Aribnb's 'party house' problem could spoil its public listing. Here's why its new rules to stop the rowdy blowouts might not even work.

Stephen Lam/Reuters

Brian Chesky, co-founder of Airbnb.

• Airbnb CEO Brian Chesky announced new trust and safety procedures for the home rental startup on Wednesday, including host and guest verification and better guest support.
• The policy updates come days after Airbnb announced it would review and remove all listings on its home rental site that were "party houses" designed for one-night large gatherings after a fatal shooting at a rental property in Orinda, California, on October 31.
• These policy changes don't address the underlying issues with Airbnb's business model, Mike Luxe, president of American Family Voices and anti-Airbnb advocate, told Business Insider.
• Some experts said they were encouraged by Chesky's quick action and policy announcement, but that it casts doubt on whether the company is fully prepared to understand and respond to other liability issues it may face as a public company.
• Others pointed to Airbnb's poor track record of working with local governments and said that it shouldn't take a homicide and ensuing news cycle to act responsibly.
• Click here for more BI Prime stories.

Add one more "risk factor" to the upcoming prospectus Airbnb will release when it makes its stock market debut next year: Party houses.

The home-sharing service has built a booming business by making it easy for anyone to rent their homes to vacationers or business travellers looking for an alternative to a hotel. But the instant and easy access to homes has also caught the notice of teens and others looking for place to throw wild parties.

Complimentary Tech Event

Transform talent with learning that works

Capability development is critical for businesses who want to push the envelope of innovation.Discover how business leaders are strategizing around building talent capabilities and empowering employee transformation.Know More

Last month, one of these party house rentals turned tragic when a shooting at an Orinda, Calif home left five people dead. As many as 100 people were at the house for a Halloween party, despite an explicit ban by the homeowner on renting the home for parties, according to the Associated Press.

The incident set off a furor and Airbnb CEO Brian Chesky has vowed to crack down on the problem, unveiling new verification and support policies Wednesday that he said would stop "bad actors" from abusing the trust the business has established with users.

But the policy changes are largely reactionary, coming after numerous problems at Airbnb party houses over the years. And many people that Business Insider spoke to were skeptical that the new rules would do much to actually stop Airbnb party houses.

"I think it's great that Airbnb is taking some action to rein in the most extreme cases of so-called party houses. But it should not have taken a multiple homicide incident for that to happen," University of Texas assistant professor Jake Wegmann told Business Insider. Wegmann's research focuses on the impact of short-term rentals on local real estate, and he published one of the landmark studies in 2016 that found the existence of Airbnb in San Francisco increased market rents.

As Airbnb, which has been valued as high as $31 billion by private investors, moves closer to a public listing, its party problem has become a high-priority.

Verification, refunds, and high-risk reservations

The new rules laid out by Chesky involve four key changes:

• Verification of all 7 million Airbnb listings to ensure the site listing is an accurate representation of the rental.
• Rebooking or refunding guests who book locations that are not up to the new verification standards.
• A 24/7 hotline and prominent customer support phone number for guests and neighbors near Airbnb listings.
• Screening of reservations that are deemed "high-risk" to deter unauthorized parties.

In addition, Airbnb said it has hired two former law enforcement officials as advisors to help the company combat the range of abuses and problems that can occur with short-term home rentals.

According to American Family Voices president Mike Luxe, the home rental startup rewards absentee property owners that have limited interest in screening guests. American Family Voices sponsored the anti-Airbnb advocacy group Airbnb Watch, which chronicles Airbnb's negative impacts on local neighborhoods and real estate.

"I don't exactly understand honestly what they are doing with that rule," Luxe said. "They are making a lot of noise about it, but I don't know how they are going to enforce it."

A homeowner renting a basement out on the weekends is incentivized to screen potential guests, Luxe explained, but a real estate "speculator" with multiple units is incentivized to get as many guests in each unit as possible to maximize profits. This is what leads to so-called party houses, and until hosts feel the pressure from Airbnb, they will continue to operate in their own interests, Luxe said.

"I do know that ultimately the problem isn't solved unless you stop multi-unit operators," Luxe said. "That's what will stop this wild party house problem. They need to monitor hosts and guests better, and they should take more responsibility when something goes wrong."

In the case of the Orinda house, it's unclear whether the new policies would have stopped the unauthorized party. According to the Associated Press, the unit had been rented by a woman who claimed her family members were concerned about health effects of the nearby wildfires in Sonoma County. The owner, Michael Wang, had received multiple citations from city officials for exceeding the home's capacity in the past according to The San Francisco Chronicle, but it's not clear whether Wang owned multiple rentals in California's Bay Area.

According to Luxe's group, there have been more than 30 news reports about violent incidents at Airbnb parties in recent months, including shootings at similar "party houses" in St. Paul, Minn., and Los Angeles, Calif. and other cities.

Just weeks before the Orinda incident, a woman was shot in the arm in Arizona at an Airbnb house party, according to the Phoenix Fox television station. In May, an 18-year old was shot at a party in a Seattle home that had been rented on Airbnb, according to local media.

The Orinda Police Department couldn't comment on the specifics of the case as the search for the shooter is still ongoing. Airbnb has a contentious relationship with its hometown, inspiring legislation from San Francisco Supervisors Aaron Peskin and David Campos to fine the company $1,000 each day for unregistered listings. The company settled with the city in 2017 after a lengthy public fight to repeal the regulation.

"Three years ago, we said the law being passed, which was written by Airbnb, won't work because there was no skin in the game in terms of enforcement," Campos told the New York Times in 2017. of this city's relationship to Airbnb.

Going public in the face of local scrutiny

Airbnb has clashed with local governments before, and has continuously fought local legislation that sought to limit the company's influence or applied short-term rental restrictions and taxes at city or county levels. On Tuesday, the company suffered a stinging defeat in New Jersey as voters overwhelmingly approved stricter regulations for short-term rentals, legislation that Airbnb publicly opposed, according to the New York Times.

The company's relationship with local governments will be critical as Airbnb tries to sell itself to public investors. Airbnb has said it plans to list its shares on the stock market by 2020, either through a traditional IPO or direct listing.

At a time when other richly valued startups like Uber and Lyft have struggled in the public markets, Airbnb will face significant scrutiny around its business prospects and the various risks it faces.

"Surely this casts light on the need by potential investors to fully understand what, if any, liability issues this or any other 'bad behavior' on the part of renters raises for the company," IPO consultant and financial advisor Lise Buyer told Business Insider.

For Luxe, the Airbnb critic, it comes down to the company taking responsibility.

"If you put up a mega-platform like this that allows people to do business in this way, you absolutely have to take responsibility as a company," Luxe told Business Insider. "You can't let pure libertarianism run amok. That can't be the way society operates."

• Read more about startups and IPOs:
• Silicon Valley's founder-led startups have lost their shine with IPO investors. But the obsession with direct listings won't fix the bigger problem.
• This is going to be a record year for $100 million-plus startup investment deals - and it has the unexpected side effect of forcing startups to grow up way faster
• Austin Ventures' $900 million VC fund was supposed to make the city the next startup hub. But it wasn't until the fund folded that Austin's tech scene flourished.