Big DVC changes

[acesneights]

That ignores the topic which is whether to spend $15PP for something you won't use in your lifetime. You're buying a 15 year extension for your grandchildren to stay at a 50 year old resort.

Stan

 

[Seth Nock]

I did not realize this post was here and posted details of the meeting on the Hotel points board. But now I have an interesting question. How will this extension effect the resale market? After Feb 29, 2008, there will be a 2 Old Key West products on the resale Market, 1 ending in 2042 and another ending in 2057. If buying resale, which would people more likely buy? What would the price difference be? For argument sake, lets take the current resale prices of Saratoga Springs @ $81/point, Old Key West @ $69/point, Animal Kingdom @ 90/point, Beach Club @ $89/ point, Boardwalk @ $80/ point, Wilderness @ $78/ point Hilton Head @ $65/ point and Vero @ $60/ point. These are pretty much accurate based on a price that should pass right of first refusal for an average (not banked point) contract. I know most people want to quote different (higher) prices, but please use these numbers for figuring, as these are pretty much accurate. The current difference between Old Key West and Saratoga Springs 12 year difference on ownership is about $12 or the same $1 / point that Disney is asking for the extension.

 

[BocaBum99]

If it were a free and open market, then the value of the 15 year extension would be equal to $12 given your example.

The issue is that Disney can maniupulate the market very easily to change these ratios.

One person told me that difference in their analysis was $8/point. You say it is $12.

Disney can easily make it $17 by NOT exercising ROFR on OKW 2042 inventory for 6 months while exercising SSR.

This really does feel like an anti-trust issue. Any lawyers in the house?

 

[Seth Nock]

Saratoga Springs expires in 2054; Old Key West will expire in 2057.

 

[Steamboat Bill]

Saratoga Springs expires in 2054; Old Key West will expire in 2057.

I think MOST of us will be in the big "Magic Kingdom" in the sky by 2054....if you know what I mean.

 

[grammy1pammy]

It's not a scientific survey, but on the Disboards, a poll amongst OKW owners shows that most won't be buying the extension. Many cite their age, lack of interest on the part of heirs, not wishing to burden the next generation with dues, etc. as reasons why they'll eventually sell some or all of their points.

IMO, DVC (and other timeshares) are bought similarly to a first house: it's a "forever" thing at the time of purchase . Yet how many timeshare owners are still in their first house? And like many houses, where and what you've bought will determine whether or not it was an "investment", or just someplace to enjoy while you've lived there.

 

[ladycody]

I tend to agree that the extension seems a questionable value.

Having said that...with regard to a regular purchase...I applaud the quote below.

You see, everyone forgets to subtract the hotel costs from that pile of money just sitting there collecting interest.

Too many times I see the time value of money touted as a reason NOT to buy a TS...but in reality, that argument is only valid if one is willing to stay home and spend nothing on travel.... which is simply not an option for those of us who want to travel and enjoy life now. The growth of money is negated by money spent (in ever increasing amounts) unless there is no money spent...and I thank you for pointing that out.

 

[Seth Nock]

Maybe I should open a new post, but I am wondering how this will effect resale. Someone buying in the next 10 years, would they buy resale ending in 2042 for $69/ point, resale ending 2057 for $84/ point, developer ending 2057 for $96/ point or Saratoga resale for $81/ point ending 2054 or Animal Kingdom for about $90 ending 2057. I am trying to figure out what to advise my owners when they ask me if they should extend.

 

[BocaBum99]

For Disney owners, ignorance is bliss. If you love it enough, price doesn't matter.

To me, Disney has given owners a bite out of the forbidden fruit. They are giving them just enough knowledge to where their fundamental beliefs about the club are being questioned. Some will see it as it is. Some will keep their head in the sand. Some will continue to be oblivious.

The real issue is that most people do not know how to determine the value of what they own. So, they leave themselves open to being bamboozled.

I believe what Disney hoped is that their owners would not view this extension rationally. They would just take it and do a straight line valuation of the points. $15/point is great when you compare it to $70/point. Wow, you get 15 more years when there is really only 35 years left. 15/70 = .21 whereas 15/35 = .42. Wow, I am getting way more years than I am paying.

