COVID-19 Vacation Rentals / Hospitality Industry Update April 9, 2020 – Major Changes In Merchant Accounts
COVID-19 Vacation Rentals / Hospitality Industry Update April 9, 2020 – Major Changes In Merchant Accounts for Vacation Rentals.
Be sure and read this article we talk about in this podcast on VRM Intel as well: https://www.vrmintel.com/covid%e2%80%9019-and-vacation-rental-payment-risk-the-big-picture/
April 9, 2020 Updates on COVID-19 / Corona Virus updates for the Vacation Rentals / Hospitality industry from Micah Berg Founder & CEO of https://www.thevru.com/ and Justin Jones Founder and CEO of IMEG In this update we talk about major changes coming to merchant services in the vacation rental industry.
You can get FREE access to https://www.thevru.com/ by using discount code covid19 at checkout.
Watch the video of this podcast
Micah Berg 0:04
Hey everyone, welcome back to another update daily, hopefully daily update of vacation rental podcast. During the COVID-19 crisis Mike Berg here with vacation rental University and CEO real joy vacations down in Destin with Justin Jones from internet marketing expert group. And today we wanted to talk about why you might be going out of business.
And that sounds dramatic, but this is a pretty screwed up piece of news that we’re going to share with you. Hopefully some of you have seen it. We’re going to just talk through it. I mean, there’s there’s really not a ton of information not a lot of answers. There’s a lot of frustration but the topic of the day is vacation rent payment to include otas I believe a cent and pretty much every other vacation rental or tourism related credit card processor has decided to hold the money from a booking until check in which means when you’re used to
collecting money 30 days out or you know, some of our booking windows are up to a year, we have 190 properties in St. Pete beach, and our booking window is nearly a year, they’re sometimes a lot longer. So if we run a credit card for that booking, we’re used to having that cash flow for that deposit are sometimes the full amount at the time of booking. But this point, we have to wait the entire year, right till they check in to receive that amount. So, you know, that’s bad, because I had told Justin about this. And he just said, well, you shouldn’t be you know, tapping into pre deposits anyway. Right? And yes, and a few states that’s illegal. And the reality is, we all tap into pre deposits at some point during the offseason and so this kind of a screwed up scenario because if you’re not prepared, can’t get line of credit or you’re on the edge financially and you’ve been leveraging your pre deposits, there’s a high likelihood you could go out of business. So this is pretty important podcast pretty important subject
Justin Jones 2:00
Justin, I knew I threw this on you literally this afternoon, right before we decided to film but give me some thoughts, man, tell me what you’re thinking about this. Sure. One thing was, if you haven’t, and we’ll put it in the link on the bottom here, check out the VR Mintel article about this, it goes into way more in depth and you should have a podcast, which will kind of break down really what we’re talking about. But the short of it is that you’re not going to get your money until check in. Now, in theory, you’re not supposed to, that’s the guest money until they check out in most places. But I’ve been doing this since about 2001. You’ve been doing it for you know, decade Plus, I mean, it’s we 150 plus 200 vacation workers to work with 90% at some point or another has dipped into the to that. Yeah, so it could cause cashflow problems. So
I would definitely be looking at ways to get money to float through the winter because a lot of people typically
get through that in the winter. Not a good idea. In fact, I’ve seen seven vacation companies go out of business, five of them are due to dividend pre deposits. Yeah. at scale. Yeah.
But so not saying it’s a good idea, but saying that if you are,
this is an interesting
total shift, because you used to get the money within one to three days. And now you’re going to get
and if you have, like you said, new summer, you’re out the large vacation rental world to the more expensive The larger the place, the further it gets pushed out. That money sitting in kind of limbo.
