CDRE 22 | STR State Statutes

 

The government plays a crucial role in real estate through legislation, regulation, and public policies. Governments establish and enforce laws to govern property rights, land use, construction standards, and transactional processes. But what if malice occurs in real estate? In this episode, Tim Davis, the Sultan of STR State Statutes and author of Ricardo’s Macroeconomics: Money, Trade Cycles & Growth, navigates through the regulations in real estate and how investors can protect themselves from different cases of malice in the industry. He explains how regulatory capture undermines the effectiveness of regulations, distorts competition, and hinders consumer protection. Tim also emphasizes the importance of having legal counsel to litigate against the government, which overreaches. There are so many insights to unpack today, so tune in now!

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The Sultan Of STR State Statutes

Is your ox getting gored? Have you ever been in a situation where a government introduces a new rule to slow down or over-regulate your business activity? Few people are as well trained in real estate and government law as Attorney Tim Davis, which makes him the perfect champion for property owners who have struggled under some oppressive policies introduced by cities and governments as the short-term rental industry has surged in popularity in the past many years.

Tim has always been my go-to guy for myself and my team when government overreaches and forces private citizens to stand up and pay to defend their own rights. He was born in a small town but journeyed to Oxford, one of the best law schools in the world, to be trained by the best in economy, business, and law. He’s my friend and a faithful champion of real estate property owners, undefeated in my book, the sultan of state statutes. Get ready for Tim Davis.

 

CDRE 22 | STR State Statutes

 

Here you are from this area, and Oxford accepts you. Do you think it was based on your credentials, or they wanted to moonlight with a kid from Missouri?

It was based on my credentials. The tutors who made the admission decision had no incentive to have someone from rural America.

These Brits were like, “Let’s see how this guy does.”

I don’t think so.

It’s all based on merit and education.

If they wanted to get people from low-income and rural areas, there were plenty of places in the north of England they could draw from.

What was your experience like then at Oxford?

It was stressful, but I loved it. First, I was taken in by the architecture of being in England. The architecture is hundreds of years old. The building I lived in was built in the 1700s. There’s nothing like that around here.

You seem to like architecture. Even in some of your travels, you’ve talked about Greece, Macedonia, and places you love to go. Why do you think you like architecture?

I enjoy art and architecture. I enjoy color and things that are beautiful. It’s not something I tried to do. It’s just something innate.

You went to Oxford based on the merits of the school and ended up finding beautiful things over in England?

Yes, like the school, the structure of Oxford, the colleges, buildings and the gardens are spectacular, then the culture of being able to go to the museums. The university itself has phenomenal museums like the Ashmolean and Pitt Rivers. The Balfour Library itself is a phenomenal museum. If you wanted any shows, you could go to London. You could hop on the bus out in front of your college. In an hour and a half, you’d be in Central London. You could take in shows in the West End. Most of the museums in London are free. You could go to the British Museum, Tate Modern, Victoria and Albert, National Gallery, and so on.

How did you know you liked to go to museums? In Branson, there are only fire engine museums, classic car museums, and tractor museums. Were your parents instrumental in getting you to go to museums, or is this something new that you discovered as a young adult?

I discovered it probably in graduate school. Keep in mind, I didn’t go to Oxford straight out of Branson High School. From Branson High School, I went to undergrad in Canada. I spent four years undergrad, and then I went to graduate school at the University of Toronto, where I did a Master’s in PhD in Economics. Toronto and Ontario, in general, have excellent museums. Ottawa and Montreal have excellent museums.

That’s where it came from. I didn’t know about Canada.

We’ve got a long interval of eleven years from the time I left Branson High School. The time I started at Oxford was an eleven-year period. It’s 4 years for undergrad and 7 years for grad school.

I’ve talked to a lot of attorneys and they say about real estate. It seems like a lot of the laws that the United States still practices came from tenant-landlord law over in England.

Almost all of our commercial law and property law come straight from England. It’s a constitutional law as well. It’s not as if the United States invented its own laws. Keep in mind, the United States was governed by England for nearly 200 years. When the American Revolution happened, we didn’t just throw out our entire legal system. It was the only legal system we had. The legal system basically continued the same. The only change was who was at the top of it. Was it the king and the Parliament in England or the United States government?

England governed the United States for nearly 200 years. We didn't just throw out our entire legal system when the American Revolution happened. It was the only legal system they had. Click To Tweet

What do you feel the advantages would be for you as a business and real estate attorney for going to Oxford, where other people may not have?

It seems to me that the legal training in England focuses on the basics. The foundations of laws were more than American systems. The English system’s going to focus much more on property, contracts, torts, and trusts. Those are, as it were, the building blocks of everything else that happens. US law schools don’t seem to focus to the same extent on those building blocks. For example, 40% of my classes at Oxford dealt just with contracts.

I come out of there with a much more sophisticated understanding of contract law than, let’s say, someone who went to a US law school and took one contract class their first year, which sometimes happens. People take one contract class their freshman year, and that’s it. They graduate from law school. They have a very rudimentary understanding of contract law, if not an outright misunderstanding of it, and the same in the property. Probably 30% of my classes in Oxford dealt with concepts of property, real estate, real property, and personal property. Whereas in the US, you might get 1 class or maybe 2.

A lot of experiences that I’ve had with you, a lot of attorneys that I’ve talked to quote opinions, but you’re always quoting or emailing statutes or case law. I’ve noticed that different about you. You’re very data-driven, it seems to be, in your approach to the clients that you take and the cases that you accept. What was your interest in law? Why did you choose this as a career?

