Is DVC Undervalued?

Drewski77 · Jul 7, 2015

There are no shortages of posts asking/exploring if DVC is worth the cost but how about the question of if a DVC contract is actually undervalued?

I look at a contract at the Grand Californian which is by no means cheap, but in comparison to paying the cash rate we break even in about 10 years...but, after 10 years we will probably have a contract that can be sold for close to what we paid. Or after 10 years we are vacationing for the cost of our MF.

Also, someone could buy into a property like SSR and rent out the points. Barring a severe drop in value the rate of return in our low interest rate environment is relatively good.

So, in general are DVC resale contracts at fair value, overvalued, or undervalued?

Missyrose · Jul 7, 2015

Drewski77 said:
There are no shortages of posts asking/exploring if DVC is worth the cost but how about the question of if a DVC contract is actually undervalued?

I look at a contract at the Grand Californian which is by no means cheap, but in comparison to paying the cash rate we break even in about 10 years...but, after 10 years we will probably have a contract that can be sold for close to what we paid. Or after 10 years we are vacationing for the cost of our MF.

Also, someone could buy into a property like SSR and rent out the points. Barring a severe drop in value the rate of return in our low interest rate environment is relatively good.

So, in general are DVC resale contracts at fair value, overvalued, or undervalued?

Take a look at what resale contracts were selling for from about 2009 to 2012 and see if you reach the same conclusions.

skier_pete · Jul 7, 2015

I don't know how you would answer that question -> DVC contracts are valued at exactly what they are valued at. The prices have been going up over the last two years, and this is because the economy is doing well, therefore less people are selling and more people are buying. The next time the economy dives again, more people will be selling and the costs will drop. Overall, prices are likely to increase for a while, until the contract lengths start to shorten. At some point in the near future, values will start to drop - say in ten years the early contracts will be expiring in 17 years versus the longer contracts which will still have 40+ years on them.

IF you would ask me, I would say the direct pricing is a terrible value, yet people continue to buy into the new resorts at these prices, so clearly those people think it's a good value.

In other words - value is all what you see in it. To you - it appears DVC is a great value. I know a lot of people that would never do it. It's all your point of view.

ziravan · Jul 7, 2015

I think the advantage you point out is countered by the lost time value of money.

That time value of money is why Disney is so keen on DVC and why it so eagerly makes this trade with you.

From a financial perspective, I consider DVC to be a wash. I didn't buy into DVC to save money. I bought into DVC because I researched it extensively and saw many people here and elsewhere enthused about DVC because it changed the way they do Disney for the better. That's what I wanted from DVC.

DVC changed the way I do Disney. That has great value for me, but it's not economical value. Traveling to Florida from Texas four times in the past year has cost me more - not less - money than I would have otherwise spent.

Drewski77 · Jul 7, 2015

Missyrose said:
Take a look at what resale contracts were selling for from about 2009 to 2012 and see if you reach the same conclusions.

If we have another recession I would expect DVC prices to fall...as will the value of many things.

Drewski77 · Jul 7, 2015

ziravan said:
I think the advantage you point out is countered by the lost time value of money.

That time value of money is why Disney is so keen on DVC and why it so eagerly makes this trade with you.

From a financial perspective, I consider DVC to be a wash. I didn't buy into DVC to save money. I bought into DVC because I researched it extensively and saw many people here and elsewhere enthused about DVC because it changed the way they do Disney for the better. That's what I wanted from DVC.

DVC changed the way I do Disney. That has great value for me, but it's not economical value. Traveling to Florida from Texas four times in the past year has cost me more - not less - money than I would have otherwise spent.

I agree with most of your post. I will say that for many, including myself, the time value of money used in a DVC purchase is much lower now due to the extremely low interest rate environment we have been in.

Cash sitting in the bank isn't doing much, to have it sit in a DVC contract doesn't create much in the way of a negative opportunity cost. This assumes of course that the money would not be used for other investments.

