Value of Extended Contracts

[nickspace]

This idea was raised on another thread but I feel it deserves a thread of its own to foster proper feedback.

If OKW extended resale contracts do not demand a much higher price than regular OKW resale contracts would it be worth while to buy an extended contract at another DVC location if Disney offers this option?

 

[disneynutz]

Depends if you really think that you need the extra years.

The OKW extension was handled so poorly that it will be interesting to see what they offer for the next resort.

 

[chalee94]

If OKW extended resale contracts do not demand a much higher price than regular OKW resale contracts would it be worth while to buy an extended contract at another DVC location if Disney offers this option?

you'd think it would teach most people that the present value of points 30-40 years in the future is pretty low...

if they decide to offer another extension, i hope they wait till 10-12 years from expiration.

(but for those of us who will be really old in 2042...the question is moot.)

 

[nickspace]

Depends if you really think that you need the extra years.

The OKW extension was handled so poorly that it will be interesting to see what they offer for the next resort.

Why was it done poorly?

 

[DisneyWalker44]

If WDW and DVC are still going strong 35 years from now, $15 to extend for 15 years will be seen as a huge bargain. In 2042 those that took the option will be laughing their butts off at those that didn't.

When trying to price the value of something 34 years from now, you're guessing about 2 factors. First, the time value of money - how much are you willing to set aside today to get a benefit far in the future. But you've also got to guess how much the item is going to be worth in 34 years. It's the double uncertainty that makes people so hesitate to pay for the extension.

If you take the extension, you are effectively betting on Disney and DVC. I'm going to turn down the extension if it's offered at $15 for my resort. But I sure hope I'm wrong and you guys are mocking me in the future.

We'll see.

 

[Dean]

As I noted in the other thread, $15 was too much. $10 was about the max to get a decent amount of participation, $5-6 pp was likely a more reasonable amount. $15 a point for a value 32 years into the future is a huge amount to the member for an asset that will be on the far downside of declining value anyway. Not to mention the dues risks when that extra 15 years kicks in.

 

[Mississippian]

....$5-6 pp was likely a more reasonable amount. $15 a point for a value 32 years into the future is a huge amount to the member for an asset that will be on the far downside of declining value anyway. Not to mention the dues risks when that extra 15 years kicks in.

I agree $5-6 was a reasonable amount to ask for an extension, but it was only worth $3-4.

Disney really ripped these people off, and I've never seen so many people happy to be ripped off!

 

[BostonDisneyKid]

We declined based on the price as we felt it was not a good (or decent or even remotely sane) offer based on the cost/value. For what it would have cost us to add 15 years to the "end" of our contract at OKW we could have gotten an add-on of a 55-65 pt contract (not including dues) direct from disney or 65-75 pts resale.

I do not have the actual offer readily available but the original notice of the offer I have copied below as a quote...

All Old Key West owners are going to be offered the opportunity to extend the contract end date from 1/31/2042 to 1/31/2057, an additional 15 years.

The price for the extension is $25 per point. If you accept this offer prior to 2/29/2008, the cost is $15 per point with Disney Vacation Club Development covering the extra $10 per point.

If you choose to add this extension, you'll receive a "Lighthouse Memory Capsule" and a special lithograph. If you choose not to accept this offer, you will still get the lithograph but not the capsule.

In order to compensate for the cost (notary) and time required to process the paperwork, all members are getting a $30 credit of their December 2007 dues whether they take the offer or not.

Payment options are through DVC with a 10 year loan with 10.75% interest. You can also opt to finance it privately, pay it in full or pay it using a major credit card. There will be no closing costs.

This offer is per contract. If you have multiple OKW contracts you do not have to accept this offer for all of them. However, it must be applied to the full value of your points to whichever contract you choose.

This is a one time offer. You will not be allowed to extend your contract with this offer at a later date.