Disney owners should not be thinking about the end date of the RTU being so far out that it is virtually infinite and doesn't matter. I know that's how many people think about it. What they should acknowledge is that an extension of 15 years adds value to their current ownership. They should do it if it adds more value than it costs. They should avoid it when the cost is more than it adds. It's really as simple as that. Trouble is that only a small percentage of people know how to do the math to determine that.

 

[JimC]

Maybe I should open a new post, but I am wondering how this will effect resale. Someone buying in the next 10 years, would they buy resale ending in 2042 for $69/ point, resale ending 2057 for $84/ point, developer ending 2057 for $96/ point or Saratoga resale for $81/ point ending 2054 or Animal Kingdom for about $90 ending 2057. I am trying to figure out what to advise my owners when they ask me if they should extend.

Good point Seth. I believe that the DVC resale market is unique and really can not be easily compared to other timeshare markets.

Say in ten years I want to sell a 300 point contract. My guess when I bought into the program in 2002 was that the long slow decline in pricing on a 2042 contract would begin in 2008. (i.e. that this is the peak of the market for 2042 contract value). It is also possible that DVC thinks the same thing and this offer is to prevent that from happening.

So my guess is that my 300 point contract will net after commission around $10,300 in ten years. I am being conservative because my guess in 2002 for value for the contract today had been around $70 per point and it appears that contracts are going for a few bucks more. But let's leave that being as good a guess as any on what might have happened with no news from Disney on extensions. I have used a 90 day expected cycle from list to closing -- assuming no exigent circumstances like open reservations - as my target.

So now we have a new variable -- an extension. So let's say the discounted $15 price is offered. Then it takes $4,500 for me to add on the 15 years. So my question becomes how does the new variable affect the $10,300 that I anticipated might be available from my contract then. You could do this with any time-frame to sell -- now, six months, a year, two years, whatever. Will it be worth much less? Will it take 180 days or longer to move at any price? If I take the extension is it to preserve value or is it throwing money away?

I have also modeled the extension on a standalone basis. I did this primarily to see what investment now would make sense on a buy and use basis. Not that I have a prayer of doing this, but for a younger owner this might be a practical consideration. So I projected future dues and hotel rate increases and factored in the opportunity cost of the money and came up with a $15 made sense and $25 was not worth it decision, but it was close to the indifference price of $22. So I thought maybe I was close to the analysis DVC did in pricing this. Naturally the key elements are the assumptions -- what hotel rates formed the base (moderate standard rooms with a mixed value and regular season usage with a 17.5% average discount off rack rates), what inflationary factor did I use for dues (3.8%) and what inflationary factor did I use for hotel rates (4.2%) and what opportunity cost (6.6%). Pick different assumptions and you get different answers. But 50 year projections are wildly suspect anyway.

And I could project a likely value of the extension on a standalone basis. But what happens when the two combine and we have a mix of 2042 and 2057 contracts at the same resort? I am not accepting, yet, the validity of looking at SSR or AKV because they have longer terms. 2054 for SSR and 2057 for AKV. I don't consider them comparable resorts because both are still under construction and have vastly different themes, styles and locations.

I think this comes down to a SWAG and there may be no amount of analysis that is likely to improve ones decision-making on this. But at least we get to have some fun discussing it all.

 

[OnMedic]

Less substantiated rumors say that Disney plans a DVC property in Hawaii.

Now were talking! Where do I sign?

 

[acesneights]

Good point Seth. I believe that the DVC resale market is unique and really can not be easily compared to other timeshare markets.

Say in ten years I want to sell a 300 point contract. My guess when I bought into the program in 2002 was that the long slow decline in pricing on a 2042 contract would begin in 2008. (i.e. that this is the peak of the market for 2042 contract value). It is also possible that DVC thinks the same thing and this offer is to prevent that from happening.

So my guess is that my 300 point contract will net after commission around $10,300 in ten years. I am being conservative because my guess in 2002 for value for the contract today had been around $70 per point and it appears that contracts are going for a few bucks more. But let's leave that being as good a guess as any on what might have happened with no news from Disney on extensions. I have used a 90 day expected cycle from list to closing -- assuming no exigent circumstances like open reservations - as my target.