I was curious about it. Many people choose a career based on what they think they can make money out of or what their family is in. I studied Economics because I loved it. The first eleven years of my college were studying Economics and Finance because I found them fascinating.

Many people choose a career based on what they think they can make money out of or what their family is in. Click To Tweet

In fact, your book was an Economic-based book.

My doctorate dissertation won an award called the Joseph Dorfman Prize, which means it was the best doctoral dissertation in my area in the world in that field of Economics. After I’d won that award, Cambridge University Press came to me and said, “Would you please write for us a book on economic policy?” I said, “I’ll be glad to do it.”

I took my doctoral dissertation and developed it further, adding information that I got from The Balfour Library in Oxford and primarily from the archive of the Bank of England to talk about how monetary and fiscal policy developed hundreds of years ago, essentially. What we see the Federal Reserve and the US Treasury doing nowadays in terms of policy largely mimics ideas that were developed by the Bank of England and key leaders in Parliament hundreds of years ago. It’s quite fascinating.

What are your opinions on the current state of the economy? Is anything worth sharing based on your economic expertise?

We have the US has a solid foundation. We have a well-established legal system, a system of property rights, and a court system that does a pretty good job defending those property rights. We have moderate taxation. The monetary policy of the Fed in the past few years accepted has been excellent since at least the late 1970s. The Fed pursued an excellent view of monetary policy after the Fed was converted by Milton Friedman to become Monetarists. We’re doing pretty well.

My chief complaint about US economic policy is that in early 2021 when it was obvious that the economy was recovering from the COVID shutdown, the Fed continued to expand the money supply in a way that did nothing to increase employment or output but only triggered inflation. It seems strange because this was coming from a Democratic president and a Democratic congress who are providing the impetus for this increase in the money supply, yet the people who were most injured by this policy, the people who are most injured by inflation, are people on a fixed income people who are elderly, poor, and who you might think of the lowest jobs in the labor market.

People who can only put $5 worth of gas in their gas tank at a time because they can’t afford to fill it up. The money is not there.

Those are the people who the Democratic Party has traditionally thought about as being their base or the people they’re caring for the most. Those are the people who are most injured. In fact, by the first year, policies of the Biden administration in cranking up the money supply when there was no need for it, for one, then when it only generated inflation.

From the start of 2020 to the end of 2021, the monetary base of the United States increased by 35% left unchecked. That increase in the monetary base was going to trigger inflation of 35% for roughly over a 2-to-3-year period. Everyone should have known this. It’s not as if the way monetary policy functions is a mystery. The functioning of monetary policy has been well understood for hundreds of years.

Somehow, at the end of 2021, the Fed then realizes, “We screwed this up.” The reason the interest rates are going up is the Fed has to sell bonds back into the market to pull some of that money supply out of the banking system. They should have started that in early 2021. Had they started in early 2021, we wouldn’t be in this situation. If they could have kept inflation in check, we wouldn’t have had any inflation problems. The Fed overloaded the banking system with free loose cash during the COVID pandemic that now, they’re having to sell bonds back into the market to pull money out of the banking system. That’s why we’re seeing these high-interest rates.

Do you see them continuing up?

I don’t know that they’ll continue up. Our inflation rate is about 5%. Inflation had been running at 9% or 10% before the Fed began putting the brakes on it. We’re at about 5% inflation. The Fed is going to ratchet up the interest rate by another 25%. We’ll at least continue these high-interest rates at least through 2025. The Fed doesn’t have a choice. They’ve got to get this surplus cash out of the banking system.

We’ve all gotten drunk on low-interest rates for the past few years, and a lot of people have built a lot of wealth through that. I remember the first house that I bought. It was 7% interest. We can function pretty well as a society with those interest rates. It’s not like rampant inflation or the Weimar Republic in Germany, where people are with wheelbarrows of cash. Do you see it going in that direction, or do you think that the folks at the head of the Fed are smart enough to be able to stop it?

The Fed will keep it in check.

Thanks for your opinions on that. It’s always good to have a scholar’s opinion on what’s going on because a lot of us don’t have somebody like you in our life. I’m thankful that I do have you in my life because you have been a huge ally to me. You’ve been a friend to me. You have always encouraged and advocated for me, but as you know, I’ve jumped into encouraging and advocating for my clients.

We met through a mutual friend, Aaron Schaffner. He was the first person that ever mentioned your name to me. He is a great guy. He loves to work on investments and real estate. You were the guy that he went to. Aaron Schaffner was the guy who, in my first year of real estate, would see me in the office trying to think my way to success.

He’d look at me like, “What are you doing?” I’m like, “I’m trying to figure this all out.” He’s like, “Come with me.” We would go into properties. He showed me that I should be out in the inventory, previewing the properties so that I could speak intelligently about the property with people I hadn’t met yet. That was an eye-opener for me. We also played a game called Gone In 30 Days. There are a lot of vacant houses in Branson because it’s a second home market. We would walk into a house. We’d look at it and we’d say, “Gone at 30 days price,” and shooting from the hip, we would have to both come up with the price and then we would track it to see who was closest.

It was a fun competition. It helped me be able to price homes fast and shoot from the hip if I needed to. I don’t always prefer to do that. I know you don’t either, but sometimes you have to. I respected him. He recommended you. I even remember the first thing that I called you on. It was not even significant. It wasn’t even worth your time anyway. I don’t like to mess around with people who don’t know what they’re doing. I weed my way through attorneys until I can find a good one. It was almost a pro bono thing that I heard about that you had done.

