As cities across the country grapple with the rise of platforms like Airbnb and VRBO, the implications for the property industry are becoming more complex. How do you accurately value a property that doubles as a business? What happens when local regulations change?

Despite the lingering questions in the industry, the rising demand for vacation homes and the allure of short-term rental platforms have carved out a significant niche in the market.

However, their increasing popularity brings new challenges, particularly for appraisers, lenders, and underwriters who must navigate the complexities of valuing these unique assets.

As housing affordability concerns grow and the U.S. faces a persistent housing shortage, some communities are clamping down on short-term rentals and imposing stricter regulations. Yet, despite these restrictions, short-term rentals are far from disappearing. Instead, they’re evolving, requiring a fresh approach to property valuation that considers not just the physical attributes of a home, but its potential as a revenue-generating business.

In This Episode:

2:19 – Why are short-term rentals (STR) currently a hot topic in the appraiser industry?

3:38 – Why does the business aspect of an STR make it unique for valuation?

8:34 – What happens when an owner-occupied property is turned into a STR? Does the valuation change?

10:00 – Can any appraiser value an STR?

12:52 – How do 1007 forms apply to STRs?

16:08 – Erika Stanley does the numbers in the housing market in The Sip.

17:28 – What happens if a homeowners association steps in and determines that STRs are no longer allowed?

20:01 – What does the process of getting a loan on a STR look like?

22:45 – Where are things headed for appraisers looking to value STRs?

25:32 – Erika Stanley reviews natural catastrophes and extreme weather events across the world.

Up Next: Appraising PropTech Innovation: Do Short-Term Changes Have Long-Term Effects?

Links:

• Marshall & Swift®: Foundational Property Valuations
• Hazard HQ Command Central
• Read CoreLogic Intelligence

Find full episodes with all our guests in our podcast archive here: https://clgx.co/3HFslXD4 Copyright 2024 CoreLogic

Shawn Telford:

That's one of the big controversies as it were in the industry right now because a lot of lenders will come to a certified residential appraiser like myself and say, "Hey, what is this home worth? And I need you to estimate the income from the short-term rental, and I need you to put it into a certain form or format that's typically used in a mortgage transaction." Because of the things we've talked about, the value of that short-term rental can be based on multiple factors, whether it's the type of host or whether it's the occupancy rate.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies, and technology affect everyday life. I am your host, Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in our industry. As concerns around affordability rise, and the US housing shortage continues, communities are responding by putting limits on the short-term housing market. However, even though there are increasing limitations around Airbnbs, VRBOs, and other short-term rental properties, they are far from disappearing. In fact, short-term rentals have gathered increased attention from the appraisers in recent years. As this category of rentals is increasing its share of real estate, appraisers as well as lenders and underwriters need to understand the nuances of this real estate class to create credible valuations. So to discuss this influence of short-term rentals in the real estate market and talk about why they require appraisers to calculate valuations differently, we've invited back CoreLogic's chief valuation officer, Shawn Telford. Shawn, welcome back to Core Conversations.

ST:

Hey, great to be here.

Erika Stanley:

Before we get too far into this episode, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media where you can find us using the handle @CoreLogic on Facebook and LinkedIn or @CoreLogicInc on X, formerly known as Twitter and Instagram. But now let's get back to Maiclaire and Shawn.

MBS:

Okay. I'm excited about this topic. So why don't we just get started. So short-term rentals, or they're sometimes called STRs, it's a hot topic in the appraiser world right now, but why exactly is it such a hot topic right now?

ST:

This is a really interesting topic. It's one of those things that you may not think about in a regular scenario of lending, but from the appraisal standpoint, from the value of that in a mortgage transaction, the lender's using the real estate as collateral. Well, in a short term rental scenario, it's more... typically they're furnished. There's other things about the property that are affecting what makes the thing valuable as a short-term rental, not to mention all the things that have to do with where it's permitted, where it's allowed, things of that nature and so forth. So it's a really interesting topic for sure, but as more of these become popular as people look for real estate investment opportunities, they want to get loans on them, they want to take the equity out, and of course that drives the scenarios for the lenders of, "What do I do? How do we appropriately understand our risk from a lending perspective?"

