motley fool article re: DRI stock

From the last paragraph of the cited article:

"The risk for investors is if regulators come in and start squeezing the margins of the timeshare business. And the CFPB could be looking at the industry as a place that's in need of more consumer protection. If that comes to fruition, the high margins and high profitability of recent years could be lost. And until that cloud passes, it'll be a problem for Diamond Resorts' stock.

My question is what could regulators do to reduce and/or squeeze the margins?


Thanks

Richard

I am not sure that a federal agency can control a public company's profits (except maybe a utility or monopoly) but they can put consumer protection regulations in place that can effect the business model.

Imagine a regulation that would require a timeshare company to buy back properties at a certain percentage of the current RETAILsales price. What would happen if the rule is that Jane buys a week for $20,000 and then timeshare company is required to buy it back within a five year period for 50% of the selling price at the time?

Or rules put in place requiring timeshare companies to eliminate restrictions on resales. Any benefits, programs, etc. associate with a week or unit or point must carry over to the new owner.

I don't think the problem is the profit margins - plenty of industries make a lot of money. The consumer protection required is how the product is sold, resold and the right of the consumer to terminate the relationship.

I am happy to be a timeshare owner but if I was told at the sales presentation that it would be for life, regardless of my job, health or income status, I would probably never have bought and can't imagine anyone buying.

Forget the buy back scenario and just imagine if they put in some sort of wording that allowed timeshare owners to terminate their ownership with reduced recourse for the management company to collect or report as bad debt the default? How many would simply walk away during hard times and how badly would that cripple the industry?

As mentioned removing the restrictions on resale owners could severely impact new sales. Why on Earth would I buy a timeshare for $40,000 when I could buy the same timeshare on the resale market.....with the same benefits of buying from the developer.......for $1 on Ebay? That simple change, which would protect consumers rights, would essentially force timeshare developers to compete in the resale market or even force them to buy back their own product to support new sales pricing. And at this point we could Segway right into the old fight about ROFR.

I could see protection laws being strengthened in such a way as to cripple the industry as a whole. Although it would be fun to watch Westgate have to deal with treating it's owners more fairly.

Simplest way to protect the consumer....

Almost all retail developer timeshares are "sold" rather than "purchased." And most customers only wanted the free stuff and the no-pressure 90 minute tour. If someone gets ground down after 4 hours of persuasion, I think the government could protect their sanity in a simple way: Have the consumer and the salesman each sign a simple one page document which outlines their right of rescission within a specified period of time (7-10 days). One copy to the salesman (for his file) and one copy to the customer.

That document would simply state the length of the contract (life maybe) and the fact that the customer can get all his money back within the rescission period. Directions on how to rescind would be on that sheet.

The panicked threads on TUG and the constant entries onto the complaint sites would slow down. No need for "secret pockets." The rules are: Everybody knows the rules. Some people might start doing research and some heat merchants might alter their pitch. Would sales go down? Maybe.

Any time you have increased government scrutiny and regulation, it drives up the cost to sell the product. More paperwork and more red tape. More audits to submit require more people to manage everything.

I do agree that additional regulation on resales and buybacks could severely impact the industry that could cut in to margins. However, these companies are very smart, they always find a way to come out ahead, sometimes even further ahead than they once were. Just up the price of the product or charge a higher management fee. In the end, the customer pays for everything. More regulation certainly won't help the customer from a pricing perspective.

dioxide45 said:

Any time you have increased government scrutiny and regulation, it drives up the cost to sell the product. More paperwork and more red tape. More audits to submit require more people to manage everything.

I do agree that additional regulation on resales and buybacks could severely impact the industry that could cut in to margins. However, these companies are very smart, they always find a way to come out ahead, sometimes even further ahead than they once were. Just up the price of the product or charge a higher management fee. In the end, the customer pays for everything. More regulation certainly won't help the customer from a pricing perspective.

Click to expand...

I agree, when government scrutiny become apart of the process. The consumer will pay for all increases and that is a fact and not a myth.