When Geoff and I bought our first vacation home Geoff was still in law school and I was fresh from serving in Iraq. To say our new business needed cash is like saying Justin Bieber needs a haircut. We clearly not only preferred payments upfront, but also needed them to survive. That said, the first group of guests we ever booked wouldn’t send us a check until they verified that we were truly Notre Dame alums by calling the registrar’s office.
Sounds crazy, but it takes a lot to send someone you’ve only met over the internet a check for $1,500. That was in 2006 and with the rise of craigslist scams, “cash, upfront” has become even less appealing. Throw in the pressures of the recession and one can see how this policy may reduce how much you make year to year. Below we examine this problem of when you should get paid by focusing on maximizing your take home income. We also examine three popular solutions for payment timing – upfront, 50/50, and our escrow based system.
Credit cards, pay as late as possible, and ideally their cool new rewards card that gives them cash back!
What about your guests? Even they dislike paying in advance and only do so for two reasons:
- Scarcity – Plane tickets, hotel rooms, and your home are scarce and run out because people tend to plan in advance.
- Trust – They trust the people they’ve bought from to deliver on what was promised.
Your home is definitely scarce because it’s one of a kind. Still, your home doesn’t have a brand name like the Ritz Carlton or Southwest Airlines, so it’s kind of tough to ask guests to trust you the same way. Additionally, most guests are comforted by the fact that their credit card companies can back them up if everything didn’t go as planned. Is it possible that you’re leaving money on the table by asking for cash upfront? Maybe, but as Geoff and I know all too well, you’ve got a business to run and bills to pay and trust is a two way street.
Bottom Line: Guests don’t like paying upfront but in our industry we’ve found that they only balk about paying 100% upfront when they’re more than 30 days away from checking-in. Price can be an issue as well because people don’t like tying up thousands of dollars on a single credit card. Still guests will pay upfront in full so long as they are confident they’ll get what they paid for and have someone to help them if that doesn’t happen.
Your priorities as a business owner
Paying your expenses and ensuring you earn what you plan to earn (aka get paid)
As Steve Rogers, one of my favorite professor’s at Kellogg, remarked, “anyone can make a sale when they give their product away for free.” You want your home rented and could probably fill your calendar this week if you just took guests at their word that they’d pay you at check-in or check-out. But you’d be giving your home away for free and run into lots of problems if your guests changed their mind or decided to go with a different property and not tell you.
Bottom Line: It’s easy to get commitments by phone or email, but until they pay you haven’t really “booked” your home.
Getting paid – Three quick tips
Making sure you get paid is as easy as 1, 2, 3.
- Get a a contract (aka lease) – A written contract, signed by both parties and written in accordance with your local state law is enforceable. Still you’ll have to collect and there’s no guarantee you will be able to do so, contract or not.
- Get advanced payment – For reservations that are very far in advance most owners require a large down payment and the balance due at some point prior to check-in. The trick is in how much to take up front and when to collect the balance.
- Increase your payment options – It costs money to accept credit card or paypal, but guests trust these options and it is foolish to not accept them. Though paypal and credit cards offer fraud protection, it is still hard to get a guest to send you payment directly because of identity theft and trust issues.
Payment Options
It’s pretty clear that upfront is tough, so what else can do you?
- Staggered payments – After 2 years of operation we migrated from upfront payments to a 50/50 structure whereby 50% was due on booking, and the remainder was due 60 days prior to check-in. This structure gave us enough money to pay expenses while making us reasonably comfortable that we’d be able to get another guest if ours canceled or failed to pay their balance. In these situations we always gave a refund to the original group if we were able to get a second group of renters. In the long run our reputation was worth more to us than the extra $800 or so associated with a non-refundable deposit, but more on that in a future post.
- Escrow payments – In 2008, we thought about offering up our services to other property owners and pondered what we’d like most as a guest or owner. As an owner, we knew above all else we just want to know that we’ll be paid 100% guaranteed. As guests, we knew we would want to know that we’d get what we paid for and we’d have someone to turn to if that didn’t happen. After a lot of thought we realized that at a minimum, we’d have to hold payments from owners until after they delivered on their rental, and guests would have to pay upfront either in part or in full. If you think you’ve seen this model somewhere before, you have – this is exactly how nearly every other real estate transaction works, simply because, well, it works!