You jumped in and it was something that you had done for someone in your community, somebody you knew, and went to church with. You jumped in and defended the person because they were wronged. You had done this pro bono thing for them. Ultimately, you told me that story as well. I was like, “What a great guy.”

It’s also interesting. I grew up in St. Louis. There are a lot of people in government in towns like that. Not so much here. There are not a lot of people in government. Those relationships are very significant. I teach people all the time in my classes, “If the planning and zoning people don’t know your name, you’re not buying enough real estate. You’re not going to enough meetings to be able to defend your clients, support your clients, or know what’s going on in town for that fact.”

It was always fascinating to me that you, even in a small town, were not afraid to stand up to your own government and defend the rights of your clients. A lot of people wouldn’t do that because you are from around here. In a small town, that matters because outside attorneys might go in front of a judge and no one knows them. In my time in the courtroom, I’ve gotten to realize that you all know each other.

For you guys, meaning attorneys, it’s not personal. There are no real personal interactions between you two because you might be working together on the next case. There’s a real interesting sense of collaboration and comradery while you’re also advocating for your individual clients. I admire it and the fact that you’re not afraid to stand up to your own government, being from around here. Not many people would do that, but you seem to with great confidence. Tell us about that.

I don’t remember that particular case, but I’m often working against the governments and the local counties or the cities that exist in the local counties. 1) It benefits my clients, and my clients pay me for that, then 2) I enjoy it.

What do you like about it?

It’s important that the constitutional restraints that exist on the exercise of state power are enforced now and then to remind the government that there are elected officials. They themselves are subject to the law. You don’t get to do whatever they want.

The constitutional restraints existed to remind the government that elected officials are subject to the law. They can't do whatever they want. Click To Tweet

You are constitution. You are a superhero. You don’t know it. There is a passion behind that. Is there anyone else like you that also believes that or is this unique to you and a core belief of yours?

Most of the good litigation attorneys have a fairly comprehensive grasp of the Constitution, at least as it replies to their area of law, and are passionate about it.

Does it happen a lot in your experience?

Constitutional issues come up in probably half of my cases, at least. I’m dealing with the government and real estate a lot. Here’s how it comes up and many readers may not think of this, but if you read the United States Constitution, there’s no mention anywhere of cities or counties, yet the Constitution defines how all political powers are divided in the US.

The question is, how is it that the local government that we deal with, which is the level of government that most affect our lives, and that can be most intrusive in our lives, have the authority to do anything? Here’s how it comes about. The state level of government has the ability, if it wants, to carve out some of its powers and delegate those to a local level of government to implement.

We happen to be in Taney County. Next door is Stone County. There are a few incorporated cities in these counties. The only reason those levels of government have any power is that the state of Missouri has carved out very limited powers from its basket of what it can do. Some of those powers are carved out in a very limited way and delegated to the local county and to the cities.

A large part of my practice is reminding everyone that the local government and officials can’t do whatever they want, but the powers that they can exercise are clearly defined by the state legislature in statute, both the substantive powers that they have then the procedures by which those powers can be exercised is also well-defined. If they get outside of that, which local governments want to do, that they’ve done something they had no authority to do, that’s inherently what Ultra Vires called Null and Void. There’s no reason a person who lives in the area should be subject to avoid action that their local government has no authority to take.

I have experienced this firsthand. I’m glad to have a champion like you in our county because this has been rampant, not just in our county but in counties all across America, especially as the short-term rental business has surged in popularity. I’m a Gen X-er. I know my parents were always taught to respect authority. Especially in a small rural town, we also have to respect authority. It’s bred into us.

A lot of times, I feel like either the local government isn’t as educated as they need to be on the topic as sensitive to the major economic and trickle-down effect of their decisions, or sometimes, they are power-hungry and want to feel powerful. They overreach. I have seen more instances of government overreach as it pertains to the short-term rental business, not just government overreach but corporation overreach, in the instance where a city utility department will charge an extra fee simply because it’s “commercial” without any defining characteristics of commercial.

 

CDRE 22 | STR State Statutes

 

If you want the privilege to operate a nightly rental, you now have to pay a $900 tap fee, even though the tap is already there and you’re renting your home for a period of less than 30 days. It’s also interesting to me how, economically, it’s not money that defines how a property should be taxed because I might buy a property and rent it out for a period of 6 months to 1 year. It’s part of my bundle of rights as a renter.

If I decide to rent my property for a period of less than 30 days, now all of a sudden, I have to pay sales tax on it. It’s not the act of making money that determines whether I pay sales tax. It’s a state statute that determines that. A lot of people don’t know that. Our local government didn’t know that. I’ll talk about some of their tactics here in a minute, but what has ended up happening all across America is that private citizens are having to pay an attorney to defend their rights, which are already afforded to them by the Constitution. This is rampant. What do we do about it?

I don’t know that there’s an option. This is not something unique to our area, but it seems like in many local governments, the people get elected and then imagine that now that they’ve been elected, they can do whatever they want. They can pass whatever local ordinance they want, prosecute whatever they want, or criminalize whatever they want.

For example, they get to interpret the statutes that empower them to tax however they feel like interpreting them at the moment. That there doesn’t need to be any consistency in the interpretation of a taxing statute. You could interpret a taxing statute differently from one county to the next, even though it’s the same statute or from one city to the next. That simply is not the case. Unfortunately, the only way to hold that in check is to litigate against them, which means you hire legal counsel to push back on government overreach.

