Nightly-rental companies that commingle funds are unethical; that’s the consensus of several vacation rental management association officers both in states that regulate the industry and ones that don’t. A few added they have no problem working within laws that require separate trust accounts for advance-reservation deposits.

Recent statements by community leaders that regulation was not necessary or needed in Utah angered some Park City condominium owners from other states. Several hundred owners are still owed money from when the city’s two largest property managers went out of business last year.

Trust accounts should be mandatory

In other states, advance deposits from guests, and sometimes the portion of revenue owed property owners, must be kept in an escrow or trust account with a federally-insured bank. These rules are usually enforced by the states’ real estate commissions.

In 1997, the nightly-rental management industry convinced Utah lawmakers that their business was a poor fit with the numerous real estate regulations only one of which spelled out strict rules regarding deposits. But the commingling of funds allowed under current Utah law is largely blamed for Deer Valley Lodging and David Holland Resort Lodging being unable to pay owners their portion of winter revenue last March.

David Zatz, the founder of David Holland Resort Lodging, has said in his company’s defense that commingling the funds allowed his company to provide the same level of luxury service during the slow months as during the peak season.

But Paul Hayes of Rent Key West Vacations and president of the Florida Vacation Rental Managers Association said commingling funds is just foolish.

But even if you do, the software most companies use will keep track of the money for you so you don’t spend it.

Steve Milo of Vacation Rental Pros in Florida is chair of the government issues committee with the national Vacation Rental Managers Associations. He said he supports laws that require escrow accounts, and believes the accounts should be used whether laws require it or not. He said repeatedly that the practice is required by the association’s definition of ethical conduct.

“Trust accounts are important to integrity,” he said. “They’re something that should be applied to property managers as well as rent-by-owners It’s good business to have separated trust accounts.”

Gordon Jones of Seaside Vacations and president of the North Carolina Vacation Rental Managers Association said his state probably has the strictest regulations in the nation. All advanced reservations are considered real estate sales and therefore must be approved by a Realtor before getting recorded. The escrow and trust accounts must be kept with a North Carolina bank. These are just two unreasonable rules kept in place by the Realtor and bank lobbies, he said.

Yet, if North Carolina were deregulated, he’d still support a rule requiring trust or escrow accounts. That practice does nothing to overly restrict a property-management business, he said.

“We really shouldn’t be allowed to commingle guest deposits and owner funds with our operating funds,” he said. “It could leave the door open for flagrant fraud and mismanagement of funds.”

He said the logic that commingling is necessary to run large operations is ridiculous. Property managers in his state manage up to 1,600 homes three times the size of Deer Valley Lodging. Spending an owner’s portion of revenue is just risky. People only buy real estate in a resort town if there’s consumer confidence, he said.

Steve Hawkins, general manager of Vail’s Mountain Haus in Colorado, another state that regulates, said he doesn’t feel restricted by the requirement to keep deposits in separate accounts.

It depends on an organization’s banking procedures and what kind of checks and balances set up. He can even manage monies so long as they remain fully-FDIC insured and secure for guests when they arrive. He sees no problem with offering that protection for all his guests.

The problem with regulation

So why does the industry in some states push to be deregulated? The unanimous answer is because following other real estate commission rules is so difficult.

Even though North Carolina property managers advocate for different levels of regulation, none are happy with the current system, Jones said.

Barbara Beatty, executive director of the Florida Vacation Rental Managers Association, said paying taxes like a broker was complicated and nonsensical.

And because the industry is so much smaller than related industries, she feels they’re often mistreated. For example, the hotel industry is now pushing the Florida Legislature to require all vacation properties to have commercial-grade fire suppression systems. That kind of retrofitting would be so expensive many in the rental pool would drop out; that’s exactly what they’re hoping for, she said.

There’s a balance between overregulation and not enough, Milo said. Being treated as real estate brokers is definitely overregulation.

“At the same time, there is a point where the consumer does need to be protected and they have the trust that the company they’re doing business with is going to hold their money safely,” he said.

Hayes said following all of the rules of the real estate commission in Florida required a lot of manpower to make sure the record keeping was ready for regular audits. Investing resources to obeying rules that didn’t fit the industry made it hard to stay focused on providing quality service to clients, he said.

In agreement with what Park City’s industry finally decided, Hayes said clients should be aware of how their property manager operates and make sure they don’t commingle funds.

Another big reason for deregulation, Jones explained, is to have more freedom to manage the huge accounts that accrue significant interest.

Regardless of how many accounts a property manager maintains, all of the direct deposits and revenues a company has at any one time is usually a large amount of money. Like a lake with water continually flowing in and out, the transient nature of the material doesn’t mean a sizeable amount can’t accumulate and exist at any one time.

Jones said property managers can earn a lot more interest on deposits and revenues if they’re in something like a sweep account versus a regular savings account.

Dé jà vu in California

Meanwhile, the problems caused by commingling funds continue. In California, another deregulated state, a property management firm called Vacation Rentals USA left dozens of stranded guests and unpaid home owners in Sonoma County when its owner filed Chapter 7 bankruptcy a few weeks ago.

The sheriff’s office is investigating and looking into the issue of unpaid taxes.

“The owners of the houses are saying they didn’t get their rent money and we’re looking into stolen deposits,” said Tony Gillote, chief of the bureau of investigations for Sonoma County’s district attorney. “If there’s anything criminal, it will probably boil down to ‘common scheme and design’ for grand theft.”

If the company was using one person’s money to pay another person, it would look a lot like a Ponzi scheme, he said.

What Hayes said he doesn’t understand is why home owners or a tax collection agency would be patient with a property manager late on payments.

“Before 60 days are up you should be screaming your head off and calling an attorney,” he said.