As home sales continue at unprecedented rates and housing inventories fall, the Outer Banks may be entering uncharted territory. According to the Outer Banks Association of Realtors, every community on the Outer Banks (with the exception of Colington and Ocracoke) saw double-digit gains over 2019 in the number of properties sold – with some of these transactions removing rental properties from the market as new owners move in themselves.
Property management companies always lose some homes from their inventory for a number of reasons, but the trend is particularly pronounced this year. The bigger question is whether this boom portends a significant and long-term decrease in rental properties and what the implications could be for the financial health of the area’s public and private sectors.
Among those who can attest to the current shift from rental to owner-occupied housing are contractors. “The majority of my work right now is not building rental homes or remodeling a rental home for the next season or building a rental home for the next season,” Paul Henriques, President of Premier Contracting, said. “It’s for people who are moving here. They’re wanting to convert rentals to move here and live here.”
What no one can say with certainty is whether the trend of the past year will continue into the future.
Lee Nettles, Executive Director of the Outer Banks Visitors Bureau (OBVB), sees the pattern as part of a natural cycle in the local housing market. “I’m not as concerned about the ebb and flow on the inventory,” he said. “I’m not sounding an alarm with some of the shifts in inventory that we’re seeing.”
CEO of SAGA Realty and Construction Sumit Gupta points out that the Outer Banks is somewhat of an anomaly among tourist-driven economies. “IF you look at a lot of markets, [it is] maybe a 50/50 ratio of second homes to just truly rental vacation rental homes,” he said, adding that on the Outer Banks, “the overwhelming majority sellers, 80%, are still renting it out. I think that’s just growing a little bit closer and being more consistent with other areas.”
“I think that if more of those [rentals] start being true second homes, it takes away rental inventory for the vacationer who was coming here and spending money at the restaurants and on occupancy tax. I do see that as something that’s going to happen,” he said. “But I don’t think we are maxed out on our capacity.”
The potential impact on revenues
Because the tax that is collected from rentals is a significant source of funding for local governments, shrinking seasonal rentals could impact their revenues. In Dare County it is a shared revenue, with two-thirds of the funds allocated to the incorporated towns and the balance available to the county.
There are restrictions on how the money can be used. When authorized in 1985, the law mandated that it be used for tourist-related activities, although the range of tourist-related activities is fairly broad. Dare County is using a portion of its occupancy tax for beach nourishment, County Manager Bobby Outten explained: “Occupancy tax has purposes. We can’t just go and spend it on anything we want. It pays all our beach nourishment costs, for example.”
Occupancy tax revenue is a function of rental income, not how many people visit. So It is possible to have fewer visitors, but generate higher tax revenue, something Nettles points to in discussing rental pricing.
“Supply and demand is going to also influence the prices and revenue collections. I think it’ll be interesting to watch, and certainly it’s been a crazy couple of years. But I think we’re in a good position,” he said.
In the meantime, the housing sales boom has had another fiscal impact on the county. When a property in either Currituck or Dare County is sold, a 1% land transfer tax is assessed. With sales at record levels, the counties are sitting on a lot of money, although how the money can be used is also restricted.
“The land transfer tax funds go into our Capital Improvement Fund. And our capital improvement fund is the funding source for our Capital Improvement Plan,” Outten notes.
And those funds, he says, have already been allocated.
“All these things that we’re doing now, are things that over the years we had planned in the Capital Improvement Plan. The new COA building, the animal shelter, the Health and Human Services Building, are all in our capital improvement plan,” he said.
The timing on projects can change, although that decision is made by the county commissioners. “The board votes every year on the capital improvement plan for the next five years and so it’s updated every year. As revenues go up or go down, it affects the timing of when capital improvements get done…” Outten noted.
New players in the OBX rental game
Airbnb and other rental properties that are not a part of property management companies have increasingly become a significant factor in local vacation rentals. Beginning last year, the Visitors Bureau began a separate listing for rental revenue that did not come from property management companies.
In reviewing the Visitors Bureau’s Gross Occupancy by Class report, it is apparent that the newer ways of renting homes have become a significant part of the Outer Banks market. But, as Nettles says, it is unclear just how significant that impact really is.
“I think it’s definitely fair to say that there are a lot of listings local listings on Airbnb,” he said. “But the thing that muddies the waters a lot is quite a few of those are sort of double listings or listings that also are represented through professional property management companies. It’s hard to kind of isolate,” he said.
One thing Nettles is confident about is that the county is collecting its fair share of occupancy tax from the Airbnb rentals.
“Airbnb remits on behalf of the owner. They collect the occupancy tax and stroke a check to the county on behalf of those owners.” he said. “Some of the other rent-by-owner or vacation rental sites put that burden on the homeowner to remit occupancy tax. In our conversations with the tax office they feel confident, they’re getting the vast majority of those collections.”