I hate timeshare salespeople
I was in Cabo recently for a vacation. Our plan was to just sit by the beach and not do much. The problem was, the resort we stayed in was building a new timeshare complex near by and had those pesky salespeople in the lobby. “Timeshare salespeople” has a similar ring to “root canal appointment” and “IRS audit” – not something you want to deal with on your beach vacation.
Long story short, we decided to go on the tour & hear their pitch to get them off our back, get $300 in food credit, and to satisfy my curiosity. I was mainly curious about the economics of a timeshare and why these heavily incentivized, aggressive sales approach was rational for the seller.
The model room they showed us in the construction zone was beautiful. It was modern, had a nice view of the beach, and had great amenities. There are three ways a seller can make money off of this unit. They can sell it as a condo, rent it out as a hotel, or sell it as a timeshare.
Even in Cabo, a 2BR condo like the one we saw probably costs around $1M. Obviously they are showing us the best one and the actual room we would get is likely much less desirable, but for the sake of argument, let’s assume the market value of the unit as a condo is $1M. For the seller, a condo gets them instant revenue & cashflow, which allows them to pay off the cost of construction quickly and move on to the next project.
If this were a hotel room, they can easily charge $700 a night, and assuming 60% utilization the unit would generate about $150K annually. The problem with the hotel business model is that it is a high initial investment business that takes years to generate a profit. It will take 6-7 years of continuous management and maintenance of the unit to generate as much revenue as a condo, but in 20 years time, they would generate $3M. The beauty of the hotel business model is the upside and high margin they can generate after the initial cost is recouped.
The price of a timeshare essentially came down to $50K for the right to use the unit for a week every year for the next 25 years (so basically $2K/week). The great thing about a timeshare from a seller’s perspective is that they can sell the same unit 50 times over, which means they can generate $2.5M. The buyer would finance the $50K by borrowing from somewhere and pay the seller upfront. For the seller, they are able to combine the financial upside of a hotel and the instant cash generation of a condo. No wonder the salespeople are so aggressive. The timeshare model generates more revenue, gets them cash up front, and minimizes the risk & cost of having to manage utilization.
From the consumer perspective
So, why would anyone pay for a timeshare when the consumer is the one baring the financial risk and is getting tied into a long term commitment? Well if you take at least one week of vacation every year (most people do) and really really like Cabo or wherever your timeshare is, then the $2K a year will get you a $700/night hotel room for 5 nights at your favorite location. That’s not a terrible deal. Timeshares are also part of a network of other timeshares, so if you want to use your week of vacation somewhere else, you likely can find a place in the network. Even though they are selling the units as a timeshare, as a buyer, you are basically buying into a lifelong vacation club membership.
The problem is the risk and misaligned incentives. Why would a timeshare maintain the properties at a pristine level if that is not going to generate any additional revenue? What happens if the timeshare company goes bankrupt? What if a hurricane hits and destroys the building? Who is responsible to pay for the repair and are they incentivized to fix the problem? When you are on vacation and you have a salesperson telling you to sign a contract right then & there, are you really in the right mindset to make a $50K commitment?
For me the answer is clear: Thanks for the food credit, but no thanks. Now if you could stop bothering me, there is a chair on the beach with my name on it.