The pre-conditions for Timeshare Reform may have arrived

[BocaBum99]

I've believed from the very first day I discovered the resale market that the Timeshare Industry needs massive reform. I've wondered how long, given the easy access to information available on the internet, that the Resort Developers could continue their sales and marketing strategy of luring in guests with gifts and closing them hard while they are there for 200-300% over the instrinsic value of the timeshare as measured by the resale market for the same unit type. I think that most of the distortions in the timeshare market exist because of that one strategy.

Now that credit has dried up, it's very difficult to consumate a large purchase by turning the sale into a monthly payment or equivalent trips to McDonald's on a monthly basis.

The resort developers have to target cash buyers to make their numbers. How many people are willing to part with cash in this economy without doing some due diligence? If it's not enough to make their numbers, Resort Developers may need massive reform to their sales and marketing plans. They must sell real value instead of dream value.

So, two things have to happen to reform the industry. First, the cost of sales and marketing must be reduced by 60% or more. Instead of 50% cost of sales and marketing, it needs to be reduced to about 20%. That right there will enable resort developers to dramatically reduce their prices from current levels.

Second, maintenance fees need to be dramatically reduced as well. Many developers are trying to keep up their revenues by dramatically increase maintenance fees. What that will ultimately lead to is people defaulting on their maintenance fee payments and foreclosures. What all resorts ought to do is create a rental program and target maintenance fees to be 1/2 of the rental rates they can get for every season of the year. In this way, investors will be more willing to pick up the timeshares for $1 or more on eBay. After all, if they did, they would be able to get a fantastic return on their capital. As long as maintenance fees are as high as rental rates, nobody will purchase those timeshares off of eBay. We are pretty far off from this day. But, it could happen.

It will be an interesting year to see what actually plays out. If the developers try to preserve the old model or if they try to adjust to the new realities of tight credit and more educated consumers.

 

[Mel]

But how are you going to cut maintenance fees back? Maintenance fees are not set as a magic number of what the resort would like to collect each year, they are the actual cost to maintain the resort!

Yes, developer controlled resorts have tried to keep the fees low, and we have seen what happens at those resorts - necessary maintenance gets put off until the resort is so bad nobody wants to travel there. If you don't maintain the resort, the rental rates will go down, and then do you lower the fees again? Sounds like a terrible spiral to me.

As long as the developers sell the weeks to people who have not real intention of using their timeshares, we will have this problem. Rental and resale rates are both low not because the value of the timeshares are low, but because a percentage of the owners give up. They accept a low rent because they are scared they might not get a fair amount - they're rather get less than the week is worth than risk not renting it at all.

 

[nkldavy]

What if ...

... the developers, individually and thru ARDA, got Congress to declare that only developers were allowed to resell timeshare deeds ??

Uncle Davey

 

[AwayWeGo]

Timeshare Companies Have To Keep Their Mitts Off Maintenance Fees.

Many developers are trying to keep up their revenues by dramatically increase maintenance fees.

I'm pretty sure the timeshare companies can get in serious trouble if they try padding their bottom line that way.

Even when the timeshare company controls the HOA-BOD, the HOA-BOD is still obligated to use maintenance fee money for (a) regular resort operations & maintenance, (b) reserves, & (c) real estate taxes.

Recently the Diamond Timeshare Company (according to various TUG-BBS entries) has been caught padding maintenance fee bills by adding in whopping administrative & management charges on top of legitimate expenses for (a) & (b) & (c). If that sort of thing spreads, it's only a matter of time before some whistleblower catches the attention of some aggressive & ambitious state attorney general & the timeshare companies involved in trying to help their profit-loss statements via inflated maintenance fees will be in a world of hurt -- worse than they are now, I mean.

Meanwhile, timeshares managed by independent, owner-controlled HOA-BODs send out bills scrupulously limited to (a) & (b) & (c). The independent HOA-BODs formulate their budgets strictly with a view to providing maximum value to us regular, walking-around timeshare owners. The bottom line of the timeshare company is mox nix.

