by Jason Garcia
Updated 11 months ago
The world’s largest timeshare developer, Wyndham Destinations, got off to a promising start this summer as a standalone company. The Orlando-based business, established when Wyndham Worldwide split its hotel and timeshare divisions, announced in August that timeshare sales increased by 7% and earnings exceeded Wall Street expectations during its first quarter on its own. “It was an outstanding quarter,” Michael Brown, Wyndham Destinations’ president and CEO, said on the company’s earnings call with analysts.
There was a cloud over the results, however. During the call, Wyndham also revealed that the number of owners defaulting on their timeshare mortgages climbed during the second quarter, extending what has become a multiyear increase in defaults. The company says the rate of increase in its provision for loan losses has slowed to “under 5%” in the second half of 2018, but in the earnings call Brown said defaults remain “higher than we would like,” seconded by CFO Michael Hug, who added that “loan loss remains a central area of focus.”
Of the company’s nearly 900,000 owners, only 200,000 have loans. However, the company expects to set aside 21% of its gross sales to cover losses in 2018 — meaning it expects not to collect $21 of every $100 it’s loaned.
Wyndham blames much of the problem on secondary companies in the timeshare market — firms that resell timeshares, arrange for the transfer of ownership or help purchasers get out of their timeshare contracts.
Wyndham says “disreputable third-party exit companies” in the secondary market aggressively solicit unhappy or remorseful owners and persuade them to stop making mortgage payments and paying maintenance fees. Some use unethical and even illegal tactics, Wyndham says — leaving owners who default on their mortgages with nothing but a lower credit score as a result of their missed payments.
Wyndham isn’t alone. A number of other large timeshare developers — Bluegreen Vacations, Orange Lake Holdings, Diamond Resorts and Westgate Resorts, among others — complain that timeshare exit companies are hurting their businesses. Boca Raton-based Bluegreen, for instance, says its average annual default rate has risen from 6.9% in 2015 to 8.4% this year and that companies in the exit market have been a “primary contributor.”
The timeshare industry is now taking steps to combat the problem, suing some of the biggest actors and lobbying lawmakers and regulators for policy changes. Bluegreen’s administrative costs rose during the first half of 2018 — from $30 million a year ago to $40.5 million this year — in part because of legal costs it is incurring as it dealing with timeshare exit companies.
“We are not ceding the field anymore,” says Tom Nelson, president and CEO of Orange Lake, which sells Holiday Innbranded timeshares and has sued at least two timeshare-focused law firms that represent unhappy owners. “We’re being proactive.”
The contention between the sellers and resellers derives from the basic structure of the industry itself.
The fundamental truth for timeshare companies like Wyndham is that secondary market sales pose an existential threat. Unlike with car sales, there is basically no difference for a purchaser between a “used” timeshare and a “new” one.
The biggest component in the price of a new timeshare is the cost of convincing someone to buy it — nearly 60% of the price of a timeshare is driven by sales and marketing costs. And while timeshare companies have made strides in cleaning up their sales practices over the years, the industry continues to rely on intensive marketing and impulse buys by consumers who are often already on vacation. Think all the “free” vacation packages to get buyers to hear the pitch and commissions paid to agents who close the deals.
“The sales and marketing practices of today are very much like what sales and marketing practices were 30, 40 years ago,” says Amy Gregory, a professor in the University of Central Florida’s Rosen College of Hospitality Management.
Gregory says her research shows that 85% of people who sign a contract to buy a timeshare end up regretting their decision. Most, she says, get out of the deals during state-mandated recission periods; in Florida buyers have 10 days to change their minds without penalties.
Since they depend so much on new sales, timeshare developers have little interest in furthering a robust secondary market. However, they do turn to the secondary market when they need to pick up inventory at depressed prices. And the industry works to keep owners of less desirable timeshares in their properties so they’ll continue paying maintenance fees, which in turn fund the management fees that timeshare companies charge for managing timeshare resorts. Wyndham alone made $300 million from management fees last year.
Timeshare developers have worked to restrict the secondary market for years. Marriott Vacations, for instance, prohibits owners who bought their timeshares on the secondary market from exchanging them for stays in other Marriott properties. Disney doesn’t let Disney Vacation Club owners who purchased on the secondary market use their points toward Disney Cruise Line.
In 2012, with timeshare exit companies aggressively marketing to owners, the timeshare industry lobbied the Florida Legislature to create regulations restricting advertising and beefing up penalties for misleading claims. A year later, the industry persuaded state lawmakers to make it harder for secondary companies to dump unwanted timeshares into asset-less shell companies known as “viking ships.”
Two years after that, timeshare lobbyists were successful in getting legislators to make it harder for attorneys to get owners out of their contracts based on minor “errors and omissions” in the paperwork.
The latest tactic, timeshare executives say, typically involves resale or exit companies that partner with attorneys. The exit company solicits owners and persuades them to stop making payments, and the attorneys send “cease and desist” letters that prevent the timeshare company from making any further contact with the owner.
In retaliation, timeshare developers are suing exit companies and law firms, arguing, among other claims, that they are illegally interfering in private contracts and fraudulently marketing to owners. The suits have had mixed results so far; one targeted law firm in Tennessee went out of business, while another large exit company filed for bankruptcy. Other suits have languished.
Timeshare lobbyists are again talking to lawmakers about further legislation and to state attorney general candidates about potential enforcement actions.
Meanwhile, demographic issues continue to drive the dynamic, which has seen an army of exit companies and attorneys emerge — and grow rapidly — since the recession. Baby Boomers make up the largest group of timeshare owners. Many can no longer use their timeshares or are dying and passing them down to children who don’t want them.
Those on the exit side of the business say the timeshare industry is deliberately trying to lump a few bad actors together with companies and law firms that use aggressive but above-board tactics.
“They’re really going after everybody that is trying to help consumers,” says Michael Finn, founder of Finn Law Group in Largo, which specializes in helping timeshare buyers get out of their contracts. Orange Lake sued the firm in 2015 in a case that has yet to be resolved. “We dig really deep into the contracts. And we find things. We’re really good at findings things.”
Even if the industry succeeds in clamping down on the newest exit strategies, it must still confront the underlying problem of why so many owners are eager enough to be rid of their timeshares that they’ll pay to get out.
Some sophisticated third-party investors see opportunities. Late last year, Tritium Partners, an Austin-based private equity firm, announced an undisclosed stake in Orlando-based Vacations Innovations, one of the largest secondary market timeshare companies with a portfolio that includes SellMyTimeshareNow.com and Timeshare Broker Services. Tritium was the primary early investor in HomeAway, an Airbnb-like business for vacation rentals that Expedia bought in 2013 for $3.9 billion, and RetailMeNot, an online coupon marketplace that Harland Clarke Holdings bought last year for $630 million.
Timeshares have “to figure out how to deal with the secondary market and how individuals who want out can get out,” says Professor Gregory. “It’s going to be a big problem for a long time.”
Read more in the November issue
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