I don't think DVC is severely undervalued by any means but I think most resale contracts still represent a good value for those who would otherwise be paying cash rates on an annual basis.

Friendlyadvice2 · Jul 7, 2015

Drewski77 said:
I agree with most of your post. I will say that for many, including myself, the time value of money used in a DVC purchase is much lower now due to the extremely low interest rate environment we have been in.

Cash sitting in the bank isn't doing much, to have it sit in a DVC contract doesn't create much in the way of a negative opportunity cost. This assumes of course that the money would not be used for other investments.

I don't think DVC is severely undervalued by any means but I think most resale contracts still represent a good value for those who would otherwise be paying cash rates on an annual basis.

IMO, that's the wrong assumption in calculating opportunity cost associated with a DVC purchase. For example, funds taken from your cash position and invested into DVC could also have been invested in the market instead to achieve far betters returns over time than low interest rates will yield; that's a more accurate opportunity cost one should be using in their calculations, not the current 1.10% a cash position is earning, IMO. Regardless, the trick is to turn the opportunity cost in your favor as soon as possible by getting back at least half of your upfront costs. At that point, half of your money is still an opportunity cost, but the other half is now working for you to negate it.

Overvalued/Undervalued, who knows? Is Disney going to continue to raise direct pricing and rack rate pricing? Contract prices are definitely higher than they were a few years ago, but that's what the market is currently supporting so I guess people perceive that as fair value. There are still deals to be had and an optimally selected and managed contract can yield significant financial value. Prices will come down; but "when" is the question.

supersnoop · Jul 7, 2015

Friendlyadvice2 said:
IMO, that's the wrong assumption in calculating opportunity cost associated with a DVC purchase. For example, funds taken from your cash position and invested into DVC could also have been invested in the market instead to achieve far betters returns over time than low interest rates will yield; that's a more accurate opportunity cost one should be using in their calculations, not the current 1.10% a cash position is earning, IMO. Regardless, the trick is to turn the opportunity cost in your favor as soon as possible by getting back at least half of your upfront costs. At that point, half of your money is still an opportunity cost, but the other half is now working for you to negate it.

Overvalued/Undervalued, who knows? Is Disney going to continue to raise direct pricing and rack rate pricing? Contract prices are definitely higher than they were a few years ago, but that's what the market is currently supporting so I guess people perceive that as fair value. There are still deals to be had and an optimally selected and managed contract can yield significant financial value. Prices will come down; but "when" is the question.

This is a common vocabulary problem. Most people use "time value of money" to reflect purchasing power; i.e. the rate of inflation. Opportunity cost is a term used to describe investment interest or gains.

In my opinion, you should use "time value of money" when calculating your ROI, but use "opportunity cost" when determining if you'd actually save money by paying cash. If you put the initial purchase cost in an investment account and withdrew money to pay cash for a room at Disney, would you come out ahead or behind?

crisi · Jul 7, 2015

If you look at it from an ROI perspective, and the idea of being undervalued is based off coming out ahead in the end, yeah, even with TVM...but with big huge caveats....

MOST DVC owners will end up spending more money than they would without DVC. They'll book one or two bedrooms instead of studios. They will go more often. LOTS of things. That is a hidden cost when factoring any ROI.

Another hidden factor - you'll probably break even in about a decade - maybe less - if you are disciplined (i.e. book studios if you would have booked studios). But our lives aren't predictable. Three years from now we could see another crashed economy and have to sell for 60% of today's prices. You could get divorced and need to sell in a less than ideal market. You could get ill. You could lose points because of a last minute cancellation due to an ill parent - eating into your overall value. All the things that could go wrong over 40 years of ownership create some risk to any calculation. I'd only look about ten years out to see if its a good deal, its hard for anyone's crystal ball to go out much farther than that.