I agree that timeshare reform is way overdue. I'd like to see a new biz. plan modeled after Wal*Mart for "new" timeshares & patterned after CarMax for resales.

Wouldn't that be something ?

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​

 

[DanM]

If I remember correctly, timesharing really "began," or at least took off, in a recession when developers couldn't sell condos for full price, so they split them into weeks. The economic model doesn't really work unless you have 1) a four season vacation destination, with 2) relatively moderate operating costs/maintenance fees (including taxes and utilities), in 3) an area that isn't overbuilt. This means that 90 percent of timeshares make no economic sense, and never did, except for marketing hype by developers.

That said, many Tuggers and I have done very well with timesharing by exploiting inefficiencies in the market (higher trade values relative to maintenance fees, or fixed weeks where and when we like to go for less than comparable rent). But, if you expect the market to rationalize, expect it to collapse.

 

[funtime]

Maybe the slowdown will help

Although I love it when I can trade into a Marriott or Sheraton with my lower level timeshares - the fact that the "big boys" are cancelling some high end developments in Hawaii may be a good thing. It will give the new sales market time to absorb what inventory is out there at their other developments. It may well be that some of those new projects simply never get built. The future seems to be in timeshares near high density population areas where people can drive to the resort - not in far away places such as Hawaii.
As to resales - the amount of "flattening" of the market as evidenced by ebay is truly frightening for those timeshares that are third tier or in over developed markets. The prices in other words have gone so low on ebay and it will scare off only the hardy and experienced. Funtime

 

[Lawlar]

90s As Example

I've believed from the very first day I discovered the resale market that the Timeshare Industry needs massive reform. I've wondered how long, given the easy access to information available on the internet, that the Resort Developers could continue their sales and marketing strategy of luring in guests with gifts and closing them hard while they are there for 200-300% over the instrinsic value of the timeshare as measured by the resale market for the same unit type. I think that most of the distortions in the timeshare market exist because of that one strategy....


The resort developers have to target cash buyers to make their numbers. How many people are willing to part with cash in this economy without doing some due diligence? If it's not enough to make their numbers, Resort Developers may need massive reform to their sales and marketing plans. They must sell real value instead of dream value.

It might be instructive to tell you what I saw in the early 90s when California real estate prices fell 30% (deja vue). I've mentioned before that I filed several thousand bankruptcies during the 90s (as a lawyer).

I was really surprised how many of my bankruptcy clients owned timeshares (mostly in Palm Srings area - but also some had units in Hawaii). My clients had purchased their timeshares on credit. Most of my clients had living expenses that exceeded their their income so they needed to discharge their timeshare obligations. Many of these people were paying more for their timeshares than their incomes would warrant (hard-sales victums?).

My clients were relieved to learn that they coud discharge their timeshare payments. I can't remember any of them expressing sorrow that they were "losing" their timeshares. I never had a client tell me that he or she wanted to reaffirm their timeshare agreement (they had the right to do that).

And I never had a trustee or creditor seek to purchase a timeshare that was listed in a bankruptcy. In other words, everyone seemed to agree that the timeshares had no value at that time. I always told my clients to try to sell their timeshares for at least something so that it wasn't a total loss. Most of the time they told me that after trying to sell it they couldn't get anything for it.

I suspect Marriott is holding its breath and wondering how many of its timeshare customers are going to discharge their timeshare debts (a possible problem for HOAs that won't be able to collect the mf).

So yes, the industry needs to evaluate what "value" they are selling when they offer timeshares at prices that don't always make sense.

 

[Lawlar]

Oooops

The future seems to be in timeshares near high density population areas where people can drive to the resort - not in far away places such as Hawaii.....
Funtime

Yikes!!!! I hope you are wrong on this one.

(can't we make Maui the exception?)