So now we have a new variable -- an extension. So let's say the discounted $15 price is offered. Then it takes $4,500 for me to add on the 15 years. So my question becomes how does the new variable affect the $10,300 that I anticipated might be available from my contract then. You could do this with any time-frame to sell -- now, six months, a year, two years, whatever. Will it be worth much less? Will it take 180 days or longer to move at any price? If I take the extension is it to preserve value or is it throwing money away?

I have also modeled the extension on a standalone basis. I did this primarily to see what investment now would make sense on a buy and use basis. Not that I have a prayer of doing this, but for a younger owner this might be a practical consideration. So I projected future dues and hotel rate increases and factored in the opportunity cost of the money and came up with a $15 made sense and $25 was not worth it decision, but it was close to the indifference price of $22. So I thought maybe I was close to the analysis DVC did in pricing this. Naturally the key elements are the assumptions -- what hotel rates formed the base (moderate standard rooms with a mixed value and regular season usage with a 17.5% average discount off rack rates), what inflationary factor did I use for dues (3.8%) and what inflationary factor did I use for hotel rates (4.2%) and what opportunity cost (6.6%). Pick different assumptions and you get different answers. But 50 year projections are wildly suspect anyway.

And I could project a likely value of the extension on a standalone basis. But what happens when the two combine and we have a mix of 2042 and 2057 contracts at the same resort? I am not accepting, yet, the validity of looking at SSR or AKV because they have longer terms. 2054 for SSR and 2057 for AKV. I don't consider them comparable resorts because both are still under construction and have vastly different themes, styles and locations.

I think this comes down to a SWAG and there may be no amount of analysis that is likely to improve ones decision-making on this. But at least we get to have some fun discussing it all.

300 points will net $10,300 in 10 years or $42 a point, sounds wrong to me.

Stan

 

[FLYNZ4]

I think that Seth is on target wrt resale prices. Below is a post that I made on Disboards yesterday in response to a poll of OKW owners asking if they would extend their contracts. The vast majority seem to be saying NO they will not, and the predominate reason seems to be that they feel they will be dead in 2042.

Personally... I think this event marks DVC stopping the artificial price increase because of their ROFR. It seems to me that those who extend their contracts will be able to continue to enjoy riding the ROFR "bubble"... and those who do not extend will see their value drop rapidly.

I think that owners of DVC are particularly sensitive to applying value not only to their own use... but also to passing this on to their children. No company is probably better at marketing to parents than Disney. I do NOT think the critical question will be "How old will I be in 2042"? Instead... I think the critical question is "how old will the person who buys my contract (or how old will their children be)... in 2042. My personal belief is that in a few more years... when DVC has only 25 years left... the vast majority of potential purchasers will view 2042 "too short" wrt their own mortality.

Anyway... the post below is copied from what I wrote on DisBoards in response to the poll.

/Jim
----------------------------------------------------------------------

I voted "other" because I purchased SSR... and hence none of the options pertain to my situation. I purchased SSR primarily because of the longer contract life.

I have also been predicting that contract extensions would occur... and the vast majority of you have been saying that I am wrong. To me it was always obvious that this would occur... the only variable was when DVC would offer this.

I personally think that the predominate reasoning of --- "I will be pushing up daisies in 2042" is based on emotion rather than analysis. None of us know for sure what the financial results will be... but I think that it is highly likely that your asset will be worth more than the "extension fee" if you decide to extend... as compared to an un-extended contract.

I also realize that most are feeling --- "I did not buy this as an investment". Once again... I personally feel this rationale is flawed. Regardless of why you purchased DVC... it is an asset that you own... and it is to your (and your heirs) benefit to have that asset be worth as much as possible... regardless if you plan to sell or not. You never know what your situation will be... so why do you want to have something that is worth less?