And not your some I’m very interested to see how that all works. You know, how does it actually get there’s going to be some API integrations, Does this hurt ascent and vacation rent pay, which owns a lot of the market space, and will people be moving and we were talking about this before? Like, I was like, What about stripe like we used to write kinds of eecom stuff, not for vacation rentals, but I looked it up and it looks like
rentals united Is that the right name? Yeah, rentals united rentals united use has integration with stripe and so does
coastally, which probably nobody here uses because it’s more of a one on one vrb o, or a few property thing. But then also you had said, Man, this might come down all the way across and like you might get by with stripe or another merchant for a minute, but it’s, yeah, we’re gonna figure out well, wait a minute. How’s it setting all these other ones? Why are they not doing it? We need to do that too. Yeah, I think so. I think if you do switch, you’d be skating by for a minute. Yeah, not very long. And especially with things like stripe and some of these that are well funded and maybe public is you know, comes down to risk mitigation. So fortunately for us, we’ve skated through
Micah Berg 5:00
got hit with, I’m just throwing random numbers out. But let’s say all of the bookings across April, got charged back to half of the vacation rental community. I mean, that’s billions of dollars, potentially. But even, even half $1,500,000,000, they’re liable for all that. I mean, one of our first literally the first podcast we did, I said, Hey, if you’re getting chargebacks, move your money from that account to a savings account or different accounts. So the chargebacks can’t take it. When you do that. It doesn’t hurt you necessarily, because you already have the money. What it does do is cause the merchant of record, which is vacation rent payment or one of these others. If they can’t pull the money from your account, they have to cover it they they’re by their regulations, they have to give back the money through the chargeback and then go and win the charge back to claim those funds. So, you know, we moved all the money we were seeing a lot of chargebacks. So we move the money out of that account to slow things down. Give
room to breathe and fight it on our terms. And you know, they got hit with that they probably had to pay a lot of this out, they’re floating that balance, and they’re probably pretty ticked off. You know, I can imagine that that’s pretty difficult for their business as well. So it’s gonna be tough. You know, I don’t know, I don’t know any businesses, honestly, that are under 10 years old, that don’t dip into pre deposits during the slower months. I mean, honestly, especially if you’re growing. If you haven’t been in business a while. If you’re, you know, trying to get things established or trying new things. You’re going to dip in your pre deposits when things get slow just to get through. I mean, it’s not like you’re not profitable or whatever. But the cash flow is what causes you those issues and so, rectifying the cash flow by taking out a pre deposits keeps you in business, then the bookings kick up, hopefully, plus up, you’re pre deposits and everything’s good. Where this gets really nasty is companies who are really Negative and pre deposits and and floated this for years. Because you can I mean, there’s just you truly you could float you know most businesses hundred thousand dollars out of your pre deposit account you know if you manage 100 properties no problem pretty soon you’re gonna have to pay the piper which is basically this coming offseason. So you couple that with the fact that we’re in the middle of a pandemic right now your cash flows dried up hopefully we have a good season and you get your profitability back. But going from an unprofitable year into this situation where you can’t leverage your pre deposits going into the winter. You know, the sad prognosis from mica burgers truly here is a good 35 40% of our industry is liable to go to go out of business or be forced to sell.
Justin Jones 7:51
Yeah, I mean really the only way to navigate around this is actually you probably should start doing real trust escrow accounting Yeah. Well now you don’t really have to just get
Micah Berg 8:05
a messed up testing.
Justin Jones 8:07
You don’t have to do that anymore. That was a good idea before this.
Unknown Speaker 8:10
Yeah, yeah. But really now
Justin Jones 8:11
you need to start with, you know, figuring out one What are you gonna have to put back and settle up by doing lines of credits loans or whatever? And then a making sure that you have a line of credit available for the offseason because, yeah, or your free line of credit, which was the guest account might not be available anymore.