Let’s talk about this in some way and give people some strategies. Here are a couple of different examples of what I’ve witnessed in my experience. First of all, in 2017 or 2018, I went to the state legislature to fight with a small band of people to defend short-term rental owners’ rights to rent their property for a period of less than 30 days. It was a very interesting and eye-opening experience with the government. It was the state government.

It was fascinating to me how corporations have much influence even our state legislators. In this case, Expedia hired a lobbyist to introduce a bill to “protect” short-term rental owners. Here’s what was confusing about it. Expedia had purchased HomeAway Inc at that time, which was the company that owned Vrbo.com.

It used to be a mom-and-pop company when I started selling short-term rentals. Now it’s a mega-corporation. Because Expedia owned that marketing platform for short-term rental owners, they introduced legislation that made it look like they were protecting short-term rental owners, but only 7% of their revenue annually would come from the short-term rental business. The rest of it came from hotels.

The hotels had lobbied strongly against short-term rentals because they wanted to “level” the playing field. It confused all of the state legislators. It was very difficult for me to get any of my clients or my entrepreneurs, and in some cases, even my agents, to show up and help with that effort. I literally donated my time going to Jeff City to do it, but I was passionate, like you are, about the violation of the rights that were occurring for people that I had brought into this industry. I felt like I owed it to my clients to be able to do that.

In that, I learned that it’s difficult to convince anybody of anything at the state level. It’s very easy to confuse state legislators and lobbyists are fascinating at it. We ultimately decided in that battle that local government should prevail because there’s no way we could have created a statewide form of government or regulations that would have protected Taney County and the Ozarks. Those are rural areas. Regulations in Kansas City St. Louis would’ve destroyed our economy. I was standing up for also our economy in Taney County. Tourism drives most of our economy. I was standing up for that reason.

For a while, we experienced a win and then slowly, the local economy started to pick up. We got a new assessor that decided she wanted to change the way short-term rentals were taxed. That’s another instance. We have utility companies charging extra rates. We have a complete moratorium for a while on short-term rentals until the county decides how they want to regulate them.

This isn’t new to me, but a few years ago, we had new regulations that would pop up where now we need a merchant’s license in order to operate, or we need a permit of some kind, retroactive code issues like, “I buy a property. I want to use it as a short-term rental. Now I have to retrofit the property with sprinklers and a fire suppression system.” We talk about these all the time. These are examples of things that could come up and might come up in your area if you’re reading from an area where there are no regulations.

I promise you that regulations will come. It happens to me all the time. Because of that battle, people contact me all the time and are like, “I’ve got a city council meeting. What do I say? They are trying to place a ban on short-term rentals in this county. What should we do?” There’s no leadership even nationwide to add advocacy in the short-term rental space. Now that we’ve shared a little bit of what can happen, what do we do when it does?

What you reference, at least in part, is a concept called regulatory capture. That is where large business interests attempt to capture the regulation that would be imposed by a state or Federal government. They’re trying to capture control of that regulation not to protect consumers, certainly, but to exclude competitors, especially an attempt to capture the regulatory control to exclude small competitors. That can happen in many industries. It shows one of the risks that the more the scope of government expands, the greater the risks for the abuse of that power.

The more the scope of government expands, the greater the risks for power abuse. Click To Tweet

We live in a very conservative Republican area, yet the regulations they were imposing on short-term rentals were more broader government. What I found is that, for the most part, these people and our elected officials are smart and good people. They’ve done a lot of good for our county. I’m not talking badly about them, but in some cases, I feel like they’ve been overwhelmed by the popularity of an industry. They have a knee-jerk reaction and they have to react violently in some cases to manage their day-to-day.

In those cases, I’ve had some luck holding meetings with people and saying, “Can we not do a knee-jerk reaction here?” In a lot of cases, they do it anyway. It’s frustrating for a lot of people, especially when they invest a lot of money in a piece of real estate, and now all of a sudden, something’s changed, they can’t do it, or they get a season desist letter because they haven’t turned in their fire suppression system plans. Those things happen.

What I found in my conversations with people all around the country is that the best cities that have come up with the most progressive and cooperative legislation have been where first they must show a compelling governmental interest. This is Arizona. They came up with this at their state legislator. Any regulation imposed must show a compelling governmental interest, a reason to make that regulation.

It should be narrowly tailored. It should restrict and regulate by the least restrictive means, not the most restrictive means. Meaning that people in Branson, Missouri, if they didn’t want to put a fire suppression system in their home, they would have to disclose to the guest using the home that, “There’s no fire suppression here. Great. Is that okay? We have an agreement. Let’s go ahead and rent to you.” It gets ridiculous sometimes because, in addition to a fire suppression system, sometimes the size of the main coming into the property has to even be increased in size.

You have public water access and service to your house, but yet the pipe isn’t as the vision diameter.

There are a lot of ways that a government can try to manipulate. That’s what I want to get to the bottom. In addition to anything that you’d like to say about short-term rentals, law, and how we can equip good entrepreneurs with the tools they need to defend their rights, how do we also recognize when malice is being presented for the purposes of one industry, say the hotel industry, versus the short term rental industry? We continue to learn from you here. What can investors learn to defend themselves?

In terms of recognizing malice, you can suspect malice and that certain regulations are being promoted for improper means. The improper means being to exclude competition from the existing economic and political powers. They have less competition. Proving it is an entirely different matter. Proving it could be much harder. The real challenge comes in and improving it. If you found a smoking gun somewhere and said, “Here’s the text, or email to the city council member talking about how they can shut down their competitors by imposing this regulation,” that would be wonderful to find.