I believe that the reason that an extended contract will be worth more than one expiring in 2042 has little (or nothing) to do with the value of your ownership actually increasing in value. However... I do believe that all contracts that are not extended will decline in price. Slowly at first and then accelerating as the number of years decrease. There are currently about 35 years left in the current contracts. In 10 short years that will be down to 25 years. My belief is that anyone wishing to purchase a DVC contract at that time will find such a contract very unfavorable... because most of us view our mortality... and that of our children to be longer than that. Yes... us old folks will die off... but anyone interested in purchasing our memberships are likely to view our contacts as "damaged goods".

The reason that I always thought that DVC would offer these extensions is because it virtually allows them to "print money". The executives making this decision now will get credit for generating revenue... yet they will be long gone in 35 years when the contract extensions kick in. The other reason that I felt it would happen is because it has been obvious that the ROFR cannot continue to artificially keep resale prices high indefinitely. Hence... I suspect that DVC will pull the plug on ROFR at some point allowing resale prices to plummet. It will be easy to market against resale product once the useful life of the contract gets lower... IE: my 25 year example above. If you don't think it will happen at 25 years... then what about 20... or 15? How many of you would have honestly spent $20K (or whatever you paid) for a membership that would not outlive your expected lifespan? Furthermore, how many of you considered your children when deciding to purchase DVC. I suspect the majority of you did... afterall... Disney is marketed very effectively to trigger your parental needs to provide for your children.

I have no idea if everything will pan out exactly as I predict... in fact, I am sure that it will not. However, I am relatively sure that at the macro level... my analysis is fairly accurate. To believe otherwise would indicate that Disney does not understand effective marketing.

/Jim

 

[Seth Nock]

I think that Seth is on target wrt resale prices. Below is a post that I made on Disboards yesterday in response to a poll of OKW owners asking if they would extend their contracts. The vast majority seem to be saying NO they will not, and the predominate reason seems to be that they feel they will be dead in 2042.

Personally... I think this event marks DVC stopping the artificial price increase because of their ROFR. It seems to me that those who extend their contracts will be able to continue to enjoy riding the ROFR "bubble"... and those who do not extend will see their value drop rapidly.

I think that owners of DVC are particularly sensitive to applying value not only to their own use... but also to passing this on to their children. No company is probably better at marketing to parents than Disney. I do NOT think the critical question will be "How old will I be in 2042"? Instead... I think the critical question is "how old will the person who buys my contract (or how old will their children be)... in 2042. My personal belief is that in a few more years... when DVC has only 25 years left... the vast majority of potential purchasers will view 2042 "too short" wrt their own mortality.

Anyway... the post below is copied from what I wrote on DisBoards in response to the poll.

/Jim
----------------------------------------------------------------------


/Jim

I have discussed the ROFR alot with my buyers as well. For the most part, we came up with Disney VERY actively buying back the 2042 expiration date units. Right now they seem to be buying most units selling for about $65/point or less. Let's guess that they will continue to buy units to resell them for the new price of $96/point. Would it make more sense for them to buy the 2042 units $65/ point, resell them @ $96/ point and show a $31/ point "profit" or buy the 2057 units @ $80/ point and show a $16/ point "profit". They are not worried about showing their stockholders profits 35 years from now. They want to show their stockholders profits right now. My guess is they are more likely to exercise on the cheaper units.

 

[Seth Nock]

300 points will net $10,300 in 10 years or $42 a point, sounds wrong to me.

Stan

My guess would be about $54/ point - 10% commission netting $48.6/point, vs $73/point - 10% commission = $66/point. However, if these are indeed the #s, then the the extension would not make sense. What does everyone else think?


Please use the figures in my example as base figures, as they are accurate based on the information I tend to see and I have been involved in brokering about 400 DVC contracts in the past 12 months.

 

[JimC]

300 points will net $10,300 in 10 years or $42 a point, sounds wrong to me.

Stan

Could very well be. That is based on a model I developed in 2002 that I admit projected a value for 2007 that is slightly lower than what it is today.