The price of OKW points purchased through DVC for expiration in 2042 was $92. With the passage of this extension resolution, the cost is now $96 per point with an expiration of 2057.


A lien will be placed on all current contracts in the form of a special assessment for the extension of the ground lease. The lein is satisfied by either accepting or rejecting the extension.

- Notice in bold they valued the price to be a $4 value but were charging $25 with a "purchase quick option" of only $15 !!! How they got people to sign the dotted line is beyond me. They must have sprinkled a little more than pixie dust in some of the offer envelopes unless some people really, really wanted the "Lighthouse Memory Capsule".

 

[chalee94]

Why was it done poorly?

part of it was requiring owners to "opt out" rather than offering the opportunity to "opt in."

so if you owned OKW and didn't want the extension, you still had to go through the trouble of getting your refusal notarized and delivered. (to be fair, DVC did reduce fees to compensate everyone.) but if you didn't decline, DVC had the right to put a lien on your contract, cancel your reservations and so on... not a customer-friendly way to handle such a "great opportunity."

 

[tjkraz]

part of it was requiring owners to "opt out" rather than offering the opportunity to "opt in."

so if you owned OKW and didn't want the extension, you still had to go through the trouble of getting your refusal notarized and delivered. (to be fair, DVC did reduce fees to compensate everyone.) but if you didn't decline, DVC had the right to put a lien on your contract, cancel your reservations and so on... not a customer-friendly way to handle such a "great opportunity."

The other approach would have been to market the extension as a separate contract. If they had gone that route, DVC would have been prohibited from offering the extension to current owners living in many states, provinces and countries due to local timeshare sales laws.

I wholeheartedly agree the price was waaaaaaay too high and that DVC should have been much better organized when it came to the extension. But on the topic of how they approached it, I have a sense DVC was in a no-win situation.

 

[Disney_Villain]

The other approach would have been to market the extension as a separate contract. If they had gone that route, DVC would have been prohibited from offering the extension to current owners living in many states, provinces and countries due to local timeshare sales laws.

Hi Tim. You bet that would have happened. Living in Manitoba, Canada we would not have been able to extend from home. (As it is, we've had one heck of a time making purchases - sometimes paying for extra flights - where so many of you in the USA can just pick up your telephone and call your guide to purchase.)

We did extend our 230 point OKW contract to 2057, as we thought that 15 years more for the price DVC was intially offering was fair. That brought our OKW contract "in line" with our other contracts in terms of expiration date. Now we have contacts with expirations of 2054, 2057 and 2060.

230 points X $15 = $3450. That isn't that big a sum of money, really. We also don't have to get the full 15 years out of the extension to get good value of out this $3450 extension.

We feel that those who declined their $15/point OKW extensions (due to anything but their impending old age) really missed out on a great deal.

 

[Chic]

Disney Villain-I agree with you. I think the extension offered at OKW was a great deal. Maybe I'm missing something but I'm not sure why others think the offer was a rip off. Let's do the math. It costs $3450 to extend 230 points for 15 years. You can stay about 2 weeks or more in a Studio room at Old Key West with that number of points. The current rack rate for a Studio room at Old Key West is about $300 a night for a cash reservation meaning it would cost $4200 to pay for those 2 weeks. The contract pays for itself in one year but it's good for 15 years. We all know that as the years pass that the room rates increase. Just imagine what the rack rate will be for a Studio in 2042 when the regular Old Key West contracts expire. My guess is well over $1000 a night. There are maintenance fees but you can always rent a few of your points to cover those dues if needed. I'm a Saratoga Springs owner and you can bet that if Disney offers us an extension, I'll take it in a heartbeat. I may not be alive or able to enjoy those extra 15 years but my children will still be around and going to visit Mickey Mouse. I think it would put a smile on their faces knowing that daddy purchased the extension allowing them to enjoy prepaid vacations well into their adulthood.

 

[tjkraz]

Disney Villain-I agree with you. I think the extension offered at OKW was a great deal. Maybe I'm missing something but I'm not sure why others think the offer was a rip off.

The main thing you are ignoring is interest lost on the money paid for an asset you won't be able to use for 33 years.

Let's say you took that $3450 you paid to extend and had invested it. If you earned a modest annual return of 6%, by 2042 you would have over $22,000 in the bank or $96 per point. Then in 2042 you could take that money and buy a 15-year contract at OKW or AKV or some other resort if you still want to visit WDW.

The real question is whether you do better paying $15 per point now or $96 per point in 2042. I'm forced to side with the latter.

Financially I think the extension doesn't stand up to the least amount of scrutiny. Extended contracts hitting the resale market are not getting $15 more per point than the non-extended contracts.

Under the right set of circumstances it's POSSIBLE for someone to make-out better with the extension. But it would take a virtual "perfect storm" of economic conditions in order for that to happen.

If people extended for emotional reasons...that's fine...it's their money. People buy $80,000 cars every day while a $30,000 vehicle would still get the job done. But economically I think you have a lot more to gain by refusing to extend, investing the money, and looking for a cheap short-term contract come 2041.

 

[logan115]

The main thing you are ignoring is interest lost on the money paid for an asset you won't be able to use for 33 years.

Let's say you took that $3450 you paid to extend and had invested it. If you earned a modest annual return of 6%, by 2042 you would have over $22,000 in the bank or $96 per point. Then in 2042 you could take that money and buy a 15-year contract at OKW or AKV or some other resort if you still want to visit WDW.

The real question is whether you do better paying $15 per point now or $96 per point in 2042. I'm forced to side with the latter.

Financially I think the extension doesn't stand up to the least amount of scrutiny. Extended contracts hitting the resale market are not getting $15 more per point than the non-extended contracts.

Under the right set of circumstances it's POSSIBLE for someone to make-out better with the extension. But it would take a virtual "perfect storm" of economic conditions in order for that to happen.

If people extended for emotional reasons...that's fine...it's their money. People buy $80,000 cars every day while a $30,000 vehicle would still get the job done. But economically I think you have a lot more to gain by refusing to extend, investing the money, and looking for a cheap short-term contract come 2041.

Ya beat me to it !! A bit more conservatively I was going to say that assuming 5% returns it would be like paying $17K in 2042.

Chris

 

[Bob Price]

Ya beat me to it !! A bit more conservatively I was going to say that assuming 5% returns it would be like paying $17K in 2042.

Chris

Or you could have bought some GM stock and ....ummm..... well.....
Well you or your family could be taking 15 more years of vacations.
Maybe the extension wasn't such a bad idea.

 

[Chic]

Help me out. I'm not a whiz when it comes to investment so explain how 6% interest on $3450 is $22,000. You also pay taxes on the interest every year when filing your taxes. According to my math, 6% of 3450 is $207 a year. There are 31 years between now and 2042 so $207 annual interest times 31 years is $6417 interest. Another scenario mentioned was paying $90 something dollars a point in 2042 instead. Really?? Since DVC began in early 1990 the cost per point has gone from $54 a point to $112 per point now. That means more than double the cost in 15 years. As far as the possibility of extensions being offered in 2042, I would think that Disney will begin the 50 year process all over again for the next generation of families. A young family just entering into DVC is not going to view 15 years as enough time to get their money's worth out of the program. Once again, I'm no investment expert so please clarify.

 

[tjkraz]

Help me out. I'm not a whiz when it comes to investment so explain how 6% interest on $3450 is $22,000. You also pay taxes on the interest every year when filing your taxes. According to my math, 6% of 3450 is $207 a year. There are 31 years between now and 2042 so $207 annual interest times 31 years is $6417 interest.

The interest compounds meaning you earn interest on your interest.

In Year 0 you start with $3450
In Year 1 you earn $207 bringing your account balance to $3657
In Year 2 you earn $219 bringing your balance to $3876
In Year 3 you earn $232 bringing your balance to $4109

...and the numbers keep going up from there.

Most investment vehicles do not have a fixed rate of interest so you may earn 12% one year and take a small loss the next. But over 30+ years those peaks and valleys will even out. Over the last 25-years the Dow averaged an 11% annual return. That's almost double the 6% I used in this illustration.

(Note that I didn't pick that period just because it returned favorable numbers...that just happens to be the figure I was able to locate most quickly.)

And that 11% came despite things like Enron, Worldcomm, the post-9/11 market dip, the 2008 market dip, etc.

Yes you do typically have to pay interest but that comes when you pull your money out of the investment--it's not an annual charge.

Another scenario mentioned was paying $90 something dollars a point in 2042 instead. Really?? Since DVC began in early 1990 the cost per point has gone from $54 a point to $112 per point now. That means more than double the cost in 15 years.

But I wasn't talking about buying a brand new 50-year contract in 2042. In 2042 (when the initial OKW ownership would end), contracts at SSR will have 12 years left. Extended OKW contracts will have 15 years left. BLT contracts will have 18 years left.

What I was referring to is buying a SHORT TERM CONTRACT in 2041/42 with the proceeds of your investment.

Your end goal is to have OKW ownership until 2057. Here are the two approaches:

1. Pay $15 per point now to extend.
2. Invest the $15 per point. Assuming the 6% rate of return you would have approximately $96 per point in your investments (perhaps much more if you get a higher rate of return.) After taxes let's say you have $70 per point left to play with.

The question is whether--in 2042--you can buy an OKW extended contract with just 15 years remaining for $70 per point. We don't yet have an inkling of how short term contracts will be priced but I'm betting you would have no problem buying a contract with those dollars and pocketing the difference.

YMMV

 

[Chic]

The accumulation of interest over the years now makes sense. At 6%, the $3450 will end up being around $20,000 after 30 years. As I mentioned in my previous post, a 230 point contract will get you about 2 weeks a year in a Studio at OKW. The current OKW Studio rack rate cost is $4200 a year without points. If rack rates did not increase over the next 30 years, multiply $4200 times 30 and you get $126,000 in cost you would be paying cash for the room if you did not own the 230 points. I'm aware that the extension is only 15 years so that's a savings of $63,000 from not paying rack rates. Keep in mind that 6% interest over the same 15 years on a $3450 investment will only leave you with a little over $8,000. If you subtract the 15 year interest of $8,000 from the $63,000 cash rack rate, you saved $55,000 by purchasing the 15 year extension. Sounds like a great deal to me.

 

[tjkraz]

Certainly extending is going to look better than paying Rack Rates. The discount off of RR is why we all chose to buy DVC in the first place.

But what I'm questioning is whether you're better off paying $15 per point to extend now (or 2007, or whenever you did it) vs. holding onto the money..earning interest...and buying a 15-year contract further down the road. I'm betting it's the latter.

 

[TSMIII]

Sounds like a great deal to me.

Chic - Tim's (and others) take on this, that the $15 per point was too high, has been shown to be correct as seen in the sale prices for OKW resales.

If you check out the ROFR thread http://www.disboards.com/showthread.php?t=1960185&page=72, you'll see that on average the OKW2042 contracts are passing in the mid-to-high $60s currently while the OKW2057 contracts are passing in the low-to-mid $70s - a difference of roughly $5-$8 which is pretty much the figure many have argued, and still do, should have been the price for the extension.

Looked at another way, if you really wanted the extra years at OKW:

Say you didn't extend your contract for the $15/pt. for the 15 years - you could today, sell your OKW2042 contract for roughly $68/pt. and then purchase a resale OKW2057 contract for, what, $6 more/pt. and pay $74/pt.

A savings of $9 per point over the extension price offered from DVC.

Then you could take that $9 leftover from the $15 you didn't pay and invest that! - or buy even more points!!