Timeshare value as opposed to real estate value

[shopgirl Senior Member Find all posts View Profile Close shopgirl]

I have an ad on a few different sales sites for a timeshare on Maui that I am going to let expire. It is expiring in just a few days on one www.timesharevacationrentals.com

A Realtor emailed me because she is trying to sell a week at the same resort for a friend that wants to get rid of it. She called me to talk in person. A wise move. Well, they were just asking too much, so of course they will not sell it because I am asking $6,500 for an annual week, they are asking $5,499 for an EOY. This Realtor knew nothing about timeshare and had not seen the deed. She thought this was a membership that you just turn over to someone else, no closing, no RE involved, no week assigned. The floating aspect of the weeks was probably why she thought this.

Anyway, I told her these are deeded just like a house and have real estate value, but as a timeshare, they are not worth anything compared to their underlying RE value. This couple has owned it for nine years, I believe.

When I finished the conversation, I thought how ironic it is that timeshare weeks really do not sell for what the real estate value is worth, not on the resale market. That is one of the big selling points during the developer's sales presentation. But here we are, accepting that the week in question at my Maui resort is probably worth twice as much as whole-owned (6,500 X 52 weeks) than what I am asking. I have no idea how much these units would sell for as whole owned, but I am sure they would sell for more than they are in pieces.

Hatrack and I had a conversation after the board meeting last November and he said the same about Twin Rivers resale weeks.

The difference between real value and timeshare value is even more pronounced at this Colorado resort, close to Winter Park. You can buy red summer weeks for just a few hundred dollars on ebay at Twin Rivers and about $1.00 for green and yellow weeks. Ski weeks are higher and just depend on who is bidding at the time and how badly they want one. If you bought all 52 weeks, you could have an entire unit, completely furnished, for under $25K. (Except we don't sell two weeks of the year, they are for maintenance.) These same units are selling for $185-200K, UNFURNISHED. Is that amazing or what? The MF's are reasonable, so you could own a three bedroom, two story unit, except the two maintenance weeks, for a total of 50X$552 per year, which covers all expenses and will GO DOWN in three years because our MF's include an assessment. The cost for fees will probably be $480 per week. A pretty low-cost vacation home.

The practicality of this is another thing altogether.

How are you going to buy all of the weeks in one unit? Well, if it is just a vacation home, why would you have to worry about those weeks all being in one unit? You just move from place to place each time you stay there.

How would it work for deductions? You can own another home that is a certain distance from your residence, but would this qualify?

I just thought that it is odd that timeshare value is so poor and has such a bad reputation that the underlying RE value is not even taken into consideration. Just my thoughts. What are your opinions? Are there any that keep their RE value?

[BocaBum99 Super Moderator Find all posts View Profile Close BocaBum99]

Cindy,

As you know, since you are a Realtor, the way your appraise real property is via its "highest and best use." Often times, a timeshare is not the underlying real estate's highest and best use.

If a property is deeded in a residential area, then the baseline valuation of the underlying real estate should be the equivalent condo. The value of that condo will rise and fall based on how the property is used.

The problem with timeshares is that by dividing it up into more than one interval, you are seriously dimishing what an owner can do with it. For instance, the owner can't even decorate it themselves. So, the more appropriate way to view it from a valuation point of view is as a hotel or motel.

The way hotels and motels are valued are based on net present value of future cash flows. So, the higher the potential cash flow, the higher the valuation. High maintenance fees, therefore, impact valuation. Have you noticed that in certain points systems like Fairfield that those units with lower maitenance fees per point are worth more? That's an example of what I am talking about.

Now, also note that when a fixed week in a resort is added to a multi-site club that the value of the timeshare goes up as well, in general. That's because the potential uses of that timeshare goes up sigificantly when it has easy access to other like kind properties. Therefore, the reservation system and club adds value to the underlying property.

Timeshares are not the only type of business where the price of the business deviates from the underlying real estate. Take K-mart and Sear's as an example. Most of you know that Kmart went into Chapter 11 bankrupcy. When it emerged, Eddie Lampert brought it together with Sear's to create Sears holdings. His key insight was that Kmart and Sears should be viewed in terms of its underlying real estate assets which were worth more than the actual discounted future net income from retail sales at its stores. In essence, running the retail outlets were worth less than the underlying real estate. The business was actually value subtractive. It would be worth more if everyone quit working and went home. Sad, isn't it.

