Are DCs really that much "riskier" than Timeshares?

[vineyarder]

A lot of discussion has gone on in this forum on the potential loss of the membership deposits in DCs, etc.

Some interesting figures:

Average New Timeshare Price ~ $15,000
Average Timeshare Buyers Net Worth ~ $100,000
Average Timeshare Price as % of Net Worth ~ 15%
Average re-sale price ~ 40% - 50% of initial price
Can re-sell to anyone willing to buy it, at any price you can get

Average Destinations Club Deposit ~ $200,000
Average Destination Club Member's Net Worth ~$3M
Average DC deposit as % of net worth ~ 6.7%
Average refundable portion 80%
Club will buy back at agreed upon value (usually 80 - 100% of deposit) as long as Club hasn't gone belly-up, etc.

So maybe it is just a matter of how much money someone is willing to lose, and the 'average' DC member is putting less of their net worth at risk than the 'average' timeshare buyer...

I know that when I made the decision to join a DC, I considered it a luxury purchase, not an investment, and looked at what the impact would be on my life and finances if I lost the whole deposit in a worst-case situation, vs. the expected enjoyment I'd get, then found the club that seemed the best fit in terms of homes, destinations, reservation flexibility, management style, and finances... Personally I think that both timeshares and DC memberships should be looked upon as luxury purchases (albeit at different levels of luxury & price) and shouldn't be purchased by people unless it is a pretty small percentage of their net worth... And I agree with whomever said that people often try to justify 'purchases' as an investment (love the analogy of justifying the $10K TV as an investment based upon less money spent at the movies!).

Also, there's been some interesting discussions on profits for the 'owners' of non-equity DCs and management fees for the founders of equity-based DCs; according to Marriotts internal figures, of the sales price for the average new timeshare, 40% is the actual cost of the land, building, furnishings, etc. (i.e. the real asset); 43% is marketing & sales, and 17% is developer profit, with management fees representing 10% of annual dues on an ongoing basis. So it makes perfect sense that a "new" timeshare purchased for $15K is 'worth' $6K (40% of $15K) as that was the value of the underlying asset.

Here's another interesting powerpoint:

http://ir.shareholder.com/mar/downloads/2007TimeshareAnalystPresentation.pdf

 

[Bourne]

Right on the money. [pun intended]

 

[BocaBum99]

I completely agree. No wonder you have a net worth of over $3M. You are wise with your money.

 

[smbrannan]

Here's another interesting powerpoint:

http://ir.shareholder.com/mar/downloads/2007TimeshareAnalystPresentation.pdf

Is it just me, or does anybody else find it shocking that more than half of timeshare sales are financed at extremely high rates (13-13.5%).

 

[mshatty]

Interesting powerpoint presentation.

I agree wholeheartedly with your approach that a timeshare or fractional purchase is a luxury purchase. It's a matter of scale depending on your income and net worth.

I have not looked at actual contracts or paperwork concerning destination clubs. But, unless a member has an actual perfected lien or a deeded ownership interest in the real estate, all the member has is a contract that is completely dependent on management's honesty and competence as well as the marketplace. If either fails, the contract is not worth very much to the member.

 

[puffpuff]

Is quite interesting how people would gladly pay $100000 for a golf course membership entrance fee without second thought and yet have so much reservation with a DC. Both are luxury items that carry no deed for the member and essentially no security . If you ask me, luxury homes are a lot easier to liquidate than a golf course.

Personally , I rather put down $100000 with potential 80% returable to join a DC and lock in the MF fee going forward than to buy a new car with the same money knowing it will depreciate a least 50% in 5 years guaranteed. Obviously I am in the minority as there are far more $100000 cars around than DC memberships. There are also more $100000 golf club memberships around than DC memberships. Many timeshare owners are happy to give their TS away just to get out of the annual dues. Lots of them are at ebay staring at $1.

Timeshare, country club membership ( inlcuding DC) are toys - you must be prepared to write it off.

Rationalizing ia membership as a bonafide real investment is difficult under the current offerings because there are too many moving pieces that makes this type of "membership-investment" concpet murky at best. Numerous attempt are trying to do this, and the one that comes closest is Cresendo.

Count on 30% haircut in the worse case, ( as what happen to members of T and H ), and if you can sleep with that, then consider DC if it fits your lifestyle. Otherwise, its not your cup of tea at this time, and best to sit on the side line, and even if you have to pay more later, its less stressful to the soul.

The only real investors today are those that shareholders of the DC itself. Ultimate, HCC, and others are doing private offerings, and that is the way to particpate in a real way on the upside.