I’ve never had that happen that we never found a smoking gun. You could only infer its existence. Sometimes I’ve attacked legislation or regulations by showing how they’re inherently anti-competitive. It doesn’t mean that the regulation goes away, but you might be able to win that one court case for your client, showing that the regulation’s inherently anti-competitive.

For example, we can talk about this case because it’s in the past. When one of our local counties decided to completely ban short-term rentals, this was many years ago. You were instrumental in the case. A number of investors got together and sued the county. What ended up happening was that the entire county’s zoning department was dismantled because you had shown that it wasn’t even properly established.

That was Stone County. That was quite gratifying. It happened in this way because, under the United States Constitution, Stone County has no inherent powers. The US Constitution doesn’t mention Stone County anywhere. Stone County only has any authority to act because the state of Missouri carved out part of its sovereignty and delegated that to the county. What Stone County had done is ignore both the substantive powers that have been granted to them and the procedures to exercise those powers. The County Commission in Stone County had invented its own system of land use controls. They weren’t alone in this.

Performance zoning.

It worked this way. Whatever you wanted to do with your land, you’d have to go into the county office and say, “I want to do this with my land.” If the county office deemed that you were simply continuing the same uses in the land, then you didn’t need a permit or anything else. You continued on. There were no criteria to determine whether you were going to change the use of the land. It was totally arbitrary.

Typically, if you were a relative of someone in the county government or a business associate of the county government, someone in county government, or lived in the neighborhood for a long time, you could go in and whatever you wanted to do was deemed not a change in use. It was deemed a continuation of the same existing uses, and you could keep doing whatever it was without a permit.

By contrast, if you were from out of the area, especially an educated and more successful person wanting to invest, then typically your project deemed a change in use no matter what it was. The counties had no record of historical uses and for determining when one use changed to another, even no categories of what different uses might be.

No records or poorly kept records.

No records of what uses had been. It was purely an arbitrary decision by unelected officials who happened to work in the planning and zoning office. That was true not just in one county but in several counties. What’s even better is suppose that the local officials said, “This is going to be a change of use,” then you submit an application form and an application fee. You go before an unelected body, the planning and zoning commission, and you say, “This is our plan.” They decide whether they like your plan or not. It doesn’t matter what it is. There are no criteria to determine whether they like it or not.

In some cases, even if there are criteria, they still may not like it.

Taney County, for example, had this score sheet where they would arbitrarily sign plus or minus points to your proposal. If you got a minus score, that didn’t mean it was voted down. If you got a plus score, it didn’t mean it was approved. You could get a very high plus score, meaning the county, by its own alleged criteria liked the project. They could still vote it down primarily if you were from out of the area or the neighbors objected.

If people show up with knives, pitchforks and protest your use, then you’re probably not going to happen.

If enough neighbors come out, you’re going down in flames. This is unconstitutional on many levels and inherently arbitrary. What I found very gratifying, instead of getting that case tried in a local court, I had that case transferred up to Franklin County, which is outside St. Louis. As soon as we got into Franklin County, the local government was dead in the water because no judge in a more sophisticated jurisdiction is going to tolerate that abuse of power.

It removes the opportunity for the local tribal government to continue to engage. You’re taking them to the principal’s office for the most part.

We’re going out to see talks to some adults. We’ve had a fight on the fight on the playground.

This needs to be a legal fight, not a political fight.

Fight up in St. Louis or Kansas City.

That was a good move. It’s well known in the area, which is why you get a lot of business, and people that don’t know should know. There should be songs around campfires for Tim Davis, who protects the people, but it is admirable. I know there are some cases we can’t talk about because they’re current. Let’s say that somebody lives in a city, rural or not, and there’s either a ban, a density restriction, or an aggressive permitting process being imposed. What’s the first step that somebody should take?

From my perspective, my first step is to see, “Does the local government have the authority to do this? If they claim they have the authority, where does that authority come from?

Where do they find that?

You could go and ask. If you get a cease and desist letter, some demand letter from your local government, fire district, sewer or water district, that letter had to come from somebody. You go find the person who sent you that letter and say, “What authority do you have to make this demand on me?” We had an interesting case in the city of Branson. The city of Branson had demanded that some of my clients do certain things. I went back to the city and said, “I understand what you’re asking of us, but where do you get the authority to make that demand?” We haven’t heard from them. That was a few years ago.

Maybe they’re looking it up. Maybe they know and they don’t want to tell you. Maybe they’re developing the suspense to make the story even better.

It would be nice to think that it was to add because of artistic flare on the government side.

It is Branson. We like art. That’s the first tactic that somebody can use, then what?

Try ignoring them. In some of my clients, I say, “The government sent us this nasty gram, this letter. Let’s ignore them and see what happens. Maybe they’ll do something or won’t do anything.”

In some cases, I’ve even seen regulations imposed that there’s absolutely no way a county could enforce them. They don’t have the budget, manpower, or ability. They typically leave it to the neighbors to enforce any regulations, which in turn perpetuates the tribal nature of the government because you have a neighbor that doesn’t like what you’re doing. I remember I went to a planning and zoning meeting. I was turning my home into a short-term rental.

Most of the neighborhoods showed up to oppose me, but the neighbors immediately right next to me showed up and said, “This guy takes great care of his property. Look what all he did to his property before he rented it out. He painted the property. He always keeps the grass mowed nicely. The shutters are painted. I saw him out there fixing the air conditioner.”

There are $200,000 cars in the driveway renting this property. It’s not people that are out trying to destroy my property. They said, “We don’t have a problem with it.” I ended up getting that. It’s amazing to me how not just neighborhoods but cities also will make fearful decisions. Why do you think fear is rampant?

