Security Deposits for Vacation Rentals 101: How to collect a refundable security deposit on Airbnb & VRBO
Listen to the episode here:
Security Deposits for Vacation Rentals 101: How to collect a refundable security deposit on Airbnb & VRBO
Protect yourself against damages from Airbnb guests. John and Tim explain ‘what to know’ about security deposits on the major platforms Airbnb and VRBO.
- Does Airbnb and VRBO actually collect security deposit money from guests?
- What is an authorization hold?
- How to collect a refundable security deposit off platform
- Using your own merchant processor to collect security deposit funds from guests
- How to handle a refundable security deposit
- What you should and should not charge guests for
See an example of an email template you can use to collect a security deposit off platform here:
https://drive.google.com/drive/folders/1Vq-DDXrmke_LfLpHMlfSJGvoOIaSDc5c?usp=sharing
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Transcript
Intro (00:01):
Welcome to the Vacation Home Help podcast. The only podcast dedicated to helping vacation rental owners self-manage their properties. Your host delivers short and sweet episodes with actionable advice, tips, and strategies to level up your hosting skills. Whether you are a complete beginner or been in the vacation home rental business for a while, you are in the right place to get the tools you need to succeed. Here are your hosts, John Candelario and Tim Casey.
How security deposits work on Airbnb and VRBO…
Tim (00:34):
Here, John. One area that I still have a lot of questions about is security deposits. I know that with VRBO, I don’t think you can ask VRBO to collect a deposit for you. I think they’re doing a reserve. Airbnb, I don’t think they’ll do either one. I’m not exactly sure as an owner, how to think about security deposits, doing it the right way, what my options are, and what’s the best way to approach it. It’s an area that’s still a head scratcher for me. Would love to get some best learnings from you on this one,
John (01:11):
All right, Tim. So this topic’s near and dear to my heart because I have a lot of frustrations with the OTA system and how they handle this, especially with all of the changes the OTAs have been making this year. Airbnb, let’s speak to that. They just launched Air Cover, which is a pretty big update in 2022 but they’re saying that they cover a lot of things and a lot of things are actually covered. But on the topic of security deposit, they’re not actually holding hard money from the guests. They’re not placing say $500, right? They’re not charging their card for $500, holding the money and then refunding it after checkout. They’re just saying that we’re going to keep a card on file and if they break something, you can report it and then they may charge the card. So there actually is not a security deposit being held.
John (02:03):
VRBO is a little bit different in that they do an authorization. So they are putting an authorization on the payment method, but you have to report to VRBO what happened for them to collect the money for you. Why this is troublesome is because as a traveler, for example, if you’re not the most responsible traveler, you have no incentive to not break something because your money is not being helped. So in your mind, you paid and you’re going to have a good time. So regardless of what you’re going to do at the rental, your money has not been taken out. So what that creates is an opportunity for them, the guests, to possibly throw a party and leave and then block their card and then not have to be held accountable for it. This has happened in the past to hosts that I know, and one of them was you, Tim.
How to collect a refundable security deposit off platform when using Airbnb and VRBO for maximum protection…
John (03:01):
But Airbnb sometimes doesn’t respond in your favor. So Airbnb has done a pretty good job at changing their policies, but in practice, it will not always rule in your favor if something bad is to happen. So you just need to know what’s actually happening. One, they’re not holding hard money from the guests. So if you’re thinking they’re holding a security deposit, they are not. So two, if you need a security deposit held, you need to collect it on your own. Three, you might be asking, “How should I do that?” Well, you can send them a separate email communication. You could use a merchant to collect and hold those funds, and then you could release it when they leave. But in your Airbnb listing, you’ll have to say that this is what’s going to be done because a guest can come back and think that it’s a little sketchy and shady that you’re asking for money off platform.
John (03:55):
You might be wondering if Airbnb and VRBO allows something like this and they do. You just have to be transparent on the front end on that this is going to be part of your booking process, because it’s also not fair to not say anything about this, have them book and then say, “Hey, I need a deposit from you.”
