Tuesday, August 28, 2012

Appraisal of a vacation club timeshare in Thailand

This blog occasionally attracts inquiries from owners of foreign vacation timeshares.  They want their foreign timeshare appraised, but the remote location of their unit makes it not cost effective for an appraiser to perform a field inspection.  In many cases a desktop appraisal can be performed, however, as timeshare units are traded in a global market and there is a rich supply of data.

“Right-to-use” vs. Deeded Interest

In this case, the timeshare unit was not a deeded unit (a real estate interest), but simply a “right-to-use” share in a “vacation club”, entitling the timeshare owner simply the right to use a studio apartment unit anywhere in the resort network for one week annually during the “low season” for a period ending in 2049 .  Because the timeshare is not location-specific, this expands the selection of comparable units, as similar “right-to-use” shares in the whole network can be used as comparables. 

On the other hand, a right-to-use timeshare is inherently less valuable than a deeded unit because it is not a real estate interest.  If a timeshare resort company fails, the deeded owners still keep their ownership interests, but a right-to-use owner loses all rights. It is similar to the difference between a condo and a co-op apartment. Although deeded ownership is the preferred method of timeshare ownership, there are some reputable vacation club companies, such as Disney, that sell “right-to-use” timeshares only.
When a timeshare owner has been misinformed about value

When I receive a timeshare appraisal request, I warn the client that market value is not likely to be more than half of the original purchase price (unless it was purchased in the 1970s), just in case false expectations were created by untruthful salespeople or by fake resellers practicing advance fee frauds. 

An untruthful salesperson might promise that the timeshare investment will appreciate in value as an investment, as real estate has historically been a hedge against inflation. The unit could indeed appreciate in value if one considers that only 25 to 50% of the purchase price is the actual value of the real estate; the rest is just marketing and administrative costs – the costs of roping in the sheep with free breakfasts and fake prizes.  Even more so than with a new car, depreciation in the unit’s value will be significant and almost instantaneous.  For example, I see a Hilton Head resort still selling timeshares for $23,000 while resales in the same resort are simultaneously occurring at 10 to 15% of this price.  Depreciation will only get worse with time, too, as maintenance fees increase faster than the rental value of the unit.

Fraudulent resale scams

Fraudulent timeshare resellers are in abundance nowadays; many of them appear at the top of Internet search results.  They contact timeshare owners (including me) with bogus offers above original purchase price, but a substantial advance fee must first be paid. Then they disappear with the money. There were over 5000 such complaints to the Federal Trade Commission last year alone. (The last scam letter I received required me to act before September 12th; that must mean that the boiler room will be vacated on September 13th.)  This makes my job as an appraiser harder, as clients want to hold on to their inflated beliefs about the value of their timeshares.  It is hard for anyone to accept the reality that he or she has been conned. 
Two such resellers have already been shut down with 14 individuals sentenced to prison. Creative Vacation Solutions and Universal Marketing Solutions were shut down after bilking 22,000 victims in the U.S. and Canada of $30 million between 2007 and 2010.  Ringleader Brian Christopher Morris of Boynton Beach, Florida was sentenced to 14 years in prison. Another such firm, Timeshare Liquidators of Boca Raton, Florida, just received 5 indictments two weeks ago for a similar scheme, and Florida law enforcement is going after others.

In this particular case, the timeshare had been purchased for about $12,700 in 2006 and a reseller was promising $20,000, but comps supported a value no more than $2000. The reseller required the seller to make a $1750 deposit.  Perhaps the mystery buyer was a Nigerian prince?

One problem with timeshares is the ever-increasing maintenance fees that eventually overtake the rental value of the unit.  If the timeshare is not in a good exchange program, the unit owners will start defaulting on their maintenance fees to the point where the resort goes bankrupt.  Maintenance expenses always increase faster than consumer price inflation because they are subject to price inflation in maintenance costs as well as the accelerating deterioration of the buildings over time.

I remember appraising one such resort in the Poconos.  All of the timeshare owners had defaulted in a resort known as Mountain Ridge, which was developed between 1982 and 1989.  A developer had assembled the units all over again and renovated them to start the “fractional ownership” process all over again.

Five years ago I inherited a 1980s vintage timeshare at Fairfield Sapphire Valley in North Carolina with monthly maintenance fees of $40. Five years later, that maintenance fee is now $80, requiring me to pay $960 per year for a unit with a rental value of about $850 for one week. That’s a compounded 15% annual increase in maintenance costs over 5 years. I’ve never actually seen the unit; I exchange it each year through Wyndham, usually for a resort in Hawaii. The only saving grace to owning this unit is to participate in the Wyndham exchange program.

Is a timeshare a good investment?

The market for timeshare resales has rapidly become a buyer's market, assuming a buyer can be found. Timeshare user web sites such as redweek.com and TUG (Tug2.net) report that FSBO (for-sale-by-owner) listings have more than doubled in the last year. Many timeshares cannot even be given away because they are not considered worth their maintenance fees over the long term. Timeshare owners are legally obligated to pay these constantly escalating maintenance fees into perpetuity.

In general, a timeshare is a depreciating asset that eventually costs more to maintain than its comparable rental value.  The timeshare concept made more sense in a day and age of high inflation; it guaranteed affordable vacations long into the future.  In today’s reality of overbuilt vacation condos and resort overcapacity, there is no compelling reason to buy a timeshare.

Next stop:  Belize




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