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How to Audit Short-Term Rentals Efficiently and Effectively

State and local revenues are feeling the impact of a decline in consumer consumption caused by COVID-19. The longer people stay home, the more taxes and fees plummet.

But as consumers realize that staying home doesn’t necessarily mean staying at their own home, the short-term rental (STR) market is beginning to boom, providing local governments with a real opportunity to innovate their auditing process and better track the local activity of Airbnb, FlipKey, and VRBO. 

“We’re seeing an increase in booking that’s pretty dramatic over last year,” said Ulrik Binzer, general manager of compliance services at Granicus, in a recent webinar about auditing STRs to ensure tax and ordinance compliance. “A lot of people are getting tired of being in lockdown and want to get out of the house, so they find a local or close-by accommodation.” 

However lucrative and appealing, STRs sometimes operate in an unregistered grey area where they can sidestep taxes and ignore local bans—if they even know about them. And while audits can help regulate the market, traditional audits don’t align with how STRs operate. To efficiently and effectively keep tabs on this growing market—and benefit from doing so—governments need to update their auditing processes to suit STRs.

Streamlining the STR audit process
In terms of how easy the audit process is, STRs are a different story than their hotel counterparts. While hotels typically have an accredited accountant, STRs are usually operated by a host that’s renting out their secondary suite for some additional income; and they can go undetected by government officials who are stakeholders in this market. 

As it stands, it’s close to impossible to identify a good STR audit candidate through the traditional auditing process. Not only is it difficult to determine the identity and address of an STR operator for an audit in the first place, it’s also time-consuming to find them manually, and that’s only if they’re registered (not all STRs are). Once government agencies do identify the operator, they have to track down old—and somewhat unnecessary—information and complete a slew of paperwork. Not to mention, from the agency perspective, each case is unique by nature, which calls for extensive back and forth between host data, communications, and government records.

Instead of casting a wide net and conducting random audits on a bunch of “small fish,” audits should be more targeted. With Granicus’ Host Compliance tool, auditors gain access to Granicus’ proprietary data of historic occupancy numbers, which can easily be cross-referenced with new listing activity to identify any major discrepancies. Auditors can also filter STRs by the degree to which they’re underreporting and calculate their estimated revenue. Once a candidate is identified, agencies can immediately notify them with an audit, including proof like screenshots of the online listing associated with the STR address.

On the agency review end, inaccurate information submitted by the audit candidate can be easily rejected (like false booking activity) with an accompanying, in-platform explanation. If the information is accurate, agents can set custom deadlines, easily accept the submission, and confirm payment from hosts.

Benefits of STR audits:

  • Untapped revenue: Financially, STRs are outperforming hotels right now, but many STR operations are flying under the government’s radar. “STRs provide an attractive revenue enhancement for local governments to identify properties that haven’t been paying their taxes historically and collect incremental revenue in the form of taxes, back taxes, penalties, and interest,” said Binzer.
  • Higher ROI: Instead of casting a wide net and randomly selecting candidates who might not make sense to audit (which is the current process), being able to select “big fish” audit candidates who both generate the most revenue in their community and are more likely to be violating the rules, will result in a higher ROI for local governments. 
  • General regulation: Because STRs tend to fly under the radar, it’s difficult to hold the operators accountable for their actions, especially in the midst of a public health crisis. “We’ve seen a notable increase in partying and noise-related complaints, and house parties have proven to be a source of new COVID-19 cases across the country,” said Binzer. Ordinances will often have a cap of how many nights rented or how many people can be in one STR (called an occupancy limit). These limits are put in place to reduce impact to the community, or sometimes they’re used for “tiering” STR permit types. By auditing STRs, local governments can keep tabs on this activity and lockdown on these occurrences to ensure that online listings are following the bans or limits put in place for the safety of their communities. If governments fail to hold STR operators accountable right now, it’s more likely that their defiant behavior will continue during future lockdowns. 

The time to innovate is now
The only way local governments can track the STR market in their community-, collect accurate data-, and hold operators accountable- is by engaging in some kind of audit system. But the current audit process is highly inefficient due to the ever-changing market and lack of paper-trail. By auditing this portion of the economy with new technology, local governments benefit two-fold: they can better and more efficiently regulate the STR market to hold operators accountable, while also tapping into the revenue stream of a booming market.

Amidst a global pandemic, efficient and effective STR audits are no longer a nice-to-have; they’re a need-to-have. Local governments are strained for revenue and old processes don’t make sense anymore. With bookings on the rise again, the STR market presents a great opportunity for local governments to innovate their STR auditing process and reap the benefits of doing so. 

For more on the benefits of STR audits, watch a recently recorded webinar here.