All Forum Posts by: Ryan S.

A bit of a rant here ... I've been in these forums for seven years and have followed the Airbnb laws in Colorado the entire time. I've always been able to find my STR clients investments that are legal and whose numbers works. Even new laws restricting short-term rentals seemed only to present new opportunities to savvy investors who knew how to find the gaps.

But the last year here, I've started to wonder if Airbnb and short-term rentals as I've known them are dead in Colorado. 

It seems that a mix of regulation on the legal side and taxation on the numbers side have changed the landscape. Anyone out there feeling this?

Airbnb laws

On the laws side, the noose feels like it's tightening. 

-- Much of Denver metro has outlawed it. (I know there are exceptions in Wheat Ridge, Westminster, Adams County, etc. I still have clients crushing it there.) 

-- Ski towns like Breckenridge and Steamboat Springs have essentially banned it. 

-- Unincorporated counties -- historically, the more conservative, skeptical-of-regulation type of government bodies -- have clamped down. Routt County, where Steamboat is, bans STRs. Clear Creek County and Gilpin County have caps and are past those caps, as is Summit County. Jefferson County, which technically allows short-term rentals, is fickle with permits and just revoked one of my clients' permits for arbitrary reasons.

-- The biggest indicator of turning public sentiment was just last month, in December, when voters in Woodland Park approved a ban on vacation rentals that also appears to NOT grandfather in existing licensed properties. I've never seen a new STR law that didn't grandfather in existing permitted short-term rentals. (Littleton and Colorado Springs, for instance, initially had laws allowing Airbnb and then revoked those laws but grandfathered in existing permits.) And Woodland Park is not known as a big liberal city.

Numbers side

And then there are the numbers, which just aren't as good as they were.

-- The influx of STR supply has certainly brought down Airbnb revenues the last few years for everyone. That dynamic will balance out this year, it appears, but still the gold rush of a few years ago is definitely over.

-- But the real nail in the coffin could come in the Colorado legislature which is considering reclassifying STRs as commercial property for property tax purposes. (Senate Bill 33, for those keeping score.) I just ran numbers for a client on a $550,000 property. Under current law, annual property taxes would be $2,300. If this new bill passes, their bill would jump to $9,800/year. 

So, what does this all mean?

The state law on property taxes is the biggie here. If it passes, I think the motivations to buy a vacation rental in Colorado will change from mostly investment to mostly personal. There will always be people with money who want a second home in Colorado who are fine as long as their mortgage is covered. But maybe the days of nabbing a killer STR investment are coming to a close.

If the property taxes are not changed, then you still have to deal with a shrinking pool of areas that allow STRs. But I think savvy investors will be able to navigate those laws to take advantage of artificially suppressed competition to do well. 

What are others feeling out there?

Quote from @Steve K.:

Quote from @Tom Gimer:

You can't take an element from state X such as "uniqueness" and try to apply it in state Y where that appears not to even be part of the analysis.

Let's see how this turns out.

 Tom so you wouldn't be as concerned about that element? I defer to your expertise here. 

Does the contract include a monetary damages provision? Don’t know, haven’t read it. But given that it expressly includes a specific performance provision I would not be ignoring it… and neither would a judge or mediator.

Real estate is unique by nature. People should stop applying sale of goods theories to it.  

You can't take an element from state X such as "uniqueness" and try to apply it in state Y where that appears not to even be part of the analysis.

Let's see how this turns out.

I definitely see what you’re saying about the seller backing out being a violation of your good faith agreement, and what is the point of a contract if the seller can just change their mind… However in my experience most people do end up settling for monetary damages incurred rather than trying to force the sale.

I have seen two cases where it went the distance and the buyers successfully sued for specific performance. The first was a $10M historic property in Downtown Denver that was truly unique due to its location and age. There are no other properties like it. The buyer had performed at closing, delivered funds to the title company, signed closing docs and everything. Seller decided to back out at the last moment for some arbitrary reason and just didn’t show up to closing to sign the docs. Closing funds were held in escrow, buyer decided to sue for SP. Eventually after about 3.5 years the buyer did prevail. I’m not sure who paid legal fees but they must have been significant.

 The second case was a commercial property (an 8 unit multifamily in a complex of 6 individual 8 unit buildings), owned by a group of investors. A developer had already worked out deals with the owners of the other 5 buildings and finally got the 6th and final building under contract. Some of the owners had wanted to sell and others didn’t. I believe the owners with the majority ownership share forced the others to sell, but they weren’t cooperating. They all had their own lawyers of course and it was a mess that took 3 years but eventually the buyer (the developer) did prevail. I think the key in that case was that the property was the last one needed in a large development of a group of blighted small MF buildings that were to be torn down and redeveloped. The building was vacant and completely rundown with the windows all smashed out by the end of the lawsuit. The owners were essentially slumlords. The buyers had invested a lot into the deal (~$100M) and purchasing the property was critical to complete their development.

In almost every case involving vanilla SFH's that I've been privy to, buyer and seller have settled during mediation for monetary damages. In a few cases the buyer has moved forward trying to sue for specific performance but eventually gave up after about a year and around $30k spent on legal fees.

The gamble is that the outcome hinges upon the courts discretion and it's rare to see specific performance unless buyer can demonstrate that monetary damages aren't enough to make them whole. As an investor looking to purchase an STR in a ski town, I'm not sure I'd feel that confident in a court deciding in my favor, personally. Seller might claim that the contract wasn't fair and equitable to begin with, or use stalling tactics, or they might say they need to move into the property because they are getting divorced/ lost their job/ need to move their ailing mother into the property, etc. and anything along those lines might make a judge more sympathetic to them than an investor buyer looking to turn the property into an STR.

