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?

A depreciating asset

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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Costa Rican Teak Farms for Gringo Investors

I’ve been preparing for an upcoming tree farm appraisal assignment in Costa Rica, but learned late that what was thought to be a teak farm is actually a tree farm with lesser tree species. Nevertheless, something should be said about the teak farm market in Costa Rica.

In the late 1980s Costa Rican President Oscar Arias declared a state of emergency concerning the depletion of the nation’s forests, much of which had been felled for timber harvesting or cattle ranching. Generous tax exemptions were put in place to encourage commercial reforestation projects. Capitalism quickly and enthusiastically addressed the problem, and some of those who observed the flow of international capital into Costa Rican forestry investments figured out that perhaps there was more money to be made by selling forestry investments than in actually growing, harvesting and processing the trees.

As with any market for investment properties, distortions are created when properties are developed in response to investor demand rather than consumer demand. For instance, great surpluses of “rental homes” were developed in Arizona, Las Vegas and Kissimmee, Florida, not in response to a shortage of housing in those areas, but to sell to out-of-state investors. Costa Rican tree farms are now repeating the same concept all over again.

Teak became the preferred tree farm crop because of its high value. There were no restrictions on the creation of new supply in Costa Rica, so many entrepreneurs got into the teak plantation business and European “investment funds” (syndications) were organized to develop teak plantations for small investors, charging high mark-ups. Many teak plantations were subdivided into smaller parcels for purchase by small, absentee investors in North America and Europe.

Misleading data crowding out objective data

The Costa Rican timber market is fragmented and lacking in price information, which has led to the crowding out of objective information by hyperbole crafted by investment promoters, many of who claim historical investment returns in the timber industry of greater than 13% per year. This is not based on Costa Rican data, however.

The most recent price survey among the Costa Rican members of OLAT (the Latin American Teak Organization) indicates prices between $120 and $595 per cubic meter for standing teak trees, depending upon diameter, but prices appear to have decreased since February of this year. For instance, standing teak trees of 50 to 59 centimeters in diameter were priced at an average of $220 per cubic meter then but are now priced at $175 per cubic meter, a drop of 20% in the last six months. Mature trees above 30 years in age have much greater value per cubic meter than immature (“short rotation”) trees, as they can be more efficiently processed into large pieces of sawn wood.

Investment promoters, however, are misleading investors with pro forma cash flow projections based on price increases of 5 to 10% per year, despite the increasing supply of Costa Rican teak, and unrealistically shortened maturity times of 20 to 25 years. OLAT’s data is based on reported prices for mature 30-to-50-year-old trees (the older, the more valuable) and describes 20 to 25-year old plantations as “young plantations” for which there is insufficient market price data, and also commenting that “Latin America will supply an important part of the teak market, but is not properly geared to marketing short rotation material. This will change in the coming years, with the knowledge that producers are not getting the best price, the market being controlled by buyers.” In Asia, teak trees are often not harvested until 60 years.

As for the balance between teak supply and demand in Costa Rica, OLAT states “With all the money that was invested by forestry funds over the years in Latin America many plantations were enthusiastically created and the know-how has been improving steadily. Lacking, to some extent, are the sales aspects of plantation products.”

Investment Promoters and Scam Artists

Some investment promoters are not even selling land to investors, just the trees themselves. It is important to know that titled ownership in Costa Rica extends to real estate only; there are no tree titles, and the idea of tree titles in a nation with so many more trees than people would be an administrative nightmare, even if it was tried.  How does one prove ownership of trees that are situated on someone else’s land? Any contract in English is not valid or enforceable in Costa Rican courts, either.

Many investors claim to be victims of scams in which plantation owners sell tree ownership and then charge a fee to manage the tree investment; Tropical American Tree Farms seems to have attracted the most complaints. Most of the alleged fraudsters are gringos themselves, including Eric Heckler, who was a fugitive from mortgage fraud charges in Florida when found selling Costa Rican teak trees that weren't his before being extradited back to the U.S. in 2009.

In the numerous listings of teak plantations for sale in Costa Rica, a sizeable discount per tree is apparent for the larger plantations, indicating an insufficient demand for the quantities of teak they are producing, with prices as low as $167 per standing tree for 20-year-old trees, which translates to about $244 per cubic meter (based on an average of 0.8639 cubic meters per 20-year-old teak tree), or 58 cents per board-foot, quite a bit lower than even the OLAT-published prices.

Next stop: Tepotzotlan, Mexico

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What is a real estate syndication?

A real estate syndicator is one who organizes groups of investors (or “syndicates”) to acquire real estate investments. The syndicators are paid fees from investors for spotting and sharing profitable real estate investment opportunities with potential investors. The process is called "syndication", "TIC" (tenants-in-common), or "crowdfunding".

Real estate syndication achieved a bad reputation in U.S. in the 1970s and 1980s as an investment vehicle that enriched syndicators at the expense of investors. They reappeared in the last few years, now called "TICs" (tenants-in-common), and repeated the same abuses committed before, with the largest syndicators, such as DBSI and SCI, declaring bankruptcy in recent years, causing major losses for their 22,000 investors. Now that "TIC" is becoming a dirty word, the new term for syndication is "real estate crowdfunding".