Tim (04:13):
So, John, I should put that information in my actual listing that I will be collecting a security deposit outside of the platform?
John (04:23):
That’s correct. It should be in your listing. One appropriate place is in the house rules section. You could include it in other information too. And two, the first info they get, the first communication after they book, they should also receive that there. And then three, I would send them an email communication requesting them to pay the deposit possibly five to 10 days before check in. You could ask even 60 days prior to check in, whatever you’re comfortable with. And you can include a link to make payment.
John (04:54):
It should be in a merchant like Stripe or Square. You shouldn’t use Venmo, you shouldn’t use Zelle, you shouldn’t use PayPal because those can get kind of tricky. Zelle won’t refund it, but it’s just a little weird sending money for a deposit through Zelle. PayPal, if you do a dispute, they always give money back. So say something happened, a lot of things were broken and then you collected the PayPal funds and you didn’t send it back because they broke things, what can happen is they can complain to PayPal and get those funds back. So you’re going to want to use a merchant like Stripe, Square or a credit card processor to be in charge of that process. And you’re going to want to make the charge. So this might be a little complicated for some owners, but it can be done and you can collect a refundable security deposit.
Tim (05:43):
So the key here is put a new listing, let the guests know upfront in the listing that you’re going to be collecting a security deposit. And then secondly, set up a Stripe account or something like a Stripe account and send the request for that deposit through your Stripe account. John, do you find, through your experience, is the guest willing to pay a security deposit?
John (06:11):
Not all the time. Most people don’t want to pay for it and it will deter renters, so let’s be transparent about that. Any time you include a refundable security deposit, that’s more money out of their wallet that they could possibly be spending on vacation. You don’t know what someone’s financial situation is. They could be splitting the booking between four or five different people. So once you increase the cost of this stay, you will deter travelers, but you need to understand more parties are happening now more than ever and we’re seeing some crazy things happen in the news. There’s even parties with hundreds of people outside in really nice communities. So the only way to protect yourself is to actually collect a deposit. And it may not even protect you 100%, but that’s the only recourse you have.
John (06:59):
So if you don’t ask a refundable security deposit, you’re just taking a really big risk and most vacation rental owners do not collect the refundable security deposit. So while we’re talking about this, most people are not doing it this way, because they’re just following the process Airbnb is highlighting for them, or VRBO is highlighting for them. But this is something most people do not do because it deters travelers and the OTAs don’t want you to collect a security deposit because they have an incentive to maximize bookings because they make a percentage as a service fee of each booking, so the more expensive it gets, they don’t have an incentive to collect a security deposit because they’re not going to make any of that. So they are not going to incentivize doing this through their platform, but it doesn’t mean you can’t protect yourself as an owner. You just need to be aware that it will impact the number of reservations you get.
Tim (07:54):
So, John, if I’m hearing you right, the way I would think about this now is that Airbnb, VRBO, the platforms, they don’t collect the kind of deposit that we’re talking about.
John (08:05):
Correct.
Tim (08:05):
They do some things really well. They’re great at getting reservations. That’s what they do. But they’re not going to be collecting the deposit. And therefore if there is damage, then it’s going to be really hard for the owner to collect on that if they just use what the platforms provide.
John (08:22):
That’s absolutely correct.
Tim (08:24):
So a refundable security deposit really helps there. What I have found is that responsible guests really don’t push back too much because they know they’re going to get that money back. The ones that push back the most are the ones that, they might be wanting to have that party. So just kind of all eyes open there.
John (08:46):
Absolutely.
Charging the Security Deposit for Damages Caused by Guests
Tim (08:46):
And the last piece of advice, John, I’d love your thoughts on this. But the advice I would offer to our listeners is don’t try to collect on the small things. In other words, if you’ve got that security deposit and there’s a little bit of damage, a coaster was damaged, something along those lines. Don’t charge them for every little thing. That’s kind of-
John (09:14):
Nickel and diming.