Unknown Speaker 8:35
Justin Jones 8:36
But one of the upsides that I would be I’m not, I don’t own a vacation real company, but working with them through marketing and stuff for a long time. If I was in that position, I’d love to hear your feedback is right now you know, get one of those where they call it EDL or whatever. With this, that’s a very low interest rate. This might be an opportunity for you if you weren’t Thinking about getting out loan to the government to the SBA to get a low interest loan to actually set money back and or fix the diminished Guest account? Yeah, that’s actually
Micah Berg 9:15
that’s good idea that you just came up with live because we talked about this for two minutes before we turn on the cameras. Yeah, that’s actually a brilliant idea. Because how that loans good for what, two years at super low interest rates, point 5% or something that literally, I mean, if you can qualify for a good amount, you’re gonna want more than just to get your pre deposits, right, though. I mean, you have to do that no matter what, because you’re going to run out of the money. But you need to figure out why you were dipping into it and how long you dipped into it and how far so that that loan can cover that as well. In my opinion, there’s, that’s sometimes hard to calculate. I mean, I’ve done this for a long time. I mean, I remember Number eight, nine years ago, eight years ago, you know, my third year in business, my wife would come to me in like, February and she she’d say, it looks like you’ve been playing chicken for four months. And, um, you know, and and the reality is I was I was balancing, we were trying to grow, we had maybe 100 properties at that point, little less than that. And we’re going, you know, from there, quickly scaling and, you know, between being in the offseason in a drive to summer beach market of Destin, trying to grow hiring people, just unknowns in business, all these sorts of things. I mean, I was literally constantly balancing cash flow on a daily basis, figuring out what was coming in, and what was going out how much I was supposed to have in my little trust account and how much I didn’t and freaking out about that for months at a time. And so, you know, fortunately for me in Florida was legal to tap these funds and I know everybody else does. That’s just you know, to me, it’s kind of risky. So rather than this podcast kind of depressing, like, I want to cry for myself and everybody else involved now, and if you want to sell your company, you can email me Mike at real joy calm, because I think that’s actually the result which takes depressing too screwed up in a way. But if you can’t secure credit, which most of us can’t, not to the degree that we may need to get through some of our offseasons and you’re not getting the pre deposits, you really have, the only option is to partner with people who do or if you’ve been thinking about selling your company, you may want to go ahead and do that package it up this this literally is the the bell tolls for industry consolidation. I mean, the Casa and turnkey and some of these other companies that are growing and buying companies and all that they they were trying to help the consolidation real joy is growing really fast. There’s a lot of a lot of companies growing there’s consolidation But, I mean, this one’s gonna force it. And if you sell soon, you might get what you’re worth. If you’re selling last minute, because you’re out of cash, it’s not gonna be pretty. So you might want to think about that now.
Justin Jones 12:15
One thing and that article I’d like to bring up and I encourage everybody, if you got time to go read it if you don’t just our takeaways in this one point.
Micah Berg 12:24
Yeah, and that’s on the VRM Intel site
Justin Jones 12:26
article from Yeah, there’ll be a link in the description below, as well. But what they stayed in here, which I missed the first read was property managers should expect to hear from their payment providers and should be beat Be prepared to provide financial documentation that can support cash on hand, relative to the current exposure based on the payments that you’ve accepted for bookings that haven’t happened yet. So it sounds like to me they’re going to come and say, Hey, the actual merchants gonna come to you and they could drop you.
Micah Berg 12:58
They absolutely can. Yeah, so Basically what that says is, the merchant is going to come to you and say prove to me you have this much cash. Based on the transactions we have, you know, if they’re integrated, they have access to the API, which means they can see the dates that these people are checking in the amounts, all that kind of stuff. And so yeah, they very well could drop you. Unless I mean, right away, because the risk is, is so far out.
Justin Jones 13:23
So if you have, you know, they’ve run two and a half million dollars a cards for you. These people haven’t checked in, and you’ve got a million dollars where the cash, they see a million and a half of exposure. I imagine they might say we’ll be back in a short period of time, if you’ve got it cool. If not, you’re going to need to find another merchant account.
Micah Berg 13:41
Yeah, yeah. Which, you know, you would think you’d have a little leverage because that would put them out of business if they dropped 40% of the of the operators. But at the end of the day, they’re probably counting on other companies to absorb those units. Those units Don’t go away. So you know, maybe To them, it’s like two months, three months worth of pain if they drop everybody. And no, but
Justin Jones 14:04
I also, I don’t know anything about, you know, merchants to this degree. But they’ve got to be regulated some way federally don’t think.
Micah Berg 14:14
Yeah, so this actually is a reaction to regulations they should have been paying attention to. So this is not a there’s no hope. Yeah. And I’m assuming you’re going down the road of maybe there’s a regulation that can pause this or something. It’s actually the opposite.