MBS:

Right. Okay. So I guess you've kind of talked about this a little bit, but valuing it is different than a regular rental property though, and is it really because it's furnished or... I mean, sometimes you can get a rental property that's furnished too, and how does it differ and what's really special about this? Why is it a really interesting business case because it's really the business that needs to be appraised versus just the property?

ST:

Right. There's a lot of unique things like that, Maiclaire. So from an perspective of... again, from an appraisal perspective, you're looking at the real estate value and it's typically estimated based on what other homes sell for, the sales comparison scenario. When a home is rented, you can use the income approach. The value of the property is driven largely by the income it produces.

MBS:

Oh, interesting.

ST:

So in a scenario of a typical... historically typical scenario where a home is rented, it's a long-term lease. There's an agreement, it's in place for a period of time. It may be months, it may be years, it could be month to month, but there's a lease and there's all kinds of commitments between the buyer and the seller. In a short-term rental scenario, it's a much different scenario in that it may be for a day, for a week, it could be over the course of a month, you could have 10 different people in there. And there's all kinds of different expectations. So for example, if you've ever rented an Airbnb or a VRBO, you expect everything to be in there, toilet paper, towels, dishes, silverware.

MBS:

Spices. Yeah.

ST:

Got to have the internet working when you get there or it's going to be a bad experience. There's all kinds of scenarios that you expect that are different from when you rent a property. If you rent a property, you may fully expect that you're going to have to get the gas turned on, the water turned on, billed to you. So it's a different scenario for what the person occupying the property expects and what the person renting the property or leasing the property is expected to do as well.

MBS:

Right. So are comparables used at all then, or is there a certain level or set of comparables for these short-term rentals, or do they just not use comparables as they would with a long-term rental or with an owned property?

ST:

This is the rub of some of the challenge right to the root of it is what are you trying to figure out? Are you trying to figure out the potential rental income as a business as a going concern, or are you just trying to understand what the real estate is worth? And it can be a nuanced scenario around what problem is the lender trying to solve? So as a home... Let's just say I wanted to buy a property. I may go to an appraiser and say, "Hey, I don't need a loan on this. I got all the cash to buy it, but help me understand what I should offer to pay for this."

MBS:

Right.

ST:

And that answer could be different whether I think I'm going to long-term rent it.

MBS:

Interesting.

ST:

Put it as an Airbnb, or whether I'm going to occupy it myself as a vacation home sometimes. So the value can be different and all those factors have to be brought into play. And again, from a lender perspective, their risk changes based on the value. So if I value it as an Airbnb, and let's just say that the permit, it gets pulled after six months because the city council votes down those or things of that nature-

MBS:

Sure. Yeah, that's happening more and more. Yeah.

ST:

Exactly. And it changes the value. Or you may have a property that the current owner can use it as a short-term, but the next owner can't. And so there's value in use and things of that nature. So as an appraiser is asked to value this for purposes of mortgage lending, it really has to be understood what they're being asked to value and to separate that from what the lender may do with that information. So if I'm making a loan on it, I may be really concerned what the collateral's worth in a scenario where I have to resell it as a lender, but the income that the property's going to generate, that's maybe something I don't necessarily need the appraiser to value because I can look at the tax returns from what that property's generated over the last two years. So there's other ways to look at the income that can be used to qualify for the loan separate from the traditional approach of asking the appraiser to tell me what the market rent is.

MBS:

So I guess kind of a question that comes to mind from that then, is this only relevant if a property is purchased with the intention of being an Airbnb? And the reason I ask that is I know a number of people that they own their home, they decide to buy a second home, but they keep that first home and they turn that first home into an Airbnb. So it wasn't bought with intention of being an Airbnb, but it got turned into part way through when it already had a mortgage. Does that come into play at all, or is it just if you are purchasing it with the intention of it being a short-term rental from the start?

ST:

I think to a certain degree, your question is answered by, do you need to get a loan on the property and if you need a loan to buy the property or you want to refinance and get equity out of the property-

MBS:

Oh, there you go.