The good news is that when someone like Eddie Lampert takes over, then he or she can retool the business so that non-performing assets can be sold off until the cash flows of the business create an asset that is worth more than it's tangible assets. That is known as goodwill in a business. The higher the goodwill, which is defined as the delta between the market value of a company and the book value of its assets (including real estate), the better the management of the company is doing in adding value.

The reason why timeshares are valued often times below the underlying real estate is that the ownership structure prevents someone from coming in and cleaing up shop to ensure that it has at least the value of the assets. So, investors and raiders stay away from it.

PerryM had a very good idea which was to force timeshare resorts to have a fixed duration so that at the end of that period, the timeshares would be worth at least the underlying real estate. Because if the owners were all forced to sell, then other uses of that property is available to potential investors.

So, timeshares don't mirror real estate values for two primary reasons. First, the ownership structure prevents a new owner from coming in and changing its business model. Second, mismanagement of the timeshare resort. Any resort whose effective rental rate is lower than its maintenance fees has value subtractive management.

[JudyS Senior Member Find all posts View Profile Close JudyS]

Very interesting question, Cindy, and very interesting analysis, Boca!

My understanding is that a few resorts, mostly in the UK, have in fact switched from timeshare to whole ownership because the value of the underlying real estate was so high. My impression is, though, that most timeshare ownership agreements make this almost impossible to do -- you'd have to get every owner to agree to give up their timeshare.

Although I think it's quite likely that timeharing may not always be the most valuable use of a property, I do think that timeshare's negative reputation, and the relative lack of a good resale market, depresses the value of many timeshares below what they really should be worth.

...PerryM had a very good idea which was to force timeshare resorts to have a fixed duration so that at the end of that period, the timeshares would be worth at least the underlying real estate. Because if the owners were all forced to sell, then other uses of that property is available to potential investors....

Actually, timeshares in North Carolina already have this provision. After 40 years as a timeshare the HOA must vote on whether to continue as a timeshare or sell; if they vote to continue as a timeshare, they have to repeat the vote every 10 years. (Do you know where PerryM said this, by the way?)

This brings up another topic -- the value of a condo as a timeshare versus as a condo-hotel. Someone (again, I think it was PerryM) was pointing out that developers can make much more money selling a development as condo-hotel units than as timeshares. To me, that suggested that developer's condo-hotel prices are even more inflated than their timeshare prices. Any thoughts on this?

[shopgirl Senior Member Find all posts View Profile Close shopgirl]

PA made an interesting observation:

Since blue and green week timeshare owners do not have much value to their weeks, why should anyone own those weeks? Why not just rent them out to owners and passersby for very low weekly rates?

Since PA and I talked yesterday, ideas have been flowing! I would like to be able to pay a low fee, like $250?, for a green week at Twin Rivers and have it banked into my Interval account for an off-season, low-cost Orlando week. I could use three of those in January, when my son and his friends/fellow employees are going to a convention in Orlando for Adams Aircraft. These guys would be happy at High Point or Bluetree. I could get units for the entire company for $250 +exchange fee and GC for each week. They have dozens of people going to this convention.

I can get anything, even the fancier places , in Orlando for my blue week at Val Chatelle, so that would probably work for II as well. That would be a good use for all those weeks sitting in inventory right now. People might just jump on those opportunities, plus it would be money in the bank for Twin Rivers. I definitely do not want to own the weeks and pay the $552 and $504 fees every year.

[love2fly Member Find all posts View Profile Close love2fly]

Great analysis, BocaBum!

Especially the last sentence ...

Any resort whose effective rental rate is lower than its maintenance fees has value subtractive management.

In some cases high MF is due to incompetence, in other cases greed.

I have a theory that timeshare developers have a grand vision for their resorts and they hire agressive sales people to sell that vision, and we all know that truth never attends any timeshare presentation tour. Hence the developer's business plan relies that people react emotionally and pay too much, because they buy into an idea, not the reality.

Managing a resort is all down to earth stuff, and requires less dreaming and more eyes on the ball. The more the management realizes that, the lower the MF can be.