Justin Jones 14:29
What I was saying is that now if they have to go to the government for bailout and say, hey, these people did chargebacks and we didn’t have the money. Why do you have the money? I thought the the business had the money. Well, they didn’t have the money. So we don’t have the money. We need the money. Yeah. And they may go through it and say, if any, all this is made up, but if you’re outside of 80% variance, the government says you cannot give them a merchant account.
Micah Berg 14:53
Interesting, actually, maybe. Well, I mean, regulation z is bent towards I don’t know it in details. I’m sure we’ll get a comment or something somewhere there. Yeah, what it means but from what I understand regulation z is there to protect the consumer. And it sets up the chargeback laws. And it basically is what puts the credit card processor at risk. Now, I’m not sure if they’re like insurance companies in the sense that they have to have their own capital, I’m assuming that that have their own capital to back this up, and they’re just regulated. Maybe, I mean, most of these are attached to banks and, you know, pretty big company. So I’m guessing they have access to financing to cover this. I doubt any of them are going out of business. But yeah, it is interesting that like, if this causes a systemic violation of regulation z issues that the feds come in and say, Look, this just there were so many consumers hurt by this during the COVID-19 crisis, that this is just the new law. And that puts a cap on it. I mean, there’s no amount of negotiations you’re going to do it at that point. That’s kind of scary. So, I’d love to figure out some positive shit to talk about here. This, you know, I mean that we have 860 870 properties as of today across, you know, two markets, one of them one of my markets has a freakin 11 month booking window 12 month booking window. So I mean, we’re holding cash for a year before these people show up. real joy is a huge offseason that we bleed cash, you know, in Destin and then we start ramping up which, you know, all that’s bad. So, things we’re looking at maybe this will give people help, you can use other credit card processors, and it might buy you some time. I don’t know. You know, I think they’re probably gonna want to underwrite you, they’re aware of the news, they’re seeing the risk they’ve been hit with their own risks. So, stripe may be an option but it may they may not approve you and it may be a short term option. You could go to your Local, if it’s your local bank, or like Bank of America, that might be like our accounts or Bank of America, that might be one of your better options. Because they understand your business, they have deposits, they’re like, maybe there’s a more holistic situation and maybe they’re willing to loan you money and be your credit card processor and integrate with your PMS. I mean, that’s kind of a cool option. Assuming they’ll do it, you might pay excuse me, you might pay a little more.
Unknown Speaker 17:30
But that that’s an idea.
Micah Berg 17:33
What other ideas Justin, I mean, don’t grow so fast, like lay off more people that can’t I mean, crazy stuff.
Justin Jones 17:40
Looking for the balance. What I hear from a financial side is you’re messing with my accounts receivable and when you mess with my accounts receivable, if I can’t fix it, I have to fix my accounts payable. Yeah. So because if I can’t do the accounts receivable I can only throw the accounts payable So we referenced this in previous blogs if you go search for them, and I’ll maybe we’ll put some links below on that too, about how to generate cash the same problem if you’re having cashflow problems with the with this, you know, COVID-19 pandemic, you might have another secondary cash problem here. Yeah, exact same strategy to get out of it is the exact same strategy to get out of this.