I’m also not quite convinced that the property is unique enough to justify specific performance because it is typically only enforced when there is a lack of other remedies such as monetary damages. For example the property being historical or a critical part of a large development plan. You could probably just go buy a different investment property and achieve the same returns. So that will be a tricky element to this IMO. 

But I get where you’re coming from, it’s super lame when a seller backs out. Keep us posted on what your lawyer says if you can, let us know how it goes, and good luck. 

Quote from @Ryan S.:

Quote from @JD Martin:

I can't possibly imagine what kind of townhouse could be worth all of that aggravation and cost. I don't know if you have ever been sued, or sued anyone, but I have and in court *nothing* is clear cut, including recovery of legal fees, which is why everything can be appealed and often is. As Jay said this kind of litigation can drag on for years before being resolved. Just the fact that it's a townhome means there's 1 or 5 or 50 just like it, so I can't picture what could be so unique about it unless the OP is fleecing the seller and he knows it, and the seller has just realized that which is why he doesn't want to sell. If that's the case I would not at all be assured of a court victory. 

I am not "fleecing" the seller. He determined the price and terms for the property, and according to the agents involved, he consulted with accountants and attorneys before signing the contract. We had been negotiating for weeks, during which he asked me to draft the offer based on his price and terms and requested over a week to review and accept it, which I honored. Despite having over a week, he ultimately signed just 15 minutes before the offer was set to expire.

Eight days later, he emailed me saying, "I have changed my mind about the sale of my home and would like to terminate the contract."

 Then it sounds like you have a good case but just be cautioned that plenty of good cases end up big losers in court. Don't convince yourself that because you are in the right you will be victorious in a legal sense. Convince yourself that there's a better than average chance that you will lose, and if you can live with the time, energy and money spent if you do. 

I can't possibly imagine what kind of townhouse could be worth all of that aggravation and cost. I don't know if you have ever been sued, or sued anyone, but I have and in court *nothing* is clear cut, including recovery of legal fees, which is why everything can be appealed and often is. As Jay said this kind of litigation can drag on for years before being resolved. Just the fact that it's a townhome means there's 1 or 5 or 50 just like it, so I can't picture what could be so unique about it unless the OP is fleecing the seller and he knows it, and the seller has just realized that which is why he doesn't want to sell. If that's the case I would not at all be assured of a court victory. 

Quote from @Ryan S.:

Quote from @Steve K.:

Did you use the state-approved contract/ a contract that addresses the remedy for breach of contract and specific performance? 

Thanks for your insight. That makes sense. This is a very frustrating situation. I really want this property for so many reasons and don't just want to just walk away.

Yes. I used a Colorado state-approved contract. The contract states the below: 

20.2.1. Specific Performance, Damages or Both. Buyer may elect to treat this Contract as canceled, in which case all Earnest Money received hereunder will be returned to Buyer and Buyer may recover such damages as may be proper. Alternatively, in addition to the per diem in § 17 (Possession) for failure of Seller to timely deliver possession of the Property after Closing occurs, Buyer may elect to treat this Contract as being in full force and effect and Buyer has the right to specific performance or damages, or both.

22. MEDIATION. If a dispute arises relating to this Contract (whether prior to or after Closing) and is not resolved, the parties must first proceed, in good faith, to mediation. Mediation is a process in which the parties meet with an impartial person who helps to resolve the dispute informally and confidentially. Mediators cannot impose binding decisions. Before any mediated settlement is binding, the parties to the dispute must agree to the settlement, in writing. The parties will jointly appoint an acceptable mediator and will share equally in the cost of such mediation. The obligation to mediate, unless otherwise agreed, will terminate if the entire dispute is not resolved within thirty days of the date written notice requesting mediation is delivered by one party to the other at that party’s last known address (physical or electronic as provided in § 26). Nothing in this Section prohibits either party from filing a lawsuit and recording a lis pendens affecting the Property, before or after the date of written notice requesting mediation. This Section will not alter any date in this Contract, unless otherwise agreed.

Good that you used the state form. So yeah Jay is right (as usual), first step is mediation. Unfortunately enforcing specific performance on a seller is a rare remedy, as most often compensating the buyer for any monetary damages they have incurred is seen as an adequate remedy. I'm not sure that the property being perfect for your investment criteria makes it unique enough to warrant a judge forcing the sale, especially considering that it was not listed for sale to begin with and that you're going to be using it for an investment property not a primary residence. STR investors aren't really looked at that favorably in our mountain communities these days, putting it lightly. Seems like an uphill battle and as Jay pointed out it would be a long, expensive process that tends to favor the seller (judges don't take forcing people to sell their property lightly). I'd hazard to guess that you'd end up settling for monetary damages in the end, which being only a week into the contract you wouldn't have that many. Good luck though, I definitely see why this is frustrating for you! Maybe through mediation you can get some more money out of the seller for your troubles.

If I was in this situation I would hire an attorney and going forward follow the contract to the letter, documenting each breach but also clearly demonstrating readiness to close on the settlement date.

And yes, I would have the lawsuit and lis pendens ready for filing before that date passes.

"I changed my mind" is not a defense and if the seller truly put that in writing and OP doesn't otherwise bungle this by missing a deadline, etc., I sense this could be a winner. Getting that won't be cheap but apparently neither is this investment.