In Time, DC industry is not only about real estate. Just like marriott is not about real estate. Its really a hosptality business . As a going concern, the DC business as one unit with stable members and positive cash flow makes for compelling valuation far above and beyond what the real estate is worth. That is the business model DC operators are beting on . Real estate is just inventory,and in this unique industry, rising appreicating inventory rather than depreciating inventory.

It does not matter how one rationalize the investment model ( by way of rising membership fee etc), there is risk with management, and management is key in every business. By the time you know something is wrong, its already too late, regardless what type or kind of club you are in. So I rate all DC ( whehter equity or not ) at this time equal in risk.

I personally would rather join a on a non-equity club that I think will survive and do well rather than a "equity" type club that is stagnant and eventually will be absorbed by other clubs at a discount. Maybe that ist he reason Exlcuisve is able to continue to grow and getting bigger while others are catching up .

So far the DC industry is very healthy and customer satisfaction is very high,. In time to come the industry will only get better ,not worse. After the T and H mess, the industry has already consolidated ( from 20 clubs donw to 8) This year it is recovering. Many clubs are able to obtai financing and these are all good signs going foward. I think growth will continue for the next 3-5 years , after whcih time the big boys ( marriott,,etc ) will likely buy out existing players and built on it. They will have four levels of particpation at each location - hotel, timeshare, fractional, and DC - all target at differnt price points and perhaps under differnt brands, but under one corporate umbrella.

 

[NeilGoBlue]

Is quite interesting how people would gladly pay $100000 for a golf course membership entrance fee without second thought and yet have so much reservation with a DC. Both are luxury items that carry no deed for the member and essentially no security . If you ask me, luxury homes are a lot easier to liquidate than a golf course.

Personally , I rather put down $100000 with potential 80% returable to join a DC and lock in the MF fee going forward than to buy a new car with the same money knowing it will depreciate a least 50% in 5 years guaranteed. Obviously I am in the minority as there are far more $100000 cars around than DC memberships. There are also more $100000 golf club memberships around than DC memberships. Many timeshare owners are happy to give their TS away just to get out of the annual dues. Lots of them are at ebay staring at $1.

Timeshare, country club membership ( inlcuding DC) are toys - you must be prepared to write it off.

Rationalizing ia membership as a bonafide real investment is difficult under the current offerings because there are too many moving pieces that makes this type of "membership-investment" concpet murky at best. Numerous attempt are trying to do this, and the one that comes closest is Cresendo.

Count on 30% haircut in the worse case, ( as what happen to members of T and H ), and if you can sleep with that, then consider DC if it fits your lifestyle. Otherwise, its not your cup of tea at this time, and best to sit on the side line, and even if you have to pay more later, its less stressful to the soul.

The only real investors today are those that shareholders of the DC itself. Ultimate, HCC, and others are doing private offerings, and that is the way to particpate in a real way on the upside.

In Time, DC industry is not only about real estate. Just like marriott is not about real estate. Its really a hosptality business . As a going concern, the DC business as one unit with stable members and positive cash flow makes for compelling valuation far above and beyond what the real estate is worth. That is the business model DC operators are beting on . Real estate is just inventory,and in this unique industry, rising appreicating inventory rather than depreciating inventory.

It does not matter how one rationalize the investment model ( by way of rising membership fee etc), there is risk with management, and management is key in every business. By the time you know something is wrong, its already too late, regardless what type or kind of club you are in. So I rate all DC ( whehter equity or not ) at this time equal in risk.

I personally would rather join a on a non-equity club that I think will survive and do well rather than a "equity" type club that is stagnant and eventually will be absorbed by other clubs at a discount. Maybe that ist he reason Exlcuisve is able to continue to grow and getting bigger while others are catching up .

So far the DC industry is very healthy and customer satisfaction is very high,. In time to come the industry will only get better ,not worse. After the T and H mess, the industry has already consolidated ( from 20 clubs donw to 8) This year it is recovering. Many clubs are able to obtai financing and these are all good signs going foward. I think growth will continue for the next 3-5 years , after whcih time the big boys ( marriott,,etc ) will likely buy out existing players and built on it. They will have four levels of particpation at each location - hotel, timeshare, fractional, and DC - all target at differnt price points and perhaps under differnt brands, but under one corporate umbrella.

Well said...

 

[PerryM]

Wake up call...

We have already had the first bankruptcy of a DC club. To make things worse it was the first DC - a model for others to emulate?

I'm sure that some timeshare developer out there has gone bankrupt, I remember reading about a HOA that went asleep and got delinquent in state property taxes and it was sold. The members got it back, thanks to the deeds they had in some part.

As an investor I get precious little information and most of that has been massaged by MBAs from Harvard. To dismiss the pioneer DC, the founding DC, as simply a mistake that has been fixed is to ignore one of those pieces of information that years from now everyone will say "Didn't you think that was important?"

