Today’s kids have atrocious posture
Presenting the Control Your Cash Open-Book Quiz, complete with answers. For each of our next 3 posts (excluding Monday’s upcoming Carnival of Wealth), we’re going to put you in a fictional but plausible financial scenario. If you can figure out what steps you should take, then congratulations. You’ve got this stuff figured out and should be busy making deals instead of reading our site. This will make more sense once you read the 1st example:
Your friend just came back from Hawai’i, and you can tell it made an impression on her because she’s taken to spelling “Hawai’i” with the ‘okina. She and her husband bought a timeshare condo and think you should buy the adjacent one. That way you can take vacations together (!), which some people are into for some reason. If you ever get sick of Hawai’i, you can always exchange your timeshare week for one in Mexico, the Caribbean or Miami.*
The annual maintenance fees on the condo are $804, and the cheapest financing you can find is 11½%. You’re going to put half down, and after 5 years all your vacations will be free.
What questions should you ask?
Do you have enough information?
If no, what else do you need and where would you get it?
When we’ve given this scenario to people in real life, the sharper ones usually stop and say, “Wait a second. 11½%?”
We were being conservative. That rate is generous by timeshare lender standards. Here’s a company (DON’T CLICK THAT LINK, WHATEVER YOU DO) that charges 12.9% for the same loan. Why is timeshare financing so exorbitant, when the average residential loan is going for less than 3½% right now?
Profit maximization, that’s why. That, and one dumb customer base. Payday loan places charge 350% annual interest, rather than 5% or 10%, because their less-than-savvy customers want cash and they want it right now. Paying attention to rates? That’s for chumps. In the same vein, liquor stores not only kill alcoholics’ brain cells, the drunks pay them for the privilege (cf. cigarettes.) Someone on a modest income who has overconfident dreams of being a regular visitor to the Na Pali Coast isn’t going to be swayed by usurious interest rates. And no one ever said that both parties in a transaction have to be acting rationally.
The maintenance fee we gave was modest, too. But timeshare owners renters justify what they pay, because that’s what Monkey Brain (® Jason Hull 2013) inevitably does. A prospective timeshare renter sees $804 as a mere $15 a week. That little to keep the place painted and sprayed for bugs? Deal of the century!
Again, look at every deal from the other party’s perspective. (Which should have been the book’s title, except it’s unwieldy.) $804 in maintenance costs. Multiplied by 52 owners. The timeshare company is getting $41,808 a year per unit. No condo unit requires anywhere near that much maintenance, not even if DeAndre Hopkins and Mark Harrison each own a week. The $41,808 isn’t pure profit, but it’s a juicy markup.
The timeshare resale market is vibrant, and populated by buyers considerably smarter than the timeshares’ original buyers. If you made the error of buying a timeshare in the first place, you can expect to recoup no more than 20% of its price when you sell.
Why? Because the maintenance fees never go away. Nor do they ever decrease. Worse yet, many properties aren’t even owned by the timeshare companies that sold your week to you in the first place. Instead the properties are on long-term leases, which means that your timeshare will only be valid for the length of the lease. You’re not going to believe this, but that’s rarely the first line in the sale agreement.
There’s always someone who can justify buying a timeshare even though it’s a horrible investment. Here are a couple of the most common justifications:
- It’ll be invaluable family time. Spending vacations together is more important than money could possibly be.
- It’s not a “timeshare”, so much as it’s vacation ownership.
Yes, these objections are being articulated by a fictional rebutter of our own creation, but they’re still used all the time.
Few things have value that transcends money, e.g. health, eros, eternal salvation. A temporary living space in a desirable location doesn’t count, especially since it’s not a necessity. Nothing’s stopping you from buying plane tickets and renting a one-bedroom suite like normal people do. Which brings us to our second justification.
“Vacation ownership.” Think about that one for a minute. That the concept has to be shrouded in a piece of business jargon should tell you something about how valid it is. A vacation is temporary and evanescent, not unlike a round of golf or, for an even more commonplace example, lunch. The idea of somehow possessing it, whether in perpetuity or for future sale, is absurd. You purchase airfare and a room, you go on vacation, you come home, you pay your American Express bill in its entirety at the end of the month. The end. What is so hard about this, and why would you prefer a different method in which the payments never end?
On top of everything else, timeshares are the one “real estate” “investment” with zero tax benefits. You might as well just put the money earmarked for maintenance fees into a money market fund, and use that for a vacation each year.
Timeshares are among the starkest counterexamples we’ve found to the buy assets, sell liabilities mantra. On an individual level, there are few more efficient ways to impoverish oneself.
*Yes, we’re aware that Mexico and the Caribbean aren’t mutually exclusive. You go to the front of the class, Geography Dork.