 

[FLYNZ4]

I have discussed the ROFR alto with my buyers as well. For the most part, we came up with Disney VERY actively buying back the 2042 expiration date units. Right now they seem to be buying most units selling for about $65/point or less. Let's guess that they will continue to buy units to resell them for the new price of $96/point. Would it make more sense for them to buy the 2042 units $65/ point, resell them @ $96/ point and show a $31/ point "profit" or buy the 2057 units @ $80/ point and show a $16/ point "profit". They are not worried about showing their stockholders profits 35 years from now. They want to show their stockholders profits right now. My guess is they are more likely to exercise on the cheaper units.

Seth,

It seems to me that the primary reason DVC exercises ROFR is to prevent the resale price from falling... so that it does not impact their primary business... which is to sell new units which probably costs them $26/point. In other words... buying and selling resales is a cost of doing business.

They need to do this now to keep resales from impacting their primary business. I think they understand very well that a resort expiring in 35 years still falls inside of a prospective buyers "mortality comfort zone".

Since you sell units, you probably have a good idea of the average age of buyers. My guess would the average is 40s - early 50s... and of course there will be some younger or older. Correct me if I am wrong... but I will assume an average age of 45... with children who are 10-15 years old.

I also expect that most people who buy DVC consider it not only for themselves... but also for their children's sake. This is because Disney knows how to market to adults... hitting the "parental need to provide" nerve.

So a 45 year old prospective buyer would consider a 50 year contract as beyond their personal use... and supplying their children with "magical Disney memories" till they are 60-65... at which point they can take care of themselves.

At 35 years remaining... their kids will be 45-50 yo... which is still probably OK for a lot of people... especially since they are still within "taking the grandkids to WDW" time frame.

At about 25 years is the point that I think prospective buyers would start getting the heeby jeebies. Their kids will be 35-40 yo and they may even miss out on the experience of bringing their grandkids to WDW. This only gets worse as the contract length gets shorter.

The above is why I believe that people are making a mistake on valuing the extension in terms of their own mortality. I think they should be viewing it in terms of the mortality of the people who will be buying their contract... people who on average will be 15+ years younger than themselves.

I think that DVC understands this very well. Right now... they cannot effectively differentiate their new product from resale product... so they exercise ROFR to keep resale as a non-threat. However... as the contracts get closer to expiration... ie: 25 years remaining... the resale product becomes much less of a business threat because they effectively market against a prospective buyers mortality fears.

I would love to hear your perspective since you probably talk to a lot of potential DVC owners.

/Jim

 

[Seth Nock]

Seth,

It seems to me that the primary reason DVC exercises ROFR is to prevent the resale price from falling... so that it does not impact their primary business... which is to sell new units which probably costs them $26/point. In other words... buying and selling resales is a cost of doing business.

They need to do this now to keep resales from impacting their primary business. I think they understand very well that a resort expiring in 35 years still falls inside of a prospective buyers "mortality comfort zone".

Since you sell units, you probably have a good idea of the average age of buyers. My guess would the average is 40s - early 50s... and of course there will be some younger or older. Correct me if I am wrong... but I will assume an average age of 45... with children who are 10-15 years old.

I also expect that most people who buy DVC consider it not only for themselves... but also for their children's sake. This is because Disney knows how to market to adults... hitting the "parental need to provide" nerve.

So a 45 year old prospective buyer would consider a 50 year contract as beyond their personal use... and supplying their children with "magical Disney memories" till they are 60-65... at which point they can take care of themselves.

At 35 years remaining... their kids will be 45-50 yo... which is still probably OK for a lot of people... especially since they are still within "taking the grandkids to WDW" time frame.

At about 25 years is the point that I think prospective buyers would start getting the heeby jeebies. Their kids will be 35-40 yo and they may even miss out on the experience of bringing their grandkids to WDW. This only gets worse as the contract length gets shorter.

The above is why I believe that people are making a mistake on valuing the extension in terms of their own mortality. I think they should be viewing it in terms of the mortality of the people who will be buying their contract... people who on average will be 15+ years younger than themselves.

I think that DVC understands this very well. Right now... they cannot effectively differentiate their new product from resale product... so they exercise ROFR to keep resale as a non-threat. However... as the contracts get closer to expiration... ie: 25 years remaining... the resale product becomes much less of a business threat because they effectively market against a prospective buyers mortality fears.

I would love to hear your perspective since you probably talk to a lot of potential DVC owners.

