Fairway Forest
By now there are millions of disappointed investors in these types of properties. The most important lesson learned is that buildings are a deteriorating asset.
When these property types were originally conceived in the 1980s, the U.S. economy was beset by a high rate of inflation. Real estate was known to provide protection from inflation, because property values were increasing at a similar rate, and leveraged rates of return were even higher. In the early 1980s, condotels had also become the rage in Miami Beach.
My mother was a realtor at the time, and she and her fellow agents were all encouraged by their broker to buy timeshare units at a resort known as Fairway Forest in western North Carolina. They were told that they were fixing their vacation costs at 1980s prices while their investments would continue to appreciate in value as vacation travel would become more expensive in the future. I even co-signed the deed.
By 2007, my mother was retired and living off a limited fixed income. The maintenance fees on the timeshare had increased to $40 per month and she asked me to take over the deed and use the unit as I wanted. I never visited the actual unit, but since it was part of Club Wyndham, I exchanged my week for other places each year – Hawaii, San Francisco, New York, San Antonio and Mexico. My week only counted for 3 days, though, for a stay in Honolulu, San Francisco or New York.
In a few short years, the maintenance fees were increased to $80 per month, meaning that I was paying $960 for 3-day stays in Honolulu, San Francisco and New York, which I could get for a similar cost without any sort of vacation club ownership. Units at Fairway Forest could be rented for just $850 per week. I was also losing money in opportunity costs, as twice I had to turn down profitable appraisal assignments because I had already invited friends to vacation with me in Hawaii. I would rather lose money than lose friends.
I quickly learned that listing a timeshare unit for sale only attracted scammers. I offered the unit for free to my brother and his family, but he told me that he could get better deals on vacation residences just by shopping around. The $960 in maintenance fees was a deal breaker. Meanwhile, I received constant letters from scammers on soliciting their help to stop paying maintenance fees.
Just Google “Wyndham Timeshare” and you will see what I mean.
Luckily, belonging to a scuba diving club, my offer of a free timeshare in Club Wyndham attracted a taker, someone who had come along on our diving trips to Hawaii and Cozumel.
Meanwhile, the various hotel awards programs I belong to have recently been calling me with the secret mission of selling me timeshares. Today it was IHG (InterContinental Hotels Group), known particularly for its Holiday Inn franchise. When a caller with a foreign accent tells you that they are "recording this call for quality purposes", it means that they are about to try sell you a timeshare and they want recorded proof of your order. Why do they need proof so badly? Just hang up.
Why are timeshares and condotels a bad deal?
It's the maintenance fees, Stupid!
This leads me to an important concept that gets forgotten in the real estate investment world, that buildings are deteriorating assets. Hospitality assets deteriorate even faster because of the exacting standards of the hospitality industry, under constant pressure to renovate. This is why maintenance fees are always rising for timeshares and condotels and other fractional vacation interests.
Meanwhile, an excess of vacation properties was built between 2005 and 2008, and values plummeted in the Global Financial Crisis of 2008 and many have not yet recovered due to the oversupply. The only phenomenon I see is maintenance costs increasing faster than property value appreciation, of which I have not seen any. That is today’s economic reality as we live in a world of low inflation. Your timeshare or condotel just might be worth nothing as an investment, but you can still use it for fun.
As for condotels, I first witnessed them in the early 1980s, spurred by the 15-year Accelerated Cost Recovery System enacted by the Economic Recovery Tax Act of 1981, but the Tax Reform Act of 1986 took away these benefits, and the burgeoning oversupply of vacation units killed the condotel industry, a historical fact that keeps getting forgotten after each time this industry collapses.
Constant problems with condotel investments include high maintenance fees, on the order of $10 per square foot per year, having to share 35 to 50% of revenue with management without any guarantee of occupancy, having to frequently buy new furniture packages to comply with the hotel franchise rules, HOA dues, housekeeping fees, special assessments and elevated insurance costs. On top of that, this is an investment type that rarely experiences capital appreciation. If capital appreciation was reasonably expected, the hotel developer would never have needed to sell units prematurely.
Condotels continue to re-emerge as a brilliant new concept before crashing in flames yet again and forgotten. Now I am once again getting e-mails from Mondinion about a brilliant new concept: the Condotel.
Industrywide failure to consider buildings as deteriorating assets
The real estate industry in general in the 1980s newly embraced a valuation method called “Discounted Cash Flow Analysis”, in which valuations were based on 10-year cash flow projections. That is what I was hired to do after graduating from SMU in 1984 with an M.S. in Real Estate degree. The only problem is that most of the DCF practitioners inflated income and expenses at the same rate of inflation, not acknowledging that buildings were deteriorating assets. Every DCF valuation thus became inflated, and hundreds of millions of dollars were lost in the collapse of the commercial real estate industry in the late 1980s and early 1990s.
In a book I was commissioned to write for the Appraisal Institute in 2011 (see sidebar), I was prohibited from mentioning that over the long term, expenses always increase faster than rents, because buildings are deteriorating assets. If you don’t believe me, think about your car expenses. Are they really increasing at only 2.5% per year according to the CPI (Consumer Price Index)? Of course not, as cars are also deteriorating assets.
As for Club Wyndham, I was satisfied with the exchange possibilities, but displeased with the high-pressure sales tactics used on me whenever I showed up to peacefully use my reserved unit. Club Wyndham, why could you not just leave me in peace to enjoy my vacations without high pressure salespersons?
In the last 2 years, in Manhattan, the unit would never be ready, even if I arrived at 8:30 pm, and I would be handed off to a high-pressure salesman trying to convince me to buy more points or I would never be able to stay at their place again.
There was also the Mandatory Information Breakfast Meeting I was required to attend during every stay at any Club Wyndham property. The first time, in Hawaii in 2007, I showed up and was denied admission because I did not bring identification, which was fine with me. They must have thought I was a tourist attempting to steal their orange juice and plastic-wrapped muffins.
In San Antonio, I attended their Information Meeting on a Sunday morning, to which I was bussed several blocks away, thus assuring I would not escape during the Texas summer heat. The speaker casually chatted with me before the Meeting started, mentioning that he had been a flight attendant before entering the career of timeshare sales. I had orange juice and muffins and scrambled eggs.
When he started the presentation, the only information he provided for the first 15 minutes was about himself, in which he had elevated himself to being a former airline pilot. Then he asked all of us to chant the phrase “Today is the Day!” I felt like I was trapped in an Amway sales rally and quietly left, walking several blocks back to a nice unit on the San Antonio Riverwalk. I lived nine years in the Texas heat and humidity, so I could handle the walk. Plus, if you have read my other posts, I have done plenty of work in tropical locations, and sweated profusely in places such as Acapulco, Fiji, Costa Rica, St. Maarten and Roatan.
When I returned to my building, the doorman had already been alerted of my escape. He asked me if there was a reason why I left the Information Meeting so suddenly. I just said, “Today is not the day.”
Now chant after me: Do not attend the Information Meeting!
Is this the City of Hope?