It seems like in the political arena, fear is a great motivator. I don’t know why that is, but it seems to be. You think of how political campaigns come, “The general theme is a vote for me because my political opponent is going to harm your children, destroy your schools, destroy your neighborhood, or release criminals onto the street in large numbers.”

Take away Medicare.

I don’t know why fear seems to be a very effective motivator in the political arena. We’ve seen this many times. When planning and zoning decisions are being made and they’re being discussed, people from the local community come out and say, “If this project goes through, we’re going to be inundated with sex offenders, people drag racing in the streets, wild parties, and drug use.” None of it at all is realistic when you’re renting a luxury home for $1,000 a night.

Here’s a case in point. There’s a local subdivision that decided to change in mid-stride. This is Branson Creek. They were originally designed to be sold as short-term rentals. A large majority of people that live there don’t do that. They called the county and said, “By what authority do you have to do this?” The county didn’t even have the records that it had been approved as a division three short-term rental approved area. Because the county kept poor records, it worked against the short-term rental owners in that case. I showed up at the public hearing to defend their right to rent.

I went to the sheriff’s department and asked them, “Can you give me a report from this date to this date?” It was an eight-month period of the number of times that the sheriff had been called to this subdivision because of some type of disturbance. It was zero times. They were standing up there trying to say, “This was going to cause this horrible thing.” It never had.

In fact, what had happened was the one person who was a very persuasive person. That’s all it takes in a neighborhood to get everyone riled up, she was sitting at the pool and sixteen people walked up at one time. It was a family that had wanted to use the pool, but she didn’t have the pool to herself anymore. Yet she was retired. She had the means, the money, and the time on our hands to defend her opinions.

It ultimately didn’t work out, but the process changed. Rather than someone being able to do short-term rentals there, 30 people had to go through public hearings and special use permit processes to be able to get those out there. The county itself created more work for itself by keeping poor records. It was a mess. It left a bad taste in people’s mouths in the community about short-term rentals. Short-term rentals have such a horrible public relations campaign. There’s nobody out there talking about some of the benefits of the ancillary jobs that are created for single moms and local repair guys, the money that is injected into our community. There are some things that I do begin to have opinions about on the other side.

I do think affordable housing and second-home markets are an issue. I want to talk to you about that. I feel like, for the most part, a lot of investors have jumped into the short-term rental business because they want money, not because they want to be a good host. We’re going to see a little bit of change there. For the most part, the investors that I’ve worked with are average people. They’re not super wealthy.

They’re people who are trying to make something out of themselves and build a little bit of freedom because real estate is one of the only ways we have as middle or upper-middle-class people to be able to get financial freedom. It’s the only way that I know of other than some YouTube side hustle. It’s been great that you have been a champion for that middle-class person that is being abused by the government. What else did you want to talk about in terms of things that might help short-term rental?

The notes I have to pertain to if people are thinking about going into the short-term rental business, some of the risks that exist out there, and pitfalls.

Let’s talk about it.

Starting many years ago when the short-term rental industry began to take off in this area. I’m sure it existed in some form on the coasts and in bigger areas before us. Once Branson got in the game, people were buying existing homes and converting them to nightly rentals, converting the use. Maybe the home hasn’t changed that much, but the use of that home, instead of being a single-family home where people lived full-time, they would now be a single-family home where people would live for a shorter period.

Thirty days or less.

For the investor who’s thinking about, “That’s the home that I’m interested in buying,” you can make money off virtually any property as long as you know about the risks and the expenses that are going to be forthcoming upfront on the front end. For example, if you know you’re going to have to retrofit the house with the sprinkler system upfront, you’re going to have to upgrade the septic system, and you’re going to maybe have to increase the diameter of the water line coming to the house, if you know all of that before you buy the house, then that’s not a problem. You adjust for all of those things in the purchase price.

Put that in there in your pro forma.

Instead of offering $500,000 for the house, you can reasonably go to the seller and say, “I believe if your house had everything that I need to do, a nightly rental would be worth $500,000, but it doesn’t have everything we need. I’m going to have to retrofit it with the sprinkler system. That’s going to cost $35,000. I’m going to have to increase the diameter of the water line coming over to the house, which means putting in a new trench and a water pipe. That’s going to cost me $25,000. I’m going to have to upgrade the septic system and get a new high-tech septic system engineer. That’s going to cost me $40,000. Instead of 500,000, I’m willing to offer you $380,000.”

It’s a great strategy. In my experience, most of the time, people who have a property like that don’t even know that it’s zoned to be able to use for short-term rental use. They’re just selling it as residential. That’s how I’ve helped people get a ton of deals. In some cases, people have caught on and they’re like, “This is zoned short-term rental, I’m going to buy this and flip this,” that tactic is one that we’ve used successfully because what you described is a lot of money.

I know because I’ve done it. I bought a house over on Maddox. I put $80,000 into it. In addition to remodeling it for the retrofit of the sprinkler system, anytime you tear it into walls or anything, you’re going to find a 30% more budget than what you had planned. It costs me $80,000, but I still came out ahead because of the value. I turned around and started renting it. I sold it to an investor with bookings already in it. For them, it was great because they bought a turnkey property. What you’re talking about is an excellent strategy. That’s great advice for somebody that’s looking into that.

