Bad debt expense, why and what happens?

[BobInNH]

In the US Collection there is about a $7.5 million expense for bad debts. I assume that is mostly for people who have just given up. For those people I know there is some kind of foreclosure process (not the right term, but the right concept) to recollect the points.

My question is this. What happens when those points are resold? Does the revenue go back into the collection? If so, there should be a line item under the revenue category for resold points. If they are resold, who resells them?

BTW, if you were my CFO and you told me we were running 3.75% bad debt I'd fire you. That's an obscene amount.

 

[Passepartout]

Yup. In timeshares in general, bad debt is right up there with salaries and maintenance as the largest line item expense on the financials.

That's the reason we, here on TUG try very hard to dissuade people from just defaulting on their obligations. When some owner comes here and asks what happens if they default, we tell them that all they are contemplating is (a) ruining their own credit rating and score, and (b) putting the expense of maintenance on the shoulders of the rest of the owners. Not to mention the legal expense of carrying out the foreclosure. We tell them to (a) offer the deed back to the resort in lieu of foreclosure, or (b) give the timeshare away to someone who will keep up the MF.

Developers could help their owners and themselves by having a genuine mechanism for people to return their unwanted timeshares to be resold quickly and at reasonable cost. Developer prices for 'new' (there is no such thing as a new timeshare) are obscene. And largely because of these defaults, MFs have increased to where simply renting one's vacation home from the rental pool makes more sense than paying the buy-in cost up front.

Jim

 

[nuwermj]

My question is this. What happens when those points are resold? Does the revenue go back into the collection? If so, there should be a line item under the revenue category for resold points. If they are resold, who resells them?

DRI, Inc. discusses this in their annual 10-k financial report.

"With respect to members who fail to pay their annual maintenance fee or any assessment, we have entered into inventory recovery agreements with a substantial majority of the Diamond Collections and HOAs for our managed resorts in North America, together with similar arrangements with the European Collection and a majority of our European managed resorts. Each agreement provides that in the event that a member fails to pay these amounts, we have the option to enforce the rights of the HOA or Diamond Collection with respect to the subject VOI, which includes preventing members from using their points or intervals and, if the delinquency continues, recovering the property in the name of the HOA or Diamond Collection. ... We are responsible for payment of certain fees, ranging from 45% to 100% of the annual maintenance fees relating to the defaulted intervals or points. Depending upon whether the VOI in default is intervals or points, recovery is effected through a foreclosure proceeding or by contract termination. The recovery of points is more efficient than the recovery of intervals, because the recovery of intervals is governed by local real estate foreclosure laws that significantly lengthen recovery periods and increase the cost of recovery.

"Under the terms of our inventory recovery agreements, we are granted full use of the inventory as a result of delinquent annual maintenance fees or assessments for rental and marketing purposes, and we are under no obligation to commence recovery proceedings. Generally, when we recover intervals, we pay from approximately one to three years' worth of annual maintenance fees on such intervals. Upon recovery, the HOA or Diamond Collection transfers title to the VOI to us, and we are responsible for all annual maintenance fees and assessments thereafter. ... After recovery, VOIs are returned to our inventory and become available for sale. Although we recover inventory in the form of intervals as well as points, all inventory recovered is sold in the form of points. Recovered intervals are transferred to one of the Diamond Collections and become part of our points-based system."

 

[BobInNH]

Thank you nuwermj. It never occurred to me to read their 10-k, but I think I will start.

I am assuming these "Inventory Recovery Agreements" are with the BOD of each collection. So, theoretically, they are negotiable. But, with the US Collection the majority of the BOD members are DRI employees so good luck with that.

It seems this is another sweet deal for DRI. For between 45% and 100% of the annual maintenance fee they can rent it out and do whatever. And, they can do that indefinitely as they "under no obligation to commence recovery proceedings."

But what does the Collection get out of it? About half of the maintenance fee and no revenue when the recover is made. What bonehead board member thought that was a good idea?

Here's an idea, when the agreement is up for renewal, don't renew it. Then when people default have a direct sale of their points from one member to the other. Let's have the collection have an auction.