 

[vineyarder]

We have already had the first bankruptcy of a DC club. To make things worse it was the first DC - a model for others to emulate?

To dismiss the pioneer DC, the founding DC, as simply a mistake that has been fixed is to ignore one of those pieces of information that years from now everyone will say "Didn't you think that was important?"

I think that people who dismiss the failure of T&H as a mistake that was fixed are doing so for valid reasons; they did have significant differences that caused them to fail. First of all, they leased roughly 80% of their properties, whereas most DC still in business lease 0 - 20%. Secondly, they guaranteed availability, 'when you want, where you want', and if one of their leased homes wasn't available, they'd lease another for you for the week, so they ended up with a huge number of outrageous short-term leases (this cost them $5M in their last full year); I do not believe that any other DC out there makes any such guarantee - most are very explicit that availability is limited and not guaranteed. So T&H really provided a model of what NOT to emulate - and other clubs learned both the good aspects of their model and the flaws...

 

[Elsway]

I think that people who dismiss the failure of T&H as a mistake that was fixed are doing so for valid reasons; they did have significant differences that caused them to fail. First of all, they leased roughly 80% of their properties, whereas most DC still in business lease 0 - 20%. Secondly, they guaranteed availability, 'when you want, where you want', and if one of their leased homes wasn't available, they'd lease another for you for the week, so they ended up with a huge number of outrageous short-term leases (this cost them $5M in their last full year); I do not believe that any other DC out there makes any such guarantee - most are very explicit that availability is limited and not guaranteed. So T&H really provided a model of what NOT to emulate - and other clubs learned both the good aspects of their model and the flaws...

I agree! The clubs learned valuable lessons (what not to do) and potential members have become better aware of the risks. I view these developments favorably.

Ultimately, the DC industry will hit on a model which provides good value to members while providing adequate protection against catastrophic financial losses. When this time comes, we will see an inflection point in demand growth - probably in the next couple of years.

I can't disagree with those who are willing to wait until the new/better/safer model emerges - to date, this has been my approach. I do, however, think some of the risks are being exaggerated (i.e. the obsession with the potential for management fraud) and I disagreee with the general belief that an asset purchase must have minimal downside risk in order to qualify as an investment (a "reasonable" expectation of asset appreciation is sufficient in my book).

 

[PerryM]

I agree! The clubs learned valuable lessons (what not to do) and potential members have become better aware of the risks. I view these developments favorably.

Ultimately, the DC industry will hit on a model which provides good value to members while providing adequate protection against catastrophic financial losses. When this time comes, we will see an inflection point in demand growth - probably in the next couple of years.

I can't disagree with those who are willing to wait until the new/better/safer model emerges - to date, this has been my approach. I do, however, think some of the risks are being exaggerated (i.e. the obsession with the potential for management fraud) and I disagreee with the general belief that an asset purchase must have minimal downside risk in order to qualify as an investment (a "reasonable" expectation of asset appreciation is sufficient in my book).

I'm guessing that the current crop of DCs will sit around and hold off until a WalMart type of company comes in and flattens the DC landscape. This is going to be fun to watch unfurl over the years.

 

[e.bram]

A ponzi scheme is ponzi scheme no matter what you name it.

 

[NeilGoBlue]

A ponzi scheme is ponzi scheme no matter what you name it.

Calling destination clubs ponzi scheme's is inaccurate and irresponsible.

Ponzi schemes are illegal.

Destination clubs are not.

Ponzi schemes swindle their investors. Destination Clubs don't. All the destination clubs I talked to shared their financials with me. This is not to say that it's not possible that a Destination could be a ponzi scheme, but to call the whole industry a ponzi scheme is irresponsible. This also doesn't mean that some DC's will go bankrupt.

Country clubs do the same thing. 1 in 1 out. Or 2 in 1 out. etc

Does that make country clubs ponzi schemes?

 

[e.bram]

Members manage(volunteers) a country club. Investors(taking big profits) manage(drawing big salaries) the DC.

 

[NeilGoBlue]

Members manage(volunteers) a country club. Investors(taking big profits) manage(drawing big salaries) the DC.

That doesn't make it a ponzi scheme, and most DC's are losing money (another reason to do due diligience).

 

[e.bram]

Adding an ostensiby legitimate business to a ponzi scheme does not make it not a ponzi scheme. With the cash flow and expenses these operations have the chance of survival are slim. The investors will draw their cash(and your iniation fee) out as big fat salaries and club will go belly up.
For instance I got an offer to extend the warranty for my 6 year old (93000 miles) van for $1200.00 for 3 years. Think I would get aa $3000.00 engine if it blew. They pay a few claims, pay out big salaries and administratve expenses and go belly up with my $1200.00 after 3 months. Sound familiar?