Buying existing homes and using them for nightly rental was a strategy that I’d say people were using a lot many years ago. Much of that inventory of vacant single-family homes is gone, at least in the Branson area. The nightly rentals that are coming online now are often new construction. There are some pitfalls, some advantages, and also some disadvantages with new construction. With new construction in advance, maybe you’re going to have to have a sprinkler system as part of the home, you’re going to have to have a certain septic system out back, you have to have a water line with a certain diameter that is coming, feeding into the home, or a tank of however many thousands of gallons, to operate a sprinkler system.

You know all of that in advance. Where I’ve seen people make the biggest blunders is two things. One is entering into cost-plus contracts. They meet a contractor who’s very personable. The contractor says, “I have the ability to build this new home that you want. I can build it with all the bells and whistles that you’d like. I’m willing to do it for a cost-plus contract.” People sign it. They think, “I like this contractor.” They never think about the fact that as soon as your signature goes on that document, the contractor now has the incentive to inflate the costs as much as possible.

I’ve had some contractors who had their parent contracting company, and then they created subsidiaries that would supply all the labor and materials, all owned by the same guy. These subsidiaries would artificially inflate all the monies that were spent on the project because the contractor was now getting to a cut twice. He got a cut, not only off the cost plus contract, but now he’s getting an extra cut off all the materials, labor, and equipment rentals that flow into this building because he set up this subsidiary.

Did you discover all this?

Yes.

That probably took quite a bit of investigation to figure all that out.

It took some. Beware of cost-plus contracts. There’s no need for a cost-plus contract if you’re building an active rental house because building a single-family home is such a standard type of construction. A contractor should know within a few thousand dollars upfront what it’s going to cost. The contractor can go to a lumber yard and get preset bids on all the lumber, electrical, and plumbing that’s going to go into it. You can get bids. You can lock in packages for the electrical.

 

CDRE 22 | STR State Statutes

 

You can lock into the lumber yard packages for the lumber and plumbing. As a contractor, you put up the first board. Before you hammer the first nail on the wall, you should be able to know pretty accurately what the materials are going to cost. If it’s your crew that’s doing it, you built $50,000 to $300,000 with equity before. You should know how much labor’s going to take. There’s no good reason that I can see for a cost-plus contract.

During COVID, it was a little crazy that people couldn’t get bids and honestly, their market was going crazy at that time. I was surprised at the contracts that people were signing because they wanted some inventory. Another thing that you taught me many years ago was the term intended to use and how important that is.

In the contracts that we use in short-term rentals, we always put the responsibility on the seller, especially if they’re advertising it as a short-term rental for them to prove that it can still be used as a short-term rental as a buyer and a buyer’s agent, it’s still our job to trust but verify. We do that process, we’re usually the source of the source, and we have that buyer go contact that county official or person to make sure that they can do short-term rentals there.

We like to put the responsibility on the seller if they are advertising it and selling it as that with fully furnished and all that. As it pertains to new construction, and I’ve seen this before, this has happened locally. A builder is building a property for a short-term rental, and then we find out it can’t be used as a short-term rental. On that contract, it needs to say that the builder is going to build it for that intended use.

It is going to meet whatever local codes to satisfy the requirements as a short-term rental.

We don’t want the builder to say, “I didn’t know you were going to use this as a short-term rental.” That’s a conversation that needs to be had up front. I’ve seen that happen in a negative way.

Something else I’ve run into is people hire a builder to construct a home for them and assume that everything’s going to go smoothly. You’re going to be disappointed. If you want the builder to put in a certain quality of finishes, cabinets, countertops, flooring, roofing material, or whatever, that needs to go into the specifications. The more detailed the architectural plans, the less margin there is for error and misunderstanding.

The more detailed the architectural plans, the less margin for error and misunderstanding. Click To Tweet

Good communication works in marriages and real estate contracts. What we’ve discovered is that we can sell anything that doesn’t exist as long as we have the consumer or the client. You pick the lot and the floor plan, and then you know what the standard features are. We make everybody sign off on that, “Here’s the floor plan.”

Before you break ground, we want the builder and the buyers to sign off on that floor plan. That’s how we know that we’re going to break ground. We have our standard features list. We know exactly what comes standard with the home, and we know what that buyer’s selected upgrades are. With those documents, you can start this process. It’s amazing to me how many people don’t.

Don’t go into that level of detail. They tell the builder, “Build me a home of 5,000 square feet. Here’s a rough sketch that I put together.”

“Here’s a standard realtor contract that was created for an existing property.” It’s not built those timelines for a home inspection, loan acceptance, and appraisal. Those are way out of whack. It’s the Wild West sometimes, but thanks for your advice. You got any other nuggets for an investor that wants to purchase real estate and use it for short-term rental and new construction?

At all possible, use an escrow company. That’s certainly an advantage.

Is it for construction disbursements or for closing in general?

I use it for both. I’ve seen many cases where people have been ripped off to the tune of hundreds of thousands of dollars because they went to a builder and they said, “Build something for me.” The builder says, “I’ll need X number of dollars upfront.” They pay the money over to the builder before anything’s constructed or any materials are bought, and the builder disappears. Hundreds of thousands of dollars or probably millions of dollars have been lost in this area through people naïvely handing over large sums of money to builders with no accountability, no clear architectural plans, and maybe no written contract. Certainly, no materials haven’t been bought. You should never do that.

This is probably when you get involved in someone’s life at this point.

After the money’s gone, then they call me. I say, “What did you do?” They explained to me what had happened. I say, “In the future if we do this again, let’s use an escrow company.” Once we have a good contract signed with the builder, we’ll put money into escrow. As the builder completes different phases of the project, he can draw money out of escrow in exchange for everyone signing lien waivers saying that they’ve been paid in full for that stage of the project.