Micah Berg 18:26
Yeah. You know, another idea I just had on the spot is, back when I mean, a long time ago, it used to be very common to have owner deposits on hand like, so they would sign a contract with you, and you would charge the owner 1000 bucks when they on boarded, and you would hold that money as just operating expense account or whatever the design of it was. I think it came from North Carolina where the escrow laws are firm, like a long time ago, and they needed money to operate through the offseason. So they would just charge Each one of their owners so if you have 500 owners you got you know what $500,000 to operate, which should get you through the offseason unless you’re just being ridiculous about what you’re spending money on. That might be the play. I mean, truly, because we already hold all the funds and no pay the owners till after checkout sometimes, you know, if they check out on the first we don’t pay them for a whole another 40 days. It sucks. For the owners, there’s gonna be a lot of pushback, but it might be the fastest way to raise, you know, enough money to get you through the offseason. And you just got to tell the owners what happened. So, you know, this literally an idea I thought of on the spot, it’s something I’m going to consider for my business and you should for years, it’s the quickest way to generate cash, and you can do it. Here’s how I recommend doing this. Do it during the peak of your season. So let’s say we recover we get into July and August and you’re going to implement this you need to start talking to your owners about it. Early in July, before you send them their payments in August, because if they’re gonna say, yes, it’s going to be during that time where you’re about to send them a 678 $40,000, whatever, you know, crazy number, check, and you just say, look, here’s the deal with the credit card processing. Here’s the risk that it puts us into your property. Can we partner on this? Can we hold $1,000 $500? From this check, it’ll be on account. It’s your money. If you ever leave our program, we’ll refund it to you. And you just don’t want to lose a ton of properties in your offseason. But you know, at least you have that money and you take it when there’s a cash flow height. So it’s not you’re not asking them to send you a check. You’re just saying can I send you just a little bit less here it is, and it goes into your system most PMS is still have I think it’s called owner reserve. And I want to reserve account so that’s an idea. Another idea literally had on the spot is a fee to the guests. And I don’t know what you’d call it because I’m thinking of the stuff on the spot, but, you know, figure out how much you might need to get through the winter. Charge x dollar fee to each guest reservation that you get and hope that you get, you know, enough reservations to get you that cash that you need. And instead of looking at it as profit, just looked at it as funding an account, like a winter savings account, basically do that every year, for several years until you’ve got enough buffer. And if you need to drop the fee to be competitive, that’s fine. But you know,
Justin Jones 21:28
one of the things I saw I saw a couple of companies do this this was 15 you know, I was 20 years ago Yeah. Was all Dude, I don’t know that you could now I don’t know about the owner nuances here. So if you’re, you know, vacation owner. Which management company like yay, then that never Hey, it’s just an idea. But they would they would have three nights they would call marketing.
Micah Berg 21:58
Your idea sucks. I’m just kidding.
Justin Jones 22:02
We’re in the car now you’d have to get your contract resigned. Yeah, it was an immediate
Unknown Speaker 22:06
fix but what they did was idea sucks worse now.
Unknown Speaker 22:09
Yeah. Everybody’s boo and
Micah Berg 22:14
budget. Give us give us one of these pounded now that’s great turn on turn this video off
Justin Jones 22:19
three nights of marketing that they could use your cabinet. Yeah for free top nights Yeah, yeah. And then what they would do is they would use some for marketing but you got 100 units you can’t use 800 times three marketing in a day. It clearly stated this wasn’t some like fraud shenanigan here, they would just keep three nights a year. And then that’s what would get them through the winter. So for you, for example, with 850 cabins or so
Micah Berg 22:48
that’s like 4900 nights or something
Justin Jones 22:51
2550 nights what’s your average ADR
Micah Berg 22:56
especially the average ADR is about one Well,
Justin Jones 23:01
but read Part One Nandi. So that right there is going to get you about a half a million dollars. Yeah, that’d be great without having to ask the owner for direct real money. Yeah. In your instance, just an idea that worked 20 years ago doesn’t work today.
Micah Berg 23:19
Yeah, that would work. Good idea, buddy. No, I’m just kidding. And basically, you’re selling. Yeah, selling those nights.
Justin Jones 23:26
At night. It was doing in short, but it makes sounds like a marketing tactic on the other.
Micah Berg 23:31
Yeah. Yeah. Trying to think through that. I mean, it could work. It’s not marketing anymore. It’s survival. And so what
Justin Jones 23:38
you do give some away for the marketing side, but you will but you like, I mean, your essence you can’t give away 2500 nights and marketing. You could but
Micah Berg 23:45
I could I just don’t have that many friends. So yeah, nobody cares about me that much.