ST:

Then the lender's going to be looking at, "Okay, what is the equity in the value in that property and what are the things that affect it," right? And there's other little nuancey things. I mean, we could spend a lot of time talking about this, but if I'm rated as a super host on the different applications, I may get a different level of occupancy than if I'm just a regular host.

MBS:

Yeah, for sure.

ST:

And that affects significantly the value of the property, but that has nothing to do with the collateral.

MBS:

Okay. The other thing too, Shawn, is can any appraiser value a short-term rental or do you have to have a certain type of license to be able to value an STR?

ST:

That's one of the big controversies as it were in the industry right now because a lot of lenders will come to a certified residential appraiser like myself and say, "Hey, what is this home worth? And I need you to estimate the income from the short-term rental, and I need you to put it into a certain form or format that's typically used in a mortgage transaction." Because of the things we've talked about, the value of that short-term rental can be based on multiple factors, whether it's the type of host or whether it's the occupancy rate, the vacancy rate matters, and so there's a lot of little variables there. Plus there's the what is this thing going to be worth in the future right? As I estimate the income, I can't just take the daily rate, multiply it by 30 out into the year, because that will create a significant issue. What if I estimated the rent based on a high occupancy week in the summer and I apply that annually, it overstates the value.

MBS:

Sure, yeah.

ST:

In the end, most people would say that an appraiser can value the real estate that underlies the short-term rental. In other words, the home, if it's a single family, I can value that home as if it were a single family residence, and I can use long-term lease revenue, and I can estimate the value in that scenario. If the lender wants to know what is the income potential from that property, and they want to do that as part of the loan qualification, then as a residential appraiser, I'm not qualified to do the going concern value.

MBS:

Oh, interesting.

ST:

I could tell you here's what the income... a record of the income is, but I can't analyze that in a way that tells you what the income is. That's what a certified general appraiser could do, where they deeply look into what is the income of the property and what is that worth, such as in an office building or other commercial establishment where the value of the real estate is part, but that's tied directly to the ability to generate income.

ES:

There are a handful of different ways to value a home, one of which is the cost approach. Regardless of what is happening in the market, you can consider the Marshall & Swift cost approach as an assurance of your valuation accuracy. Learn more at the link in the show notes.

MBS:

ST:

MBS:

Sure, yeah.

ST:

ES:

Although this is the 149th consecutive month that the US has seen year over year home price gains, the pace of growth is continuing to cool. Only one state posted double-digit gains this month. Next summer, prices are projected to slow further only growing by 2.3% on a year-over-year basis. The April surge in mortgage rates notably weighed on consumer sentiment, and consumers increasingly chose to respond to the anticipation of a lower mortgage rate environment later this year. Still, several states did post notable home price gains. The states with the highest increases year-over-year were South Dakota up 10%, New Jersey up 9.3%, Rhode Island up 9.2%, Connecticut up 8.5%, and New Hampshire up 8.2%, and that's the SIP. See you next time.

MBS:

Okay, Shawn, another thing comes up to mind. You mentioned risks, and you mentioned this before too, the HOA issue here. So what happens if somebody has a short-term rental, they already have a loan, but an HOA comes in and says, short-term rentals aren't allowed anymore? And there's a risk with that from a lending perspective. So yeah, what happens there?

ST:

Absolutely. And that's one of the challenges for a lender is understanding that risk right? Because if they make the loan based on that short-term rental income, which may be different than the long-term rental income, that's a problem. And so from a lending standpoint, they obviously want to... using the long-term rental income is a more sustainable and trustworthy way to do that in most cases.

MBS:

Sure, yeah.

ST:

That's not true. It may get cut off immediately. So those are some of the real risks that come in, whether it's the homeowners association that put limitations on that, or whether it's a city or county or whatever that comes in and puts limitations in the value if based on the assumption of short-term rental capability changes, that's a big deal, and I need to be very cognizant of that when I make a loan. And thus moving back to the traditional model such as the sales comparison or the traditional income approach based on long-term market rent, it's a lot more certain as a lender, as certain as anything can be as to what the actual value of that collateral is or what the income potential of that is in a typical normal situation.

MBS:

Right. Right. So I guess the other thing too, let's just say I'm a homeowner and I want to get a loan for a short-term rental. What does that process look like?