/Jim

Actually, there tend to be 2 major categories of buyers. One, is 25-30 years of age (usaully 2 children, interested in controlling their vacation costs). For this category, price is the major factor. They typically want to save the money up front (2042 expiration). The second set of buyers are about 55- 70 years, buying to take the children and grandchildren. They feel that if they "own" the vacation, their children will will include them in the vacations (otherwise, they may be left home). This group might go for the 2057 expiration, or may figure that they won't need it beyond the 2042 date.

At the meeting, I asked if the current owner does not agree to the current extension, will they be permitted future extensions. I was told that they would be permitted future extensions. This means that if a "young family" buys the 2042 expiration, in order to save $, they may choose to extendfrom the years 2057- 2072 (15 years from now, when they are more financially secure). It will be strange though, they can own from now until 2042, Disney has ownership from 2042-2057 and they would own again from 2057-2072.

 

[FLYNZ4]

It will be strange though, they can own from now until 2042, Disney has ownership from 2042-2057 and they would own again from 2057-2072.

This last part seems very strange to me... and has to be a misinterpretation on their part of your question. Assuming that an owner decides not to take this current extension... but decides to extend some number of years down the road (assuming that it is offered)... it would seem that the most viable solution would be to charge that person more than someone who had previously extended... since that extension would be for a longer period of time.

Interesting data on your customer demographics. I would not have expected a lot of buyers in the 25 year old range. I can understand the secondary market of those that are older and more financially stable. Thanks for the data.

What is really interesting is that I would have expected a lot of younger people to buy directly from DVC rather than resale because of the easy to acquire financing. However... when I discussed this with DVC guides... I heard that most were older... with 40+ being the most popular age demographic.

/Jim

 

[Seth Nock]

It is fairly easy to get financing on the resale market. I am guessing that maybe people in their late 20s are more comfortable with buying on the internet than people in their 40s, but that is just a guess.

Regarding the extension, though, Disney claims that one who "opts out" now will be permitted to "opt in" to the next offerring. This seemed very strange to me.

 

[Steamboat Bill]

Regarding the extension, though, Disney claims that one who "opts out" now will be permitted to "opt in" to the next offerring. This seemed very strange to me.

This is very strange indeed. I would probably not extend now.

 

[spookykennedy]

Saying the extension on OKW is only worth $8 doesn't take into account resorts. SSR is not OKW...When we purchased OKW resale we had the option of buying SSR but disliked the resort in almost every way and purchased OWK instead in spite of the different end dates...so to compare them both to me isn't accurate just based on when the contract ends.

 

[JimC]

Actually, there tend to be 2 major categories of buyers. One, is 25-30 years of age (usaully 2 children, interested in controlling their vacation costs). For this category, price is the major factor. They typically want to save the money up front (2042 expiration). The second set of buyers are about 55- 70 years, buying to take the children and grandchildren. They feel that if they "own" the vacation, their children will will include them in the vacations (otherwise, they may be left home). This group might go for the 2057 expiration, or may figure that they won't need it beyond the 2042 date. ....

I think the largest first time purchaser group are in their 30s -- close to half, then 40s - about one quarter, then 20s and 50s plus taking up the balance.

We were in the 40s category when we purchased with two grown children off at university. Purchase reasons were preferred style of vacation and value for dollar spent.

 

[Seth Nock]

I think the largest first time purchaser group are in their 30s -- close to half, then 40s - about one quarter, then 20s and 50s plus taking up the balance.

We were in the 40s category when we purchased with two grown children off at university. Purchase reasons were preferred style of vacation and value for dollar spent.

Most of my buyers with 2 grown children and no grandchildren tend to buy Marriott or Hilton rather than Disney. If they plan to trade the property, they like to know that it is deeded in perpetuity. Most of my buyers have 2 young children or a few grandchildren. They are more interested in being on Disney property, than having a deed in perpetuity.

 

[vittoria]

The offer received in the mail today from the DVC was $15 per point to extend the OKW contracts to 2057, if purchased before the end of February.

Does the $15 vs $25 change whether anyone thinks this is a good idea or not?

Vickie