Justin Jones 23:50
But that’s not an immediate fix. I think your immediate fixes take advantage of some of these government SBA loans that some are forgivable and some are very low interest rates and bail yourself out. yeah get back in the good graces with your average escrow account and then use my antiquated barbaric strategy you’re one of my kids fresh new and
Micah Berg 24:12
fresh and oh man that is fresh and new as my haircut you know this this pandemic thing closing down all the hair salons there. Oh man I’m looking forward to like three three weeks from now I’m hoping I can grow like a mohawk or something for this podcast
Justin Jones 24:31
you know when we make it through all this things are gonna be so normalized like like this right here alone would get the whole vacation rental industry going what and now we’re just like another little something. Yeah,
Micah Berg 24:43
yeah. Can I have another sir? Hit me again, Paul.
Justin Jones 24:50
So um, but I do highly recommend checking out that article, which will be in the link below. They go way more in detail. And really, this is a speculation. I think it’s really To be thinking about it now and be thinking Oh, so you don’t get you know, in a month or two or whenever it happens, whatever happens. Oh, I don’t know. I mean, I already got notified by our PMS because we use vacation rent payment. I mean, it’s done. It’s today.
Micah Berg 25:14
Yeah, it’s it’s done. Yeah. No, it’s it’s uh what were the others? Oh, there’s a bunch you’ll get notified but basically, you know, they’re holding holding the funds. There was some other stuff that until check in until check in Yeah. The otas too. I mean, Airbnb has done this for a while vrb owes mentioned it and does it to some people. But if your were larger, you could get past it. Booking coms never actually ran credit cards. So that just falls into your credit card processor. So you know, I’m just glad we’re talking about it so people can get ahead of it. You can write maybe you’ve got 6789 months, it sucks that it’s coming during the time where we’re like, well, I just hope I stay in business anyway. And now it’s like, I hope I stay in bed. long enough to go out of business that’s kind of a shitty place to be but you know, we’ll we’ll figure this out together and you know if you have comments questions shoot me an email Mike m IC h at real joy rlj.com shoot me an email let’s talk about it put comments here on the video you know we’re gonna have to figure this out I know Amy at VRM Intel who is amazing and covering all this stuff is getting the right people involved to think about it there’s going to be more webinars and more stuff like that. So just please be aware of this stuff like this one’s important. I mean you got to be on this months in advance and and get some line of credit and get ahead of this change. Change your fees, maybe change your cleaning fee if you can adjust a couple of fees up a few dollars each and and take that you know, that becomes profit because, you know, we just got our pace all got slowed down. For our peak season, so maybe there’s a ton of bookings left that you can go make, raise your fee, add a fee, do something right now. Because if you don’t do it now, you could go out of business. So, you know, raise a fee. At this point, we can’t worry about competing with each other. We’re just going to have to protect our businesses. Look at partnering with people look at selling your business if you’ve been thinking about it, wanting to retire move on. I mean, I’ve heard at least a dozen people that I’ve been talking to through VR you are like I think I’m done not that they’re going to sell. Maybe they are but they’re just done with vacation rentals and it’s really sad but you know, if you’ve been thinking about that, go ahead and get your business in gear and you know, sell it while it’s sellable. You know, get be one of the first Don’t be one of the last. So anyways, plenty about that really sad kind of screwed up podcasts, a lot of screwed up stuff happened in the vacation rental industry. Thanks for being with us. We will catch you again tomorrow and then I failed to mention this sometimes. But Justin, and I Mager paying for subscriptions to VR you so if you haven’t signed up which actually surprisingly like a bunch of people, I don’t even know the numbers, I get the email numbers and it’s been a lot but a lot of people are signing up. So thank you Justin for that. But free masters monthly subscription, go to the VR Comm. Th e VR, you comm sign up for masters monthly, put in coupon code, COVID-19 COVID, one, nine. And you’ll get that for free for the next three, four months. Thanks to Justin here and get get some learning done. Check out all the stuff in there. It’s getting more and more important every day between all these issues, having to recover going into the season, needing to get your margins fixed, operational processes, your accounting, we cover all of it in there. So get in there, learn that stuff. Let’s get our businesses right so that the people who survive this come out stronger. And that’s my plan. So we’ll see you next week or excuse me next time. We’ll see you tomorrow. We’re not editing this so you’ll get all those bloopers. See you soon.