Timeshares – Buyer Beware
For fun and to escape the cold Canadian winter, my wife and I got a deal and hopped on a plane to Vegas. By nature, I am not a gambler. If you look at the casino games, you can calculate the odds of a game like roulette and know that on average each time you play you’ll lose about 5% of your bet. Losing money just doesn’t excite me. So we passed the casino tables and exited hotel. Seeing discount show tickets, we got convinced by the salesperson to see two shows and dinner for $50 USD if we attend a timeshare presentation. Not having gone on one before, I was curious to figure out how it all worked to see what a buyer loses in making one of these “investments”.
The fee of course is negotiable but you also commit to 2-3 hours of your time to see a timeshare building and learn about how a timeshare works. I figure the salesperson is getting the $50 USD as their commission. Assuming 6 couples are convinced to go in a day, that’s $300 USD in cash – not a bad day’s pay.
Heading to the presentation centre, you’ll likely see a sales rep, sales manager and office manager. Then, as a last ditch effort, you’ll meet someone from corporate who gives you the final “deal” before you get your two shows and dinner vouchers. The cost of the ownership of the timeshare might drop from around $35,000 USD down to $9,000 USD. In essence, you are getting about one week a year and can exchange your week to one of some 40,000 other timeshares throughout the world. On top of this you have some closing costs and of course annual costs. The closing costs include $300 USD for the paperwork which registers your ownership and $300 USD in sales commission. Each year you have a timeshare corporation fee of about $90 USD and about $700 for taxes, HOA, etc. When you want to use your one week, you pay about $200 USD for the week.
In my simple math, the annual costs after purchase of the timeshare comes to about $990 USD (= $700 taxes and HOA + $200 usage cost + $90 timeshare corporation annual fee). There may also be a fee for switching from the Vegas timeshare to one in Cancun – our preferred location to break up the Canadian winter. So let’s call it an even $1,000 USD per year, or $142.86 USD a night for 7 nights. When I take my favourite hotel in Cancun after subtracting out the flight and all-inclusive cost of meals and drinks, the hotel room cost ends up being almost the same as the annual timeshare cost.
So, if my annual running costs as a timeshare owner are the same as not being an owner and renting an equivalent hotel room, then my timeshare ownership really isn’t worth anything.
Now let’s look at the economics of the timeshare for the timeshare corporation. One condo requires 52 buyers to fully occupy the condo for the year. To get 52 buyers, let’s assume the rule of ten that it takes 520 qualified prospects to get 52 buyers. And let’s assume that they get good quantity discounts and can buy 2 shows x 2 tickets per show plus dinner buffet for 2 for $100 USD. The marketing cost comes to $52,000 USD (= 520 prospects x $100 USD) which is divided by the 52 buyers = $1,000 USD per buyer. Let’s also assume $1,300 USD is split for overhead and to pay for the sales people and other costs. That leaves $7,000 USD per timeshare buyer x 52 buyers = $364,000 USD as the potential sales price for one condo unit.
If it costs $100,000 USD to build, they make about $264,000 USD profit on each condo unit. Then on top of this, they are guaranteed gross revenue of $990 USD per week. In essence, the “hotel” is fully booked for the lifetime of the timeshare owners. I definitely want to be the side of the “house” as the timeshare owner appears to lose bigtime. I might be completely missing something here as this is just my “back of the envelope” calculation. I also haven’t seen a contract. All I am saying here is buyer beware.
It appears that with a timeshare, you are not locking-in (or freezing) any part of your travel costs. Worse than that, you are making a commitment every year to spend most of your “hotel cost” whether you go or not as you have to pay your timeshare corporation annual fee and you have to pay your taxes and HOA. If you don’t pay them you might lose your timeshare unit. You also don’t seem to own a particular condo property so you can’t really get a feel of home. I don’t even think there is an opportunity to convert your timeshare units to a 1/52nd ownership of a specific condo unit (even if you are overpaying to do so). And in the end, what do you really own? It appears that the timeshare units are only “owned” by you for a particular number of years and then reverts back to the timeshare corporation. So forget about the idea that your timeshare investment will go up in value.
You might be thinking then that buying the shares of a timeshare corporation might be an interesting investment, but how do you feel ethically about owning something where you are really cheating people out of a part of their life savings.
If you want to substantially cover most or all of your vacation costs for life, there is a much better way to do so. Why not buy $20,000 worth of blue-chip dividend paying preferred shares that generate say 5% in dividend income? That way you have $1,000 every year which you can spend however you want. Or even better, you can reinvest it. And your children can inherit something of real value.
The Next Step:
If you want to start to substantially get your vacation costs covered, why not contact me and I’ll help you put together your dividend paying stocks as well as provide you with financial planning advice at no extra cost. I can be reached by calling: (604) 288-2083 (extension 2), or by email: Steve@lycosasset.com
Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.