 

[frenchieinme]

The timeshare status quo will remain as is as long as...

Timeshare reform will probably not happen as long as human beings have an element of greed and also thinking they are getting somethiong for nothing. When you add to this volatile mix the fact people will too often act impulsively, then expecting reform is handicaping the results.

Now, do I think and believe reform is needed in the timeshare industry? You bet. However, as long as the players (potential buyers on vacation) do not change in the game of buying timeshares, then reform is relegated to a back burner issue. :zzz:

Add to the mix people not reading the print in a contract let alone the fine print, trying to reform the industry will be difficult at best. Heck we all know what tobacco smoke both first hand and secondary can do and look how many smokers are still addicted and/or simply refuse to see what is clearly evbident (heck it's written on the pack of cigartettes very clearly).

Let's hope...

frenchieinme

 

[jdb0822]

heres the problem as I see it.

#1. Timeshare sleezy-ness. We all know it. Heck, even saying "I own a timeshare" to someone makes you cringe. Why? Cause everyone knows how sleezy timeshare companies are. The timeshare product itself is fine, and we here all enjoy it, but we all get put off by the constant, sometimes relentless sales tactics, even after you own. You know its bad when the words "timeshare" and "scam" seem to go hand and hand more often than not.

#2. Marketing costs. They are sky high. Offering all the freebies, the sales bonuses to the sales reps, etc. These costs are high and will go higher based on the reputation of the timeshare industry. Any industry or company that has to heavily entice their customers just to get them through the door has an severe reputation issue. (ie. timeshares, Direct Buy, etc). If people weren't turned off by timeshares based on their reputation, then there would be no need for the expensive marketing. The question is, is the timeshare rep even fixable at this point. Lets be honest, you can turn a Nun into a prostitute, but you can't do the reverse. (yea, I know, bad analogy)

#3. Over-saturation. When is too much TOO MUCH ? Just visit Orlando and the countless timeshares there yet when a new one opens, developers expect top dollar, even though there are plenty of timeshares there. It goes against any real estate logic. Its like Toll Brothers building a 400 house development in Detroit today, there just isn't a market for it.

#4. Rental rates vs. Maint. Fees. Rental rates follow the economy and local demand for units, they go up and down. Maint. Fees don't. They are simply tied to the resort maintenance. If an area, such as orlando, is so over-populated with resorts and hotels that keeps the rentals low, then it doesn't make much sense to get locked into the Maint. fees.

Disney is in a class of their own because they have other products that compliment their timeshares (theme parks, etc), so its tough to compare prices, etc with their system to others.

I think because of these kind of issues, that we really won't see much of a reform in the industry. We'll probably see it shrink, with larger companies buying up the smaller developers, and those developers not developing at the same pace. We'll see some resorts close up shop due to many people not paying Maint. Fees on time. (They will get turned into hotels or demolished, many orlando resorts saw this fate).

 

[Charlie D.]

Cutting back on maintenance fees dramatically is unrealistic!! Waive some magic wand and the housekeepers will take a 50% cut in wages. Electric and gas companies cut their bill in half? Don’t keep a reserve in place and charge special assessments every 4-5 years to re-roof/ re-carpet, etc. Maybe even cut back on the number of staff at check in? Instead of waiting 10-15 minutes to check in we could wait 45-60 minutes but just think of the savings in fees.

Also, every resort tries to set up some sort of rental system? Rather than Wyndham online you would advocate Wyndham Branson online and Wyndham Pagosa Springs online, etc. for all 100 or however many there are?

I personally do not believe that the rental costs will go much below the maintenance costs. I have never tried to rent out my points but I would not for much if any less than the maintenance fees that they cost me. As the maintenance fees go up with inflation the FMV of what the points associated those increased fees will be rented for will go up also.

Charlie D.

 

[dioxide45]

Second, maintenance fees need to be dramatically reduced as well.

