Timing for Financing a DVC Purchase?

[wnielsen1]

I don't know what that means. I've never financed any real estate.

Putting it simply: It means if you don't pay the loan, you will lose your contract to the lender.

 

[DLgal]

Putting it simply: It means if you don't pay the loan, you will lose your contract to the lender.

But what good is a contract that hasn't been paid off? That makes no sense.

For argument sake, let's say someone finances a $25,000 DVC loan and then makes exactly one loan payment and then defaults. Now the loan company is holding a contract that they've already paid for and now has to sell, potentially at a loss. How does that benefit the loan company?

 

[Epcot Forever Forever]

The ownership interest of the contract collateralizes the loan, just like any other real estate financing.

So Monera is basically betting the market will never drop? I assume they have some sort of make good clause beyond that if the market value of the contract doesn’t cover the loan.

 

[wnielsen1]

But what good is a contract that hasn't been paid off? That makes no sense.

For argument sake, let's say someone finances a $25,000 DVC loan and then makes exactly one loan payment and then defaults. Now the loan company is holding a contract that they've already paid for and now has to sell, potentially at a loss. How does that benefit the loan company?

They generally make it up across their portfolio with higher interest rates. You're not getting a 3%, 30 year mortgage here.

 

[DLgal]

They generally make it up across their portfolio with higher interest rates. You're not getting a 3%, 30 year mortgage here.

Interesting. I wonder how they determine risk, then. Or do they just literally approve anyone?

 

[wnielsen1]

Interesting. I wonder how they determine risk, then. Or do they just literally approve anyone?

They will definitely loan the money without a credit check (if you want). I would think the interest rate will reflect that (along with considering down payment, length of the loan, etc.).

 

[DLgal]

They will definitely loan the money without a credit check (if you want). I would think the interest rate will reflect that (along with considering down payment, length of the loan, etc.).

Man, that seems kind of predatory/shady. Reminds me of all those people who were given mortgages they shouldn't have gotten back in the early 2000s.

 

[wnielsen1]

Man, that seems kind of predatory/shady. Reminds me of all those people who were given mortgages they shouldn't have gotten back in the early 2000s.

Could be, but DVC isn't really someone's personal residence so I don't think it is held to the same standard.

 

[DonMacGregor]

So Monera is basically betting the market will never drop? I assume they have some sort of make good clause beyond that if the market value of the contract doesn’t cover the loan.

That’s more or less what every residential real estate lender does. They make their money off the interest charged. If payments stop, they foreclose. Now, with someone’s primary residence, people are a bit less willing to walk away, but these DVC loans are really small compared to regular mortgages.
I’m gonna guess, and there’s probably some small print somewhere, but I doubt Monera will loan you $100k on a signature loan. There have to be some limits.

 

[crisi]

So Monera is basically betting the market will never drop? I assume they have some sort of make good clause beyond that if the market value of the contract doesn’t cover the loan.

The bet that they are making is that you will pay their above market rates until the loan is paid off. They hedge that bet - if you don't, that you will have paid them enough money that when they seize your asset, they will be able to resell it and - with your prior payments and down payment - be able to sell it at a profit. Plus there are tax writeoffs to make the whole thing high profit/low risk.

A LONG time ago my husband worked for a shady bank that made high interest loans on luxury goods, repossessed them, and resold them (it was not the most ethical company he ever worked for). Most people pay for a while before they get foreclosed on - make a year of payments on your 50k boat at high interest rates - plus the downpayment - and the bank is looking pretty good when they repo.

 

[ilvdisny888]

I don't know what that means. I've never financed any real estate.

It means your DVC contract is your collateral.

 

[kanerf]

It does not appear that Monera is in any danger of going out of business any time soon. I have used them several times and while the interest rate is higher than many loans, you can of course pay it off early using cash or another loan. The best thing about them is how fast they can fund the loan, so when you find that resale contract you are looking for you can get it.

 

[Epcot Forever Forever]

That’s more or less what every residential real estate lender does.

The bet that they are making is that you will pay their above market rates until the loan is paid off. They hedge that bet - if you don't, that you will have paid them enough money that when they seize your asset, they will be able to resell it and - with your prior payments and down payment - be able to sell it at a profit.

Sure, but DVC is not real estate. It’s a prepaid vacation plan. If the economy turns significantly south, supply will increase rapidly, demand will drop meaningfully, and ROFR will be suspended, all basically simultaneously, leading the market to utterly collapse very quickly. Sure it will rebound when the economy rights itself, but someone is backstopping Monera and I’m sure they have their own obligations to meet, and they won’t be able to do that holding a pile of temporarily worthless contracts.

And that will be exacerbated by people who owe more than their contract is worth simply walk away from the obligation if they need to improve their monthly cash flow.

Housing has a floor; People need a place to live. No one needs a prepaid vacation plan. That’s why if I owned a resale DVC lending service I’d want another guarantee beyond just the contract itself - in the situation where they’re getting an outsized number of contracts back, the contracts have lost a substantial chunk of value.

 

[crisi]

Neither are boats or luxury cars. And yet, its still a very profitable business.

 

[DonMacGregor]

Sure, but DVC is not real estate. It’s a prepaid vacation plan.

But it is sold as a deeded real estate purchase in an expiring right to use (RTU) lease, no matter how you want to describe it semantically.

 

[Epcot Forever Forever]

But it is sold as a deeded real estate purchase in an expiring right to use (RTU) lease, no matter how you want to describe it semantically.

Yes but that isn’t how the market will behave because the expiration means that the underlying real estate has no intrinsic value to the leaseholder. What you get that has value is a prepaid vacation plan.