ST:

Yeah, that's a really good question to think about because there's so many people that they see this in like, "Oh, I can just put it on Airbnb right?"

MBS:

Sure, yeah.

ST:

Well, there's a lot to be understood about the value that you might get out of that property or that you're willing to pay right? If you went into it a little bit ignorant, you could significantly overpay if there's a bunch of risks, or you may only be able to generate the short-term rental income for a period of time, or it was overestimated. So number one, I'd say would say is be wary of what you're actually paying for and what value is based on right?

Is it all these different factors in the market like repeat sales of these properties? Are they all being used as single family? Are there future changes being talked about or in the process of coming down when it comes to legally permissible? And it goes to something we mentioned earlier, what is the highest and best use of that property? And how do I... just to make sure I understand that, and secondarily, to make sure I understand what I'm telling the lender so as I get that right, because there are lenders, Fannie and Freddie will allow you to use income from a short-term rental as part of the qualifying.

MBS:

Right. Yeah.

ST:

There are other lenders that lend on the income cash flow. They're not hard money lenders, but they're debt service cover ratio lenders are another option. And those folks lend just on the income of the property. So they're less worried about the property as real estate and more worried about what is the income potential there. And because they're not under the Fannie/Freddie guidelines and such, they have a different way of analyzing their risk and so forth. So there are lenders out there who will make those loans.

MBS:

Interesting.

ST:

They might have different things like they may require you to have a lot more cash reserves, put more money down, things of that nature to protect themselves because they know they're lending on income potential versus the actual value of the real estate without all of the income potential.

MBS:

It really is fascinating how a lot of people think that they can make money off of Airbnb'ing their home or making it a short-term rental, but don't necessarily think of it being a business and everything that goes into it when you're looking at it from an evaluation perspective. So I guess just to finish today, Shawn, if you look into your crystal ball, this conversation has changed so much over the last few years. Where do you think this conversation with short-term rentals is going to go from an appraiser perspective in time?

ST:

We know that Fannie and Freddie are aware of some of these challenges, and lenders are becoming aware too. I think the lenders are concerned that they have misinformation in their loan file that could result in a buyback, which is no lender wants a loan buyback because they didn't do it the way Fannie and Freddie. So we believe or understand that Fannie and Freddie are going to come out in the near future, I don't want to commit them to anything, more guidance that will help lenders and appraisers understand how to handle these situations in a way that's transparent and fair and not misleading.

With respect to the value of these things, clearly the marketplace has spoken. There's value in these short-term rental scenarios, Airbnb, VRBO, and others. There's a demand for these things, but we're also seeing communities speak and say, "Hey, we're fine with these, but within a certain realm or under certain permits," and blah, blah, blah. And so at the end of the day, I think we're going to see a whole lot more discussion on this. And as far as the financing of these things, I think we're going to see more scrutiny, much more scrutiny from the lending community on what is the best way to understand the potential value of these properties. And I think we'll see segregation of the real estate value versus the potential for income value and looking at those differently. Because you can look at the real estate value and any appraiser can tell you what that is.

The income potential value is a different question, and I think we'll see those separate so that a lender can figure out the income potential without the need of an appraiser necessarily right? There's products from Airbnb or a data company called AirDNA that produce estimates of what that property could produce in form of rent. Plus, a lender can look at tax returns because again, it's a business, you're filing for the tax return of the revenue, so you can deduct the expenses and offset that revenue so that you don't have to pay high taxes.

MBS:

Oh, sure. Yeah.

ST:

So there's lots of different ways that this can come to fruition, but as these things become more commonplace in the financing world, I think we'll see more clarity and better products for how to get a loan on them and understand what their actual potential revenue is.

ES:

MBS:

Well, I can't wait to see where this goes. Short-term rentals are definitely here to stay, definitely a business opportunity for so many, and it will be very interesting to see how the conversation continues. So Shawn, thank you so much for joining us today on Core Conversations, a CoreLogic podcast. It's been great to have you back.

ST:

Thank you.

MBS:

And thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcasts, to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life, producer Jessi Devenyns, editor and sound engineer Romie Aromin, our Facts Guru Erika Stanley, and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another core conversation.

ES: