If you own short term rental properties and need to assign the value of those assets in your divorce to your spouse, this article was written for you.
When you are going through a divorce the perspective about the value of short term rental properties changes from how people tend to think about them. If you do not think about this clearly you could leave a lot of money on the table (or lose it completely from your portfolio). It is important to look at every aspect of your short term rentals to understand their true value. Once you understand these issues then you have to know how to negotiate them in context to the other assets in your marital estate. Let’s first look at how most people look at the value of short term rentals. Then we will briefly touch upon some of the other issues you may want to take into account as you think about your short term rental properties in context to your divorce.
Most people (including your spouse, the opposing counsel and possibly your own attorney) may jump to the conclusion that your short term rental properties are valuable pieces of property. They will attempt to have you think the value of the properties are high and negotiate against you to assign a value that compromises your future wealth position. If you believe them, and do not conduct the appropriate due diligence, then you will pay for that value in your divorce process. Overpaying for your own rental properties will create wealth at risk for you.
Short term rentals come in many forms such as properties at ski resorts, holiday destinations, weekend getaways, vacation clubs, among other locations. Yet, when you place the lens of a divorce on the value of your short term rentals, you need to look at things differently. Perspective is key. Demonstrating that perspective so others can understand your perspective is critical for your negotiations.
The presumption (outside of a divorce process) is short term rental properties can:
- Provide an ongoing source of income — you have the ability to replace money relatively easily
- Command higher prices than longer term rentals — people are willing to pay more for a luxury location or a getaway
- Increase the value of the property — higher prices translate in their minds to higher property value
To make sure you do not leave a lot of money on the table during your divorce process be sure to look at your situation as if you had to sell the properties to a third party buyer (even if you never plan on selling the properties). Why? A third party buyer will be the person who will ultimately pay you for your properties. In a divorce process, you are either a buyer or a seller in this “transaction”. As a result, a third party buyer is the perspective you need to maintain as you define the value of your short term rental properties.
A couple of questions you have to address are:
- How will your third party buyer define the value of your properties?
- What risks will your buyer perceive exist that will reduce the value of your properties?
When you think about these questions be careful not to assume too much as you may already have the knowledge how to manage the risks. Yet, your third party buyer may not. When the perception of risk is high the value of your properties are lower. In context to your divorce process, if you are the “buyer” do you want to pay a higher price for your own properties or a lower price? If you accept what your spouse places on the value of your properties or the opposing counsel you will compromise your financial position.
Your “buyer” will likely have concerns about your property. These concerns translate into your buyer’s risk tolerance. If you decide to transfer the properties to your spouse, then your spouse has by default become the buyer. Yet, your spouse will likely have many questions and may not be the right buyer for your properties. If you are the buyer of the properties, you need to ask yourself whether or not you are leaving money on the table. As the primary manager of the properties (between you and your spouse) have you taken into account everything you do to find new tenants, sell the short term rental, maintain your properties, review the legal terms, etc.? As the manager of your properties, you likely do a lot more too. You need to assign a value to these activities in you divorce negotiations. Be careful not to short change yourself if you are buying the properties from the marital estate in your divorce process.
Why do we bring this to your attention? Some issues that are not commonly brought to the surface during a divorce process are the value of a short term rental property is highly dependent on:
- The term of the lease agreement influences property values — guaranteed revenues to a buyer are more preferred than ones that are not as predictable. Short term rentals have shorter lease terms. Therefore value tends to be lower than longer term rentals
- The quality of the marketing infrastructure is strong — a well-oiled marketing engine that can operate independently of any humans has more value than one that does not
- The demand for the property in the market — demand needs to remain high assuming the destination location has not received any bad press and the supply remains status quo or lower than the current state (i.e. not too much “inventory” is introduced into the market)
- Governing regulations — if any regulations exist that control zoning rights or lease terms the value of the rental property may decline
- Quality of the property — this assumes the property does not need to be repaired after the tenants move out
- Level of competition — the value of the property can be impacted based on the competition in the area and any new properties being built in the area
If you look at this issue from a third party buyer’s perspective, a buyer will ask the seller of these short term rental units whether the units can be filled easily. If the processes and skills needed to rent out your short term rental properties are dependent on one individual, a third party buyer may say to herself that she does not have those skills or processes. Third party buyers of properties want things to just work by themselves. They don’t want humans to do the work per se. Renting a property requires finding tenants, potentially customized leasing terms (hence drafting legal terms), negotiation expertise, repairing properties, among many other issues that arise and often go unnoticed. These issues, among others, impact a buyer’s perception about the value of a short term rental property. They should influence yours too, even if you have these capabilities.
Third party buyers look for stability and predictability in future income streams. A buyer maintains the perception (right, wrong or indifferent) the less predictable the income stream and the more the buyer needs to be involved in the process, then the less the property has value to the buyer. This translates into the buyer paying you less money. If you are classified as the buyer of the property you may choose to pay less money for those rental properties from your marital estate too.
Now keep in mind that you and your spouse will each become a buyer and seller of the tradable components that make up your marital estate. In much the same way a third party buyer will value short term rentals differently than a seller, each spouse will have a different perspective about the short term rental too. A couple of questions that come to mind that your spouse may ask if she or he becomes the “buyer” of the property from the marital estate are:
- How do I feel about having to customize the legal language in the rental contracts?
- If I have to pay an attorney to customize the language how does that influence the value of these properties to me?
- Do I have the skills (or would I have to pay someone else) to troubleshoot plumbing issues and damages that result from problem tenants as well as routine maintenance and repairs? If you have to pay someone, the value of the property to you may be lower.
There are a number of data points you have to analyze to form your negotiating position in context to the value of your short term rentals during your divorce negotiations. No matter your position in the negotiations, whether you want to be the buyer or the seller of the short term rentals in your divorce, the key is to:
- establish the right perspective when you assign the value to your short term rental property
- understand you are negotiating with someone who you used to be married to but is likely on the other side of the negotiating table and looking at this from a different perspective
- be prepared to present clear facts supported by irrefutable evidence
All of this requires critical thinking, clarity of thought, objectivity (no emotional interruptions), socratic mindset to think through these issues in a logical manner, negotiation expertise (a clear understanding how to gain negotiation leverage), ability to communicate your perspective in a compelling manner and a fiduciary attitude to arrive at your desired financial outcomes.
So, if you are in the middle of a divorce process and have short term rental properties, be sensitive how much you perceive is the value of your properties. This will impact how much you ultimately keep or retain in your portfolio during your divorce process. The key is to know how to position it with your spouse so you can come to an agreement. Your spouse is looking to say one thing, “this makes sense to me”. Without those words in your spouse’s mind then your divorce process will likely drag on. Depending on your spouse’s educational background you may be facing an uphill battle. Your documentation must be socratic in nature. It must be clear and objective with no emotional triggers embedded in your words. If you are equipped to seamlessly bring your evidence together to demonstrate your perspective, then congratulations you are among the minority in the population. Most people are emotionally charged. They may communicate one thing which disturbs their spouse’s thinking and completely unravels all of your hard work.
Be cautious how you negotiate the value of your short term rental properties in a divorce.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
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About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
Learn more about us at divorceoutcomes.com or review our blogs to gain a clearer understanding about our approach and how we maximize the financial outcomes for our clients.
Disclaimer
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.