How do developers come up with pricing?

[tony_i]

Hello!

I am new to the forum but I have been reading articles for a couple of year. I already own a couple of resorts, one fixed and one club points, and I am very familiar with what I own and what I will be looking to buy in the future.

For the last couple of month I have been researching weather or not to purchase a fixed week in the FL Panhandle, and recently I started researching actual prices of beachfront properties to get an idea of what is out there. While doing this, I asked myself the question of how do developers come up with the prices they try to sell their product.

I started pulling prices of beachfront land sold or available for sale, searching tax appraisal districts to get an idea of current appraised land value. Then a quick search for the current pricing per square foot of construction in the area.

My first calculation was a property sitting in a beachfront lot, currently appraised at around 2.7 millions dollars (the lot). Then gathering the amount of units and the average sq ft of all the units, and any common areas of building and let say it was about 40,000 Sq Ft of total construction.

In my calculation I did a couple of days ago, it looked something like this:

40 rooms in the building, 40,000 Sq Ft total construction, $150 Sq Ft of construction, and 2.7 million lot.

$6,000,000 Cost to build 40 units
+ $2,700,000 Cost of Land
$8,7000,000 Total Build Cost
÷ 40 Amount of Rooms
$217,500 cost per room
÷ 52 Units per year (week 53 is reserved for resort)
$4182.70 Actual cost of each unit.

The $217,500 price per room is very comparable with midrange condos beach front currently available in the area. Low end for a studio/1 bedroom is around $150,000. High end for a 2b 2b condo is around $500,000.

But let say that the lot is 5 million, and construction sq ft was $250. You would be looking for a room price of $375,000, and a unit price of $7211.54.

I met with the developer asking for a week at this resort and the starting price for access was $40,500. Yesterday I pulled all deed register at this resort, and I am not sure if it would be accurate, but there was 1 registered deed showing the developer as the grantor, and it had an amount of something like $23,000. Again, I not sure how accurate that price is, but it was there. The deed was listed as week 5, so they would receive x amount of club points for that week, which is not high season.

So how to they come up with these prices? I understand that they have to make a profit, even though they should profit in the actual development and their management, and they have a bunch of staff at their sales centers... Oh and all the gift they give out per presentation, but charging over 5.5 times, or almost 10 times like in the first example? They could be selling more and have more happy costumers if they would be more reasonable with their pricing!

I came across this Tampa Bay Times article, and it provides a several numbers to compare developer pricing vs cost.

It states that the Wyndham Clearwater had a cost of $175 million, and it has 448 rooms ($390k per room or $7512 per unit). There is also mention of a $50 million Opal Sands Resort with 230 rooms ($217k per room and $4180 per unit). I know half of Wyndham Clearwater is a hotel, and there is the convention space, but the above number is just to have a number.

Anyone know how Wyndham sells access to the their Clearwater Resort? Or do they have a starting price per point? I would like to know this if anyone knows.

I know it was a long post, but I think timeshares are a good product, and it is just sad to see all the negative stuff and how it can negatively affect a family that is put in this position because they purchased knowing that the idea of the product was good, but the pricing, terms, and many other factors were really wrong.

I am glad this community has helped and informed so many, and as soon as I find out how to login on the other site with my current login, I will be supporting as a member!

 

[ecwinch]

For most timeshare developers, the cost of goods sold (i.e. project construction) is less than 30% of price they sell at. The rest is consumed sales/marketing/overhead and of course profit.

 

[bnoble]

There is also value to the buyer of not having to buy all 52 weeks (and obligate oneself for the ongoing costs of the entire condo). That additional value explains why someone might *pay* more than just the straight line portion of a whole-ownership condo.

 

[tony_i]

There is also value to the buyer of not having to buy all 52 weeks (and obligate oneself for the ongoing costs of the entire condo). That additional value explains why someone might *pay* more than just the straight line portion of a whole-ownership condo.

This I perfectly understand, which is part of why I think timeshares and clubs are great products. I am just asking about how they price them because I see the numbers in my mind and they do not add, but they figured out a way to be able to price and sell them at these prices.

While I was meeting with the developer, there was a couple on the table next to mine. They were adding points to their account, and they already had a loan on their first contract. They agreed to the price of the additional points, and while the sales lady left to figure out a way of adding the new points and doing the new paperwork for the loan, the wife asked the husband if they should just pay everything off now... 10 minutes later, the sales lady came back with the new paperwork and loan document, and they informed her that they wanted to pay off the original loan and acquire the new points without the loan.

The reason for sharing this story is that maybe they sell this high because there are many people that can afford them without affecting anything in their finances. I have met people that have a very high value ($) of their time, and gathering information the way we do in forums like this cost them more that just buying at the current rate. I don't know, but that is why I asked, to see if we have some timeshare sellers here or previous timeshares employees that might have a better idea on the question.

 

[VacationForever]

A fools errand. There is no reconciling construction cost to sale price. The paperwork on my last developer purchase (WLR) which we rescinded, the first page clearly stated some high percentage (60% or something like that) of the timeshare sale price is to cover their marketing expenses.

 

[davidvel]

They come up with pricing as follows: they price (and sell them) as high as they think they can while still getting enough buyers to sell them to. Just like every other supply/demand system (with the addition of high pressure sales, and short rescission/return window.)

 

[T_R_Oglodyte]

They come up with pricing as follows: they price (and sell them) as high as they think they can while still getting enough buyers to sell them to. Just like every other supply/demand system (with the addition of high pressure sales, and short rescission/return window.)

Bingo!!!

Pricing is based entirely on what the developer believes the developer can sell the unit for. Cost comes into the picture only during the economic analysis for starting a project, when the developer considers whether sales revenue will meet the minimum required rate of return on investment.

*********

Note that the analysis is exactly the same when you sell one of your timeshares. When it comes to sales, the only thing that matters is the price at which you can sell the unit. What it might have cost you to acquire that ownership is irrelevant.

 

[bnoble]

I was going to come back to say something similar: Price has nothing to do with cost, and everything to do with (perceived or imputed) value. *Profit* is determined, in part, by cost.

 

[ecwinch]

They come up with pricing as follows: they price (and sell them) as high as they think they can while still getting enough buyers to sell them to. Just like every other supply/demand system (with the addition of high pressure sales, and short rescission/return window.)

There is very little in the timeshare market that is subject to supply/demand economic theory.

In a supply/demand system, it is efficiency in the market that dictates pricing. But because there is little organic demand for timeshares, both demand and scarcity of supply have little impact on pricing. Because with timeshares, the majority of buyers don't make informed purchased decisions and have few resources to make price/value comparisons.

Demand is essentially created by the sales process... and bottom line pricing is clearly determined by project cost. Like any business, you dont approve projects unless the ROI is there. With "retail" pricing just begin a starting point for negotiation, and represents the upside on ROI. For they always will have bottom line (floor) pricing that is tied to the project ROI.

 

[bnoble]

In a supply/demand system, it is efficiency in the market that dictates pricing. But because there is little organic demand for timeshares, both demand and scarcity of supply have little impact on pricing.

Demand needn't be organic. It can be generated. Hidden Brain's episode from this past week was all about this. It made me want to avoid entirely anything supported by advertising. https://www.npr.org/2019/04/25/7171...n-on-ads-how-mass-marketing-affects-our-minds