 

[Bourne]

I am amazed...

 

[vineyarder]

Definition of a Ponzi scheme: Offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter.

Definition of a Pyramid Scheme: In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same. The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors.

Clearly, from the definition of these two terms, neither can possibly apply to a non-equity DC, as they only apply to investments (Ponzi) or MLM/money-making schemes (Pyramid). As many of us have pointed out, joining a DC is a luxury purchase, not an investment or an attempt to 'get rich quick', so no ROI (other than enjoyment of the services provided) is expected.

And, of course, extended warranties, while usually a poor financial choice, have absolutely no bearing on, or relation to, the DC industry!

 

[Steamboat Bill]

This thread is starting to give me a headache.

We have discussed Ponzi schemes a few months ago, yet this pops up again. I feel like I am stuck on a merry go round that I can't get off. The DC industry is the next evolution of upscale travel opportunities and is NOT a Ponzi scheme...please read the Wikipedia entry on those.

The best analogy for DCs are golf club memberships and possibly leased cars.

I loved Puf's post #6 analysis.

 

[PerryM]

It's not a Ponzi; we're just kidding

I was kidding in my interest in a Ponzi Scheme – we as a society can’t admit that Social Security bears some interesting comparisons to Ponzi so I can’t really support that DCs are a Ponzi scheme. Link to this article and it’s a real stretch to include DCs in Ponzi.

However, little facts like this mean nothing to the mainstream press – that’s what’s so scary about DCs, they have mortgaged themselves to the hilt and any crazy article in the New York Times or on TV could spell huge problems for their industry.

I’m not a mathematician but there must be some kind of sensitivity analysis that can start to put a hard number on the risk factor on failure for the DC industry. Of course the inverse would be a percentage of confidence of years ahead for robust growth with little worry about failure.

Helium Report where are you?

Bill, have a great vacation.

 

[grupp]

The best analogy for DCs are golf club memberships and possibly leased cars.

I see this comparison frequently to golf club memberships. While I am not a member of a golf club myself, I have many friends who are members at a variety of clubs. These clubs are run by the members with an elected board and each members has voting rights. So they have input into how the club is run and decisions that are made that impact the members.

Don't see this type of members involvement with the DC, so how can you use the analogy with golf club memberships?

Gary

 

[travelguy]

I agree that the several posters who continue to apply the "ponzi Scheme" and "pyramid" label to DCs are inaccurate and irresponsible. By their definition, they could rationalize their loose and wide-ranging interpretation of these terms and apply them to many successful business models and even capitalism itself. The basics of their anti-business argument are:

1. It's bad when investors make lots of money.
2. It's bad when management makes lots of money.
3. Leveraged debt is bad.
4. Paying for a service, use or amenity without receiving some type of hard ownership in return is bad.
5. Ownership is always good regardless of the liability involved.
6. Old business models are better than new business ideas.
7. If a single business fails, the entire business category is destined to fail in time.
8. Management is crooked.
9. Risk is scary.

As Bourne said, I too am amazed!

 

[PerryM]

I see this comparison frequently to golf club memberships. While I am not a member of a golf club myself, I have many friends who are members at a variety of clubs. These clubs are run by the members with an elected board and each members has voting rights. So they have input into how the club is run and decisions that are made that impact the members.

Don't see this type of members involvement with the DC, so how can you use the analogy with golf club memberships?

Gary

This I like. This is a valid point.

 

[Steamboat Bill]

Of course the inverse would be a percentage of confidence of years ahead for robust growth with little worry about failure.

Bill, have a great vacation.

That's the ticket I am going with....let's call this the Purple Pill.

As I type this, the interior design team is here delivering brand new outdoor furniture for the HCC Turks and Caisos property along with some new drapery. Funny, I thought the original stuff was fine, but the new furniture is very upscale.

 

[hipslo]

Taking HCC as an example, does anyone know what their "burn rate" is? That is, assuming that they are still in a "loss" mode, how long would it be before they burn through reserves and are no longer able to meet expenses (especially debt service?) At what point are they expecting to be at breakeven or "profit" mode? How large a cushion of reserves exists, compared to the projected point in time to reach that breakeven point? What are the assumptions underlying the projected time at which breakeven is achieved? How many new memberships do they need to sell, at what intervals, and at what membership fee? How does the purchase of new homes factor in to the projected breakeven date? What is projected to happen to maintenance fees during that period of time? To state the obvious, assuming that those of you who have purchased HCC memberships (or memberships in any DC) are able to answer all of these questions, and you are comfortable with the assumptions underlying the projections, then the decision to acquire your DC memberships are financially sound. If not, well then your strategy is something along the lines of "keeping your fingers crossed" while enjoying the current benefits.