Lately, I have seen such syndications go international. They may start in Canada, for example, and recruit Canadian or UK investors to invest in US real estate or Latin American real estate without involving a single US investor. They typically overpay for properties because they are compensated in proportion to acquisition prices. I am not implying that Canadians are any more dishonest than Americans, only that the dishonest ones are released from prison a lot sooner up there than down here in the U.S., if they serve time at all.

Take Canadian Ed Okun, for example. He had already had a civil judgment for fraud in Canada before coming to the U.S. to continue his ways.  He is now serving a 100 year sentence in US Federal prison. Here is his story:

Ever since he was a young man in Canada, Ed Okun dreamed of living a lifestyle of the rich and famous. His first wife described him as a con man who stole $150,000 from his father-in-law and raided his own family’s trust fund to buy a 53-foot yacht, Rolls-Royce, Aston Martin and Mercedes before fleeing to the United States to escape a civil judgment. Just prior to his arrest in the U.S. for embezzlement, he drew unfavorable attention to himself with a small dinner party in the Bahamas that cost more than $56,000, a fact eagerly disclosed to law enforcement by his second wife after he dumped her to marry a Brazilian call girl.

Ed Okun is perhaps an extreme example of the type of people the real estate syndication business attracts, but it is not a business that attracts saints. Otherwise, Mother Theresa herself would have been organizing real estate syndications.

Okun’s syndication scam

As a syndicator, Ed Okun claimed expertise in “identifying, acquiring and turning around distressed commercial real estate”. Okun, doing business as Investment Properties of America (IPofA), managed several such syndicates. Being a Certified Fraud Examiner, I was contacted by the lead investor of one such syndicate, composed of 20 senior citizens who lost all of their $13 million investment in Okun’s acquisition of the Park 100 Industrial Building in Indianapolis, the investment he arranged for them.

The Park 100 Industrial Building is an aging behemoth, a 459,000 square foot warehouse built in 1959, about the size of eight football fields. Unbeknownst to the syndicate, Okun already owned this building, for which he paid $3,300,000. As the manager of the syndicate, he then used his claimed investment expertise to have the investors pay him $12,650,000 for the building, earning him a 283% profit.

To justify such a high purchase price, he had to show that he was adding value, which he did by securing a tenant to pay almost $1 million per year in rent in addition to all operating expenses. The investors later found out that the tenant was a shill for Mr. Okun. The lease document between Okun and the tenant promised a $1 million incentive to be paid to the tenant “upon successful syndication of the property”. Thus, the tenant was chosen not to pay money but to consummate the syndication deal. The tenant occupied the property for about a year, but did not pay rent.

Also enabling the scam was Cushman & Wakefield Valuation and Advisory Services, which appraised the warehouse for $12,650,000 based on comparisons to 21st century warehouses. This same appraisal firm currently faces over $10 billion in class action lawsuits in connection with the Credit Suisse syndicated loan fiasco involving the Yellowstone Club and other prominent resorts.

The warehouse was foreclosed on and has traded since then, but since Indiana is a non-disclosure state (good states in which to commit real estate fraud), the subsequent prices are not known. The local tax assessor has assessed its market value to be $4,125,400.

This quite common type of syndication scheme involves the syndicator organizing investors to acquire a major property, such as a mall. The syndicator usually shares few of the risks of the venture by taking huge upfront fees and minimizing his own equity in the investment. He may have already bought the property through another business entity and then sold it to the syndicate or TIC for a profit. Through another company which he owns he may receive substantial fees for management services. The syndicator uses his superior knowledge to take unfair advantage of the investors. The reported “acquisition price” is typically above market value.

In one recent Texas syndication the syndicators purchased a piece of land from themselves, on behalf of the investors, at a $20 million profit after a one year holding period, in a market with a growing inventory of large land parcels for sale at much lower prices. In addition to the $20 million profit, the syndicator earned fees of about $3,300,000 in selling commissions, $500,000 in wholesaling fees, $800,000 in placement fees, $600,000 in reimbursement of offering costs, $350,000 in underwriting fees, and $5,200,000 in reimbursement of offering and organization expense fees. This represents over a $30 million profit on a property that probably lost value since its original purchase as the demand for residential land waned.

Syndicators are thus able to acquire real estate or sell their own real estate with other people’s money and charge those people again and again for the right to take their money. One Internet course on real estate syndication (syndicationsuccess.com) teaches 17 different ways to extract fees from investors. Not to be outdone, New York University (NYU) offers a course this spring entitled Real Estate Investment Syndication: Acquiring and Managing Real Estate Using Other People’s Money, also promising to teach “maximizing opportunities to generate revenue.”

Meanwhile, many syndications are falling apart. 12,000 syndicate investors lost money in the DBSI bankruptcy two years ago, and an estimated 10,000 investors are affected by the current SCI bankruptcy. Both DBSI and SCI were American syndicators, located respectively in Idaho and Los Angeles.

There needs to be a cleanup of this culture of predation on small investors by the real estate syndication industry. Perhaps NYU can offer a course on that, too.

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