Tim (09:15):
It really is. Let those things go. That’s a part of being in business. What I think about that deposit for are the big ticket items, those things that are really expensive or smoking in a house is going to cause a lot of cleaning. Those are the kind of things I would use it for. How do you think about it?
John (09:34):
That’s the right frame of mind. You really highlighted what you would charge for, what you would not. But a lot of hosts, they think anytime linens are staying beyond washing that they should charge. Same with towels. But you really can’t because they’re meant to be used and if someone has an accident or they’re messy, doesn’t mean you should be charging for every washcloth, hand towel and sheet that gets ruined. That’s actually a cost of doing business.
John (09:58):
And when I started doing this, a lot of hosts I worked with wanted to charge for every little thing, like a washcloth. They would send the guests a bill for $7 for the stained washcloth. But why? You’re just going to upset people. That’s not being a good host. So just what you said, there’s one category which is cost of doing business, like stained towels, linens. If they broke a plate. Don’t charge them for a plate. You could get another plate from Ikea, right? So then there’s another category if they break the bed or if the couch was broken.
John (10:31):
Sometimes even when they break something, if it’s an accident and the kid breaks it, you could let it slide. That’s on you, what you decide to do. But think about being a good host first, because imagine you charging for something that they broke, like a glass table, it costs you $100. Okay, they broke it. You could ask them for that $100 or say, “Don’t worry about it.” And maybe they’ll come back next year. But if you make a big stink about it, about this table you got from Ikea, then they’re not coming back because you were being combative and arguing with them about a table. So you need to choose your battles wisely and unless it was intentional and it was a lot of damage, it’s kind of just the cost of doing business and I wouldn’t really charge a deposit for stuff like that.
Tim (11:14):
I think that’s the right way. You use the word intentional. That’s a really good way of thinking about it. I had a guest not too long ago that was doing laundry and they put a wash cloth that had bleach on it on a leather Ottoman. Well, bleach and leather don’t get along real well.
John (11:30):
No.
Tim (11:30):
And it damaged the leather Ottoman. But there was no intent there. They were doing laundry and they simply put this cloth down. It did some damage to the Ottoman. I’ll replace that. But there’s no intent, so why would I charge a guest for that? I think about charging a guest when there’s intent or when they’ve chosen not to follow a house rule. That’s when I think it’s most appropriate to apply that expense against their security deposit. But if they just had a child that put a cloth on something that damaged something, there was no intent there. So why penalize the guest?
John (12:02):
Right. That’s a good way to think about it. Think about if you were the traveler, if you were the guest, and some accident happened, you don’t want to be penalized all the time. Even if it’s a small thing or a big thing. It’s just you’re traveling and it was an accident. I’m sure you didn’t mean to break something. So it’s just thinking about it with that frame of mind and don’t abuse what a security deposit is because you won’t stay in business long if you’re the person nickel and diming people at their security deposit. How do you expect to earn a good review if you’re always charging people for towels and that you’re never going to get a good review base that way. So there is a cost, a hidden cost, of doing business, I should say, with running a vacation rental. And that is all the loss you’re going to have just day in and day out and you just need to recognize that as you operate.
Tim (12:53):
Yeah and it’s a good point. I’ve built that now into my financial model. I put a miscellaneous of, I think, I use 5% and that 5% covers towels and all those things that do get damaged just because of the business we’re in. We’re in a-
John (13:07):
You’d be surprised how many people don’t think about that cost.
Tim (13:09):
Yeah. I mean, we’re in a business where guests are going to use your home and they’re going use your towels and now sometimes there’s stains that you can’t get out. It’s a write off, it’s going to be a cost of business. And if you build that into your model, you’ll find that you react differently to it when it happens, you’re expecting it, you built it into your model. You know it’s the business we’re in. That would just be a piece of advice I might offer.
John (13:33):
Absolutely. And if you want a template of the type of email we would use to collect a security deposit, all platform, just look at the show notes and we’ll include a link there so you can get started.
Speaker 1 (13:46):
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Speaker 1 (14:24):
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