t.

Robert E Wilder · Answer

@Elaine Petty prices have skyrocketed due to low inventory in the area. Investors are simply cashing out. Another reason may be that a lot of the older (baby boomers) generation are retiring. I know many of them.

Todd Goedeke · Answer

@Elaine Petty, for those people who know little about marketing they rely on platforms like Airbnb or VRBO. True self management is where you market thru your own efforts or outsource your referral process for social media. There are people who will handle your marketing on a success basis for 5-6% if you have a high enough daily room charge.

Juston Clarkston · Answer

@Ken Latchers Have you considered using a reputable management company?

Ken Latchers · Answer

Personally, I would not own short-term rentals in the Smokies or anywhere else that is not where I live. I live in a tourist town in Eastern Pennsylvania. All the winners are quiet and I generally get people for the weekend, the housing prices are super cheap so it's a good return. I live a block away from my rentals. When things get bad I haven't sufficient long-term Market to rent to, as I've done with all my unit now.

I have long distance long-term rentals in Tennessee and Virginia and it is a Non-Stop annoyance with the management issues.

John Underwood · Answer

Self managing for most of us does mean using Vrbo and Airbnb. There fees are mostly passed on to the renters. This is still a much cheaper option than using a PM.

Why so many Smoky Mountain Sales?

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