Vacation Home Buyers Beware: Guaranteed Income Scheme Scams Are Back
In recent weeks I have attended a few real estate seminars in Orlando and an alarming trend has started to re-emerge.
It seems some real estate companies are again trying to lure potential buyers of vacation homes with the promise of “guaranteed rental income.” Unfortunately, the history of vacation homes in the Central Florida area, dating back to the mid 1980’s, shows that schemes like this virtually always spell disaster for the person who unwittingly signs up for this nonsense.
In its most basic form, the guaranteed income scheme is derived because a management company has signed up with a tour operator who has made a promise of so many nights rentals during a season. This then gives the management company the false confidence to go out to the market place to try and earn more commissions through selling more real estate. It’s not unusual for these commissions to range from 6% to 10%. However, there is a huge downside and it usually ends in trouble for the new homeowner and the management company.
Some folks in our industry know I have a pathological hatred of tour operators and here’s why. Simply put, they screw the management company on the nightly rate they pay to rent a property and then the management company screws the homeowner by paying such a low rate that it eventually becomes impossible to make ends meet. To give you an idea, it’s not uncommon for tour operators to pay less than $100 per night to the management company for a four bedroom home. In fact, it might shock you to learn that some tour operators pay less than $80 per night for the same home.
Now let’s think about that. If the management company is lucky enough to earn $100 per night, what does the homeowner make? Naturally, the management company has to be paid for their time and effort in dealing with the rental reservations and they can take anywhere from 20% to 50% of that nightly rate. All of a sudden that $100 per night looks awfully dim.
The bottom line here is that it is always the homeowner who pays. The cycle continues until the homeowner realizes that the numbers don’t work and that then brings them to a choice; a) they find a different MC or b) they cannot afford the property anymore and have to let it go.
Worse, if they don’t come to that realization, then the day will come when the tour operator will no longer work with their management company. Tour operators are greedy vultures and they tend to operate with methods that some would call predatory. There is a cycle that has been repeated over decades where they contract with a management company and then get them dependent on the rental income that is created. After a while, usually three to four years, the tour operator starts the process of chipping away at the rates. It’s not uncommon that after say, three to four years, for the tour operator to be paying less than they were in year one simply because the management company has become reliant on this income and is frightened the tour operator will go elsewhere.
Unfortunately, history has shown, that at some stage, it will happen anyway.
The tour operator will find someone who will give them a better rate and that’s the time when many owners all of a sudden lose the “guaranteed rental income” they were promised.
It’s not a pretty sight when this happens and I can name numerous management companies that have done business with tour operators who have all gone broke over the last 20 to 30 years. This then creates lots of chaos as homeowner after homeowner is affected.
The bottom line is that tour operators are bad for business. They drive rates down and ultimately, they rape the vacation rental business. Guaranteed rental schemes are part of this world and simply not worth the paper they are written on.
Want evidence? Take a close look at the advert I have published above by clicking it to open a larger version. Note the asterix alongside the claim that “All operation expenses PAID” ** Then note that it says that the “Guaranteed Rental Scheme” doesn’t include taxes, insurance, HOA and mortgage.
Who’s kidding who here? This is an enormous red flag if ever I’ve seen one, as these are all normal operational expenses of owning a vacation home. It seems that those who hawk these offers actually want to reduce the level of their commitment to the new homeowner from day one and the reason is obvious. The rates they get from the tour operator don’t actually cover all of the expenses of owning the property. So much for a “Guaranteed Rental Scheme” then.
But then, it gets worse. The second red flag is “Starting at $329,900.”
There are some Realtors around who are promoting this offer as the best thing since sliced bread but these folks really ought to be making the walk of shame. They know better.
At a time when median prices in Orlando are half of the asking price quoted in the advert, some would have you believe this is truly a great deal. The real truth, however, is that if they do find a buyer for one of these properties, they’ll stand to gain a rather hefty 10% commission.
Now, don’t get me wrong here, a 10% commission is absolutely fine if all parties are happy with the deal being presented. However, past cycles in the vacation home business have shown that not all real estate sales people are particularly concerned about giving their buyers the whole picture or finding them the best deal to suit their lifestyle. Typically, they find someone who shows some interest in buying a property and they then attach themselves like brothers and sisters to those buyers until they close on the property. Commission earned and they then sail off into the sun to find the next victim while the new homeowner is then left to suffer their inevitable fate.
Buying a vacation home is not something to be taken lightly. Important financial decisions have to be made and every week I have had folks who dream of owning an Orlando home come into my office only to walk out with their dream in shreds. Many folks have unrealistic expectations and it is my job to ensure that everyone considering purchasing a vacation home is aware of the reality of doing so. Sadly, that means many folks end up disappointed. The upside, though, is that a little disappointment now saves them from a whole boatload of stress down the road.
The bottom line is that anyone thinking of buying a vacation home should not be doing so if they need rental income to make ends meet. They certainly should not be doing so because someone else makes a promise to them that they will not be able to keep. In today’s world it is impossible to guarantee anything. Tour operators can also become victims of world events that prevents people from traveling for a while and we only need to think back to the tragic events of 9/11 to understand that fact. Sadly, after 9/11 happened, we saw the inevitable cycle of tour operators canceling agreements, management companies going bust and homeowners losing their homes. This was then repeated during the difficult economic depression we saw just a couple of years ago and anyone wanting evidence of that only needs to have driven along US27 in recent times to see literally hundred’s and hundred’s of vacation homes going through the foreclosure process.
So, there you have it. The bitter truth from someone who has worked in the vacation home industry for over 20 years. Someone who has been the President of the local vacation home industry and who has seen and had to deal first hand with the fall out of “guaranteed rental schemes” over the years.
Buyer Beware.
PS. If you are thinking or purchasing a vacation home in Orlando, do your research. Listen to your real estate agent but verify the facts. I wrote two easy to read books on the subject of buying and owning a vacation rental home and they are available to anyone who would like to come into our office to collect them. Alternatively, they are available to purchase at Amazon.com at the following links:
What You Must Know About Buying Your Vacation Home
5 Big Mistakes To Avoid When Selecting A Property Management Company
If you would like to pick up copies of the books, please email me to arrange a convenient time to do so: nigel@floridaleisure.com