Clearly #1 can work for individual property owners who are going it alone, but #2 requires the assistance of a third party. Also, the version of #2 that we use pretty much requires payment upfront with only a few exceptions made by our property owners. What you do depends on your situation
Conclusion – Nothing’s perfect (yet, anyway)
If you have the brand equity, you can probably pull of going it alone, otherwise increase your brand equity
If you own a home that has a 2 year waiting list and rents for hundreds of thousands of dollars, then you probably have sufficient brand equity to require payment whenever and however you’d like. For the rest of us we can either try to find an escrow source or raise our brand equity. Here are things you should look for in either solution:
- Escrow agencies – Are they licensed? It’s nearly universal that to escrow payments, a company needs to be licensed. While some websites claim to be “payment processors” they’re still engaging in real estate transactions and if they’re not licensed but still hold payments in escrow then they’re not legal and your payment may not be guaranteed. Do your research and ask to see proof of licensing! Also, escrow payments needs to be secured and separate from the rest of the company’s accounts. Make sure that your provider has the proper account setup or else you may not be safe! To optimize your chances make sure that your provider takes all forms of payment!
- Raising Brand equity – These are simple things but often overlooked:
- Get a website - Even one page is sufficient. Make sure your photo and contact information is prominently displayed. Disclose your address so guests know you have a real home and can verify you on Google Maps. Even better you can often embed a map with your location prominently displayed. Make your mailing address MATCH the address listed online. Not all of these things are always comfortable or possible but do your best!
- Add credit card support – If you only take cash, you’re saving 2.5 – 5% but you’re absolutely isolating a large group of guests. Add these payment types and prominently display them on your website. Guests often know they can turn to their credit card provider if there was an issue with your property. If someone wants to pay in cash or by check, great, you’re getting the best of both worlds.
- Get reviewed – Reviews from real people, help build trust but in this day and age it’s hard to prove reviews are real. Services like Yelp or google places can be helpful but they haven’t been friendly to individual properties in the past. If anything it’s great to get a facebook page up and have your guests review you there, then link to these reviews from your website. Real people, real reviews done easy!
- Align yourself with a trusted brand – Many owners use vacation rental listing sites to “prove” they’re trustworthy but from a guest’s perspective payments are still going directly to you. If you don’t do the things listed above you won’t benefit much from the new brand. Some brands are more trusted than others. We’d like to think that guests trust us the most because we guarantee every booking, but we’re escrow agents so we can do that.
- Be professional – Guests aren’t dumb, but scammers are. As a result, just being professional and prompt can work wonders for your property and help you stand out from the pack. That said, a website or listing riddled with spelling errors and typos can knock you down big time. In this day and age, you also can’t rely on simple text advertisements so being professional means either listing on a professional site or making your own (see above).
Making our solution better (warning: self promotion follows!)
So far we’ve got the escrow down but we’re still looking to improve
We know we’ll be successful when our property owners are successful. Right now, our solution is the most trusted in the industry because we guarantee our owners will get paid and guarantee our guests will get what they paid for. Not only is our solution safe, but it’s also easy. Still,we’re in the process of exploring how to make our system more flexible while maintaining the same level of trust. We’re also out to improve some of the little things we mention above such as increasing payment options, making our review system better, and possibly adding some customization to how guests pay. If you ever have an idea on what we can do to get better send them on to us at support@gamedayhousing.com.
Likewise, if you are interested in joining the GamedayHousing.com family email us at support@gamedayhousing.com or visit GamedayHousing.com/owners to learn more about our service and what we do!
NOTE: Just after this was posted on November 12, 2010, Chris fielded a call from guests interested in booking a home in Iowa City for September 16, 2011. These guests wanted to pay some portion upfront and the remainder by July 1, 2011, otherwise they would take the chance of the home booking up and wait until the spring to book. Look for an update in a micro post coming soon!
Chris Brusznicki is the CEO and Co-Founder of GamedayHousing.com, which is a vacation rental website for sports fans, by sports fans.
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