In my mind, participating in these conversations for a decade the conclusion I've come to is DVC is a good deal if you can afford it and it fits your travel style. In which case, don't worry about the calculations. And if it doesn't fit your travel style - it is never a good deal. And if you can't afford it - it is never a good deal.

chainkid · Jul 7, 2015

DVC for us was a great value even when buying direct in 1999. We have had a severe correction in the stock market since then and I personally took a beating with invested money. Some of my money has regrouped and paying well but a lot was lost never to be regrown. I have recently bought resale for more than I paid direct back in 1999. I do go more to Disney than I would have if I didn't own DVC but once you determine its a good fit for your vacation style and family's pleasure then its a no brainer. I have taken large family gatherings over the years and the memories are priceless to us. I recently went to Aulani and booked a Grand villa on points. It was the best vacation yet . We are by nature always busy with work but I'm a planner so this is fun for me and a forced down time for my hubby. I could sell my DVC points tomorrow for much more than I paid for them and come out ahead in the memories alone. I did spend more money with the mouse than I ever hoped to but I've probably added a few years of quality time to my life. If you can buy without financing you are much better off. I will never buy direct again but I watch for resale deals all the time. I'm up to 800 points and still willing to buy more if the price is right.

suebeelin · Jul 7, 2015

Drewski77 said:
If we have another recession I would expect DVC prices to fall...as will the value of many things.

I'm waiting for another crash. I'm looking hungrily at SSR and wishing they were back at 2011/2012 prices.....

lovelylady226 · Jul 7, 2015

While I am not looking for a crash-I sure am already looking at a contract at SSR even though I haven't even stayed with DVC yet.

Friendlyadvice2 · Jul 7, 2015

supersnoop said:
This is a common vocabulary problem. Most people use "time value of money" to reflect purchasing power; i.e. the rate of inflation. Opportunity cost is a term used to describe investment interest or gains.

In my opinion, you should use "time value of money" when calculating your ROI, but use "opportunity cost" when determining if you'd actually save money by paying cash. If you put the initial purchase cost in an investment account and withdrew money to pay cash for a room at Disney, would you come out ahead or behind?

In evaluating a DVC cash purchase, the time value of money IS the opportunity cost....no matter how one parses words. Upfront costs cannot be ignored and that opportunity cost in the form of the time value of money by not investing it elsewhere is working against you until at least half your ROC is acheived. The "rate of inflation" is not used to reflect the time value of money of a particular investment nor should it, no matter how many people you know that may misinterpret it this way. Sure, inflation may erode the "purchasing power" benefits of the time value of money just like deflation and investment gains can increase it, but that pressue is there regardless of your investment choice. Optimally utilizing the time vale of money is what's important......just ask Disney; it's why DVC exists!

I've never had a problem beating the rate of inflation with my investments and the value I've generated utilizing my money's time has been worthwhile, although I've definitely incurred some opportunity cost by not selling right at the top or getting in right at the bottom!! Heck I even incurred an opportunity cost one time at a restaurant when the fish I ate decided to stage a coup a few hours later.....missed an important event that night.

Sparrow624 · Jul 7, 2015

I am not "looking" for a crash, but do have one of those jobs that is rather protected during one...so, a fall in DVC resale prices would make this guy, hunting a nice sized BWV resale in the right year, a happy camper

pmaurer74 · Jul 7, 2015

ziravan said:
I think the advantage you point out is countered by the lost time value of money.

That time value of money is why Disney is so keen on DVC and why it so eagerly makes this trade with you.

From a financial perspective, I consider DVC to be a wash. I didn't buy into DVC to save money. I bought into DVC because I researched it extensively and saw many people here and elsewhere enthused about DVC because it changed the way they do Disney for the better. That's what I wanted from DVC.

DVC changed the way I do Disney. That has great value for me, but it's not economical value. Traveling to Florida from Texas four times in the past year has cost me more - not less - money than I would have otherwise spent.

I think many people do not know that resale is an option. I know when we were sitting in the sales presentation 5 years ago considering AKL we could not do it at that time but told the sales guy maybe within a year. Finally 5 years later we have the money but back then we had no clue there was even the option of resale.

DougEMG · Jul 7, 2015

Drewski77 said:
So, in general are DVC resale contracts at fair value, overvalued, or undervalued?

I think that the resale market is fairly stable so I would say that DVC resale contracts are currently being sold at a fair value. Two years ago they were definitely being undervalued as there were more sellers and less buyers than today.

Drewski77 · Jul 7, 2015

DougEMG said:
I think that the resale market is fairly stable so I would say that DVC resale contracts are currently being sold at a fair value. Two years ago they were definitely being undervalued as there were more sellers and less buyers than today.

I think the strength of the resale market is the key to DVC not just being a decent value but potentially a great value.

Think of pre-buying a product that after X amount of uses you save money every year. This could be a good purchase. However, think about if you could sell this money saving vehicle for close to what you paid for it after many years of saving money? This could go from a good to a great purchase and that is how I see DVC.

Financing and using money earmarked for the stock market would change my opinion, but for idle cash I see great value in DVC...oh, and the memories created are the most valuable still. Unless of course someone enjoys inviting friends and family over to look at Bank statements with idle cash earning next to nothing

crisi · Jul 7, 2015

Drewski77 said:
Financing and using money earmarked for the stock market would change my opinion, but for idle cash I see great value in DVC...oh, and the memories created are the most valuable still. Unless of course someone enjoys inviting friends and family over to look at Bank statements with idle cash earning next to nothing

OK, this has hit a hot button for me. You can make memories a lot of places for a lot cheaper than Disney. Disney is a wonderful place to spend time with your family, and if you can afford it, go for it, but don't use memories to cost justify anything. I feel nothing but pity for the people on this board who have posted over the years that apparently they can only get good family memories by spending thousands on a Disney vacation - somehow they've missed kid's baseball games and swimming in the lake and going for a hike and riding a bike and decorating Christmas cookies......

And the stock market has been very very good to me since the crash. Having six figures in gains last year is not next to nothing - at least not for me.

Drewski77 · Jul 7, 2015

crisi said:
OK, this has hit a hot button for me. You can make memories a lot of places for a lot cheaper than Disney. Disney is a wonderful place to spend time with your family, and if you can afford it, go for it, but don't use memories to cost justify anything. I feel nothing but pity for the people on this board who have posted over the years that apparently they can only get good family memories by spending thousands on a Disney vacation - somehow they've missed kid's baseball games and swimming in the lake and going for a hike and riding a bike and decorating Christmas cookies......

And the stock market has been very very good to me since the crash. Having six figures in gains last year is not next to nothing - at least not for me.

I didn't mean to strike such a nerve. I was simply pointing out that a DVC membership does provide an element of consumption value that idle cash does not.

You are correct that there are any number of ways to create wonderful memories and I would suspect that most DVC members partake in many family activities aside from trips to Disneyland.

However, we are on a message board that is dedicated to Disney. The absence of me mentioning bike rides or baking cookies isn't a function of me not seeing value in those activities, rather, we are not on a cookie baking or bike riding message board.

crisi · Jul 7, 2015

Drewski77 said:
I didn't mean to strike such a nerve. I was simply pointing out that a DVC membership does provide an element of consumption value that idle cash does not.

You are correct that there are any number of ways to create wonderful memories and I would suspect that most DVC members partake in many family activities aside from trips to Disneyland.

However, we are on a message board that is dedicated to Disney. The absence of me mentioning bike rides or baking cookies isn't a function of me not seeing value in those activities, rather, we are not on a cookie baking or bike riding message board.

In my years here, I've seen people justify some financially downright STUPID decisions with the "but...MEMORIES" excuse. If you can afford it, and it fits your style, you don't need to justify anything to anyone - go for it. Even if its not nearly as much fun as my idle cash - which is not idle - its an investment in being able to travel around Europe as my husband and I back off on our careers.

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