While others don't, I can agree with this statement. The problem is that HOA's are non-profit organizations. I have worked for a non-profit that sold one of its assets to a publicly traded company. I worked for the unit that was sold. While it may not be true in all non-profit organizations they do tend to have more waste within their processes and organization. They have to spend everything they bring in and there is not as much scrutiny because they aren't really accountable to investors for profits. I am sure there is at least on average 20% that could be taken out of most HOA budgets in waste.
When the company I worked for was sold, the belt tightening occurred and costs were reduced significantly with no real impact to the customers.

 

[rickandcindy23]

Why is it that a generic resort can maintain its facilities on 1/2 the cost of a Marriott? Marriott and Sheraton, along with the other big hotel timeshare operations, may have to re-think their high management fees in this climate. Better to have a floating ship than a sinking one.

 

[timeos2]

In some cases 20% excess will be low - but not at the best operated ones

While others don't, I can agree with this statement. The problem is that HOA's are non-profit organizations. I have worked for a non-profit that sold one of its assets to a publicly traded company. I worked for the unit that was sold. While it may not be true in all non-profit organizations they do tend to have more waste within their processes and organization. They have to spend everything they bring in and there is not as much scrutiny because they aren't really accountable to investors for profits. I am sure there is at least on average 20% that could be taken out of most HOA budgets in waste.
When the company I worked for was sold, the belt tightening occurred and costs were reduced significantly with no real impact to the customers.

At resorts that support cost+ management contracts (I believe Marriott among many others have that terrible arrangement - usually developer operated management companies) I would agree there is at least 20% that could be cut overall, although not in every specific line item. The big chunk is in completely unjustified management fees and % on all the work done that goes to the management (why?).

At a well operated, independently managed resort with an active owner Board I challenge you to find even 3-5% in "fluff". Heck, I can even get you access to two resorts that I serve on the Board for and you can go line by line (as we do every year in the budget process) to see just exactly where you think all that waste resides. As our independent annual audit verifies you won't find it. (And again, back in our developer management days they had their own firm do the "independent" audit. When reviewed later by a true independent there where errors found including thousands paid in taxes we didn't even owe! We were able to get those back but only for 3 years and only because we spent the money to have the audit audited!). When we made a contested management change way back in 2001 we cut the costs from nearly $1 million per year to just under $250,000. Now THAT was unnecessary spending. So were the 65 different contracts we found - including 4 with the developers TV supplier/operation alone. We cut those over time to less than 20 that were bid out and truly represent the best value for the cost.

Don't paint every resort with the same problems. They certainly exist and may even represent the majority of resorts as far too many still have developer management, but it is far from all. Oh, put Wastegate at or close to the top of that bad boy list. Look for those that are best if you want value from your annual fees and a great resort to own.

 

[Mel]

As John points out, it really depends on the resort, and the budget process.

The BOD at each resort has a fiduciary responsibility to the owners, unlike with a traditional non-profit. The budget is set, and the costs are splits among the owners who are billed for their share - unline a traditional non-profit. I have sat on the board of a national non-profit, and we budgeted based on what we expected in contributions. Not so with a timeshare resort - the budget is set FIRST, and "contributions" are billed to match that budget.

I too would challenge you to look at the budget of your own resorts (it should be available to all owners - both our resorts mail it to us each year). See where you can find the fat, if it is in fact there. The biggest fat I've seen in resort budgets are in the management contracts, so yes some is there. But once you start looking at some of the other costs you really have to consider what the cuts will do to the quality of the resort.

Does your resort offer free local phone calls? Free internet access? Daily maid service? All those are things that could be cut, but at a cost in quality.

I haven't looked at this year's budget, but in the past when Orange Lake send our annual mailing, they include a graph showing the previous year's fees at most of the other Orlando timeshares. A few have lower fees than us, but most are higher, and some are as much as twice as much. The resorts with double the fees are really nice resorts, but I wouldn't pay twice as much to stay there - they probably have more "fat" than our budget.