That’s the only thing I liked about the past four years where it was truly a seller’s market. The builders were forcing buyers to get their own construction loans and pay the interest on the build. The only thing I liked about that was that the buyer had a lot of control over when those draws took place. In some cases, the builder didn’t meet their obligations. They didn’t get paid, which was a great incentive for them to keep moving forward.

That’s good advice. Let me ask you this. If somebody is in a situation where they’re getting ready to have to rally some of their neighbors to defend their rights to do a short-term rental, whether it’s at a city council meeting or a county planning and zoning meeting, would you recommend that they get an attorney right away or try without an attorney?

It depends on a case-by-case basis.

What’s a case where you think we’d need to get an attorney involved right away?

If you’ve gotten pushback from the county itself on whatever your project is, it is probably better to get an attorney involved at that point. If the county hasn’t shown a negative reaction to you, then maybe it’s okay to go in, just you and your neighbors to say, “We like this idea.” I’ve seen plenty of successful applications where it was the property owner and some of their neighbors or some business people from the community going in and support of a project. Plenty of times that that’s worked successfully without an attorney involved.

If you've gotten pushback on your project from the county, you better get an attorney involved. Click To Tweet

If somebody wanted to get an attorney, what questions would you recommend that they ask that attorney to ensure that they know their stuff?

You could ask them how many planning and zoning projects they handle during the year and how much construction litigation they handle. If they do a fair chunk, then you should be okay.

How do we know that they know the state statutes as you do?

That’s one of the problems. It’s very difficult for a layperson to evaluate the expertise of an attorney whom they might hire.

I’ve learned a lot about the quality of different attorneys, not just in my experience with them, but with friends that have had issues even with family law. A good attorney is a great friend, which is why I’ve always appreciated you. Regardless of what I do or what attorney team I’ve got, I always like to keep you close because I feel like not only do you understand the law better than most people I’ve ever met, but I trust you. I’ll have to even say this about attorneys.

Sometimes realtors are the same way. People think we grow up with moss on our skin that we have to scrub off because we’re dirty, greasy, and slimy. Why I became a real estate agent was to prove that wrong. I had this conversation with somebody. They said, “Real estate agents.” He was an investor and he’s like, “I’ve never met a real estate agent that was worth anything because I can go out and find properties myself.”

I’ve heard that multiple times from investors. I said, “You’ve never met a real estate agent that I have trained because that’s why I get up out of bed every day. If you did have a real estate agent like the ones we train, your net worth would be two times what it is.” I check and challenge that attitude. Go find a real estate agent that’s going to be on your power team.

Everybody needs a great attorney like you in their life because I don’t know the law as you do. I always appreciate your expertise and involvement. Even sometimes, when I’m talking to an attorney, I still want to talk to you because I’m like, “Is this right? Is this person trying to get fees? Is this legit?” Big Brother Tim has been involved in a lot of stuff here. I appreciate that about you. That’s not as easy to get because I don’t trust a lot of people. We’ve been working for the same customer in this town for many years. I respect what you do for people. Do you want to find somebody that specializes in government law or real estate law or both?

Sometimes, maybe it depends on the project, but you certainly need and it’s helpful to have someone who does a lot of litigation. Time in front of a judge does make a difference. The experience of going through one case after another after another.

Why does that matter?

From law school, I came to understand the basics of contract and property, understanding the nuts and bolts of how the law functions. That comes from experience.

What’s next for you or what is exciting for you?

I don’t know that I’m going to do no much different. I continue to practice law here in this local area. I make sure that I take enough breaks so I don’t get burned out. It’s easy for attorneys to get burned out.

How come?

Maybe it is because there are a lot of conflicts inherent to what we do, stress, expectations, and demands from clients. A high percentage of attorneys get burned out and drop out of practicing law. I’ve been able to avoid that in part because I make sure I take breaks, leave the country and go off to Europe, the Middle East, Asia, or North Africa every now and then for a few days and then come back.

Enjoy some architecture. I’ve found the same to be true with real estate agents. Primarily most real estate agents were like school teachers that would quit and then get real estate licenses in their twilight years to make some money and enjoy retirement and still be social around people. I was 30 years old when I got my real estate license. I had to wear a tie and fool people into thinking I was professional until I got to the point where I knew what I was talking about.

It was always fascinating to me how the burnout rate for real estate agents. Here I am, many years into the business. I happened to be a red-line guy. Anyway, I happened to love passionate conversations. That’s kept me going. It’s good for my wife. She likes a passionate guy. Maybe I’ll get a chance to join you on one of your world trips.

That would be excellent.

That’d be great. Thank you so much for being here and for your expertise. I appreciate what you do for our county and for investors.

Thanks for having me.

My pleasure.

 

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About Tim Davis

CDRE 22 | STR State StatutesTim Davis earned his PhD. in economics from the University of Toronto in 1998. His dissertation received the prestigious Joseph Dorfman Prize, awarded annually to the best doctoral dissertation worldwide in the history of economics. Tim is the author of a critically acclaimed book on monetary and fiscal policy: “Ricardo’s Macroeconomics: Money, Trade Cycles & Growth”. Cambridge University Press publishes Tim’s research in Europe and the Americas.

In 2001, Tim received his law degree from Oxford University. He was admitted to the New York Bar and joined a corporate law firm on Park Avenue. In 2004, Tim returned to his home town—Branson, Missouri—and began a law practice that emphasizes commercial litigation and government law. He worked as the City Attorney for Branson, overseeing the City’s affairs until running for United States Congress for Missouri’s 7th District in 2010.