Doesn't sound like an "upgrade" to me, and indeed I wasn't thinking of a downgrade to a cheap motel. There are obviously several schemes/incentives that can be set up to make sure the traveler will get "similar or better". For example, if the traveler doesn't agree with the suggested alternative accommodation the host will pay back the original sum + X which will amount to a stay in a decent business-grade hotel in the area, or something similar. Some schemes will probably leak one way or another but they should all favour the traveler and make the host responsible since the cancellation did originate at host end after all.

Oh, and receive kickbacks from the hotel. Don't forget that part.

Hell, just be the hotel. If the other listing is fake anyways...

Or better make your business model to rely on all of the above.

Oooh, good call!

Obviously you'd have to issue a full refund, which solves the loophole.