@FinancialPlan

Are timeshares a good financial move? In this post I offer some advice.

I went to a timeshare seminar in Puerto Rico while on vacation. This was not the first time I went to one, about 5 years ago while in Vegas I endured the same sales pitch. Then as now, my instinctual reaction is to question why anyone would want to buy a vacation 3,5 or more years ahead of time. With all the options that exist today to plan and buy vacations this does not seem like a good idea to me. My opinion can be summed up as follows. It’s an allusion to that famous line in the movie, The Godfather II (”keep your friends close, but your enemies closer’):

“Be cautious about paying for a future expense today. Be extra cautious if you also borrow money to do it”.

Borrowing money is your enemy, and you should have a good reason whenever you do it.

When timeshares first appeared, they were little more than a prepayment plan for future vacations. The industry has evolved, the timeshare that was offered at the seminar was a deeded property with title. They also provide the ability to use your account (with a point system) to pay for other vacation expenses such as rental cars and airfare. This is not unlike a condominium or townhome, the only difference is ownership is split up into multiple pieces instead of having a single owner for all 52 weeks of the year.

The Sales Pitch

The salesman was no ordinary rep, he was an executive of the company. A good salesman always impresses me because it’s a skill that I have struggled to develop. He talked about all the traveling he did in his life, visiting and living in places all over the world.  I was drawn into his stories not only because of everywhere he has visited, but also his spirit of adventure and how he made his love of travel into a career. I was thinking:

“Forget the timeshare. How much will it cost to rent YOU as my travel guide for the next 20 years?”

Then reality set in. How can I be a free spirited traveler if I have to earn enough money to pay off this timeshare? I bet he didn’t own a timeshare when he did all of his traveling in his younger days. Nope, timeshares are for working people not unemployed folks who buy travel cheap.

The Offer

The first timeshare contract offered was for a two bedroom unit, one week a year. There is a lot of flexibility here, so if you decide to take your vacation during the ‘off season’ you may be able to get a 3 bedroom unit instead. (If you think that you can get Hawaii cheap by going during the ‘off season’ keep in mind that all the great places you would want to go (like Hawaii) don’t have an off season.) The total cost: about $20,000. What would it cost to buy the whole unit for a year? This will give you a rough idea of the equivalent value. The whole unit value is:

Cost to buy whole unit: $20,000 X 52 weeks = $1,040,000

A million dollars for a vacation property is a lot of money. Is it worth it?

Evaluating the Offer

The sales pitch for the timeshare was about 3 parts dream/motivation and 1 part financial. The main financial argument that was made as to why a timeshare is a good value was a calculation that compared the cost of buying a hotel room for 30 years versus buying the timeshare now. The hotel room cost was as follows:

(7 nights * $100 hotel room * 10 % taxes) added up over 30 years with 5% inflation.

If you run this calculation in a spreadsheet, you will get a figure around $50,000. So, the argument goes, you can buy $50,000 worth of vacation for only $20,000. Sounds good, right?

Adding in the Discount

The problem with this financial argument is that no discount has been applied. Discounting is a commonly used business calculation that has application in personal finance. In fact you already use it but may not realize it. Here is a simple example. When you buy a magazine once at a news stand you pay full price. If you buy the same magazine 24 months in a row you are still paying full price. If you chose to buy the same 24 months worth of the magazine through the publisher (paying upfront) they won’t charge full price they will give you a discount, perhaps 50% or more off the retail price.

There is a practical as well as a financial benefit here. The magazine publisher wants you to pay up front because it guarantees revenue as well as strengthening their case with advertisers. As a consumer, you might not be sure that you will want the magazine all 24 months, so why pay full price now for 24 months? The discount helps to mollify your uncertainty.

From a purely financial angle, money you hold onto now can earn interest (or in the case where you borrow the money, you save interest costs). If you were very certain that you would use the timeshare every year, a discount of 3% would be appropriate. If you borrowed money at 8% to buy the timeshare, then 8% would be an appropriate number. Any number can work, a lower discount value implies a high certainty of use whereas a higher number implies a lower amount of certainty of use.

Here is the total cost of the hotel room discounted back:

$50,000 at 3% discount ==> $30,000

$50,000 at 8% discount ==> $14,000

The 3% discount implies some savings would be realized with the timeshare, whereas the 8% discount you lose money.

Advantages to a Timeshare

There are advantages to timeshare that may make them worthwhile for some people. Here are some that I came up with.

• The timeshare gives you a strong incentive to plan and take vacations.
• Your vacations typically include many other family members and you prefer the ability to get a larger unit instead of a bunch of hotel rooms. These units are worth more than a normal hotel room. Also, the accommodations of the unit will typically be closer to a condominium and not a hotel room.
• When buying the timeshare you are also buying “service” as well as a unit and an implied level of consistency all over the world. This could come in handy when travelling overseas and you want some certainty of your accommodations.
• Since the timeshare offers titled ownership, it is an asset that can be sold, rented, or passed on to your heirs.

Should You Buy One?

Timeshares don’t work for me, but that doesn’t mean they are not right for you. I know a few very savvy people who are skilled at their own personal finances who own timeshares. If you do want to purchase one, carefully consider the cost versus a realistic assessment of how much you will use it.

This article was featured at the Carnival of Financial Planning at TheSkilledInvestor.

Tags: borrowing, Discounting, timeshare

This entry was posted on Thursday, March 5th, 2009 at 11:19 pm and is filed under @yourFP. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.