What so others think ...

[cmrdgrs]

that assumes that a dollar right now is worth no more to you than a dollar in 2030. or that a point in 2030 is no more valuable to you than a point right now.

Agree chalee94. I don't think anyone is saying that a dollar in 2014 will have the same value in 2030.

you might be paying $20 per pt in annual dues in 2040, but the thing you have to wrap your head around is that paying that much in 2040 is no more than paying $5 per pt in 2014. it looks like it if you put it in a spreadsheet (and implicitly assume you are dealing with constant dollars), but it's not the case.

Again in agreement. Dollars do not have constant "value" through the years.

i would like to borrow from people who don't understand the time value of money...you could loan me $10,000 right now and in 15 years, i will cheerfully return your $10,000 in full. $10,000 = $10,000 and we are all square. except that when i put it in those terms, you start thinking i would have to give you more money down the road to make it worthwhile for you to give up that money right now.

DVC is expensive upfront and down the road. but you should have a natural understanding that every dollar that it costs you upfront hurts worse than several dollars will in 20 years.

DVC is expensive. Investing in DVC is a gamble, maybe most don't buy in with that understanding, but it is. Maybe I will and maybe I won't get my future value out of what is spent buying today.

I could take the money I spent on my upfront cost at DVC and go to Vegas. I might win and I might lose. I could take my money and put it in the stock market. I might win and I might lose. If I look at my own scenario of when I bought, I could have taken all the money I spent on DVC between 2006 - 2009 and bought a small house. Today, that house would not be worth more than I paid for it, and neither is my DVC if I sold it.

But, DVC isn't an investment. To your point I am using today's dollars and prepaying for something that will be more expensive in the future. I'm not sure, but aren't we really agreeing in the end?

 

[DizBub]

But I was curious how all the hard core 'merchants' would respond.

Rabble rouser.

 

[supersnoop]

Can someone provide examples of how you calculate the time value of money into your purchase decision?

I've assumed that maintenance fees should increase relative to inflation, or, worst case, below the market rate of return. Therefore, the current value of all future maintenance fees can be reflected by the current maintenance fee rate in today's dollars. Therefore, the future value and expense of a contract can be reflected by calculating the total future fees at today's rate.

Also, remember that this is not an invested, but a depreciating asset. Since the various properties have different term end dates, I've found that the current price differences are commensurate with the total future utility of the contract. The price differences between properties should be irrelevant beyond desirability. Where the utility is higher, the "value" is greater.

Consider a sample 160 point contract with a $5 annual maintenance fee. If one were to pay $20 more per point for the same contract ($3,600), the total opportunity cost assuming a 3% annualized return would be $10,500, or $48,000 at 7%. In comparison, the total maintenance fee expenses at 3% would be $60,000, or $160,000 at 7%. The maintenance fees have a much larger impact on total cost than the premium paid at purchase by 4-6 times. Of course, if you bring those numbers back to net present value, they are simply the total future maintenance fees at today's rate, which makes the calculation unnecessary.

I could see some value in calculating the total future utility based on term years, but the initial purchase price has very little affect on the total cost of ownership compared to maintenance fees. Please let me know how you calculate and compare the future value so I can see if I'm missing something.

 

[Dean]

that assumes that a dollar right now is worth no more to you than a dollar in 2030. or that a point in 2030 is no more valuable to you than a point right now.

The dues inflation somewhat accounts for the potential increased dollars allotted for future years as does the comparison for any option that would be chosen instead of DVC. However, that really isn't really the question at hand as I see it. The current question is simply how to value the up front costs and potentially how to value the difference between say resale and retail or one resort compared to another from a cost standpoint.

Can someone provide examples of how you calculate the time value of money into your purchase decision?

I've assumed that maintenance fees should increase relative to inflation, or, worst case, below the market rate of return. Therefore, the current value of all future maintenance fees can be reflected by the current maintenance fee rate in today's dollars. Therefore, the future value and expense of a contract can be reflected by calculating the total future fees at today's rate.

Also, remember that this is not an invested, but a depreciating asset. Since the various properties have different term end dates, I've found that the current price differences are commensurate with the total future utility of the contract. The price differences between properties should be irrelevant beyond desirability. Where the utility is higher, the "value" is greater.

Consider a sample 160 point contract with a $5 annual maintenance fee. If one were to pay $20 more per point for the same contract ($3,600), the total opportunity cost assuming a 3% annualized return would be $10,500, or $48,000 at 7%. In comparison, the total maintenance fee expenses at 3% would be $60,000, or $160,000 at 7%. The maintenance fees have a much larger impact on total cost than the premium paid at purchase by 4-6 times. Of course, if you bring those numbers back to net present value, they are simply the total future maintenance fees at today's rate, which makes the calculation unnecessary.

I could see some value in calculating the total future utility based on term years, but the initial purchase price has very little affect on the total cost of ownership compared to maintenance fees. Please let me know how you calculate and compare the future value so I can see if I'm missing something.

I'm not good enough with excel to put it all together so I normally do it separately and add the info together but the TVM is easy, just put the numbers into a future value calculator, I use 8% for long term investment dollars (5 years or more) and MM rates for the short term amount. For a purchase vs not to purchase situation I assume that the same pool of money would be used for vacation housing and thus reduce the total over time as I go on vacations. I would suggest using what you've done historically to calculate potential cost or savings. IMO, using the rack rate of DVC or even a discounted rack rate, is not a reasonable comparison.

So for a purchase vs no purchase scenario I'd do the follow assuming resale:

• Take around half and put it aside in a MM account and use that plus the yearly fees at a 4% inflation (both fees and cash rooms) until it's gone. Ideally the amount here would be enough to get you though exactly 5 years otherwise we should adjust the balance between short and long term.
• The other half I'd assume at least 8% earnings before taxes and again, using the dues amount to supplement each year.
• For a property that was more expensive or for retail over resale, I'd take the difference between the total above and the actual cost and add that to the long term investment pool.
• IMO one needs a real savings with DVC of around 20% minimum to justify the risk involved.

I don't normally get into what else you get with a timeshare simply because it's MUCH more difficult to quantify. I t think your example misses the mark because I believe you have to include the entire amount up front rather than just a smaller difference of $20 pp in the example you've set. Without checking your numbers by financial calculator, that's put you at almost $150K lost earnings. Obviously that assumes you wouldn't have gone on vacation to get those dollars in hand but it still correctly quantifies the lost opportunity costs.

 

[JimMIA]

I have a friend who loves to say, "If you let me frame the discussion, I can win any argument." I think his strategy applies perfectly to this discussion.

The amortization of acquisition cost over the life of the contract argument depends entirely on two fundamental fallacies.

The first is that the prospective buyer will hold the contract to expiration -- or if not, will receive the FULL pro-rated return from any sale of the contract. That is a Magic Kingdom assumption -- specifically Fantasyland.

You will not hold your DVC contract until expiration, and when you sell it you will take a substantial loss. I know all the arguments about folks who bought in 1993 making profits, etc, but if you believe you will break even, you are living in a dream world.

A much more realistic assumption is that you would hold your DVC contract for 10 years, and sell it for a NET (after commission and other costs) of 40-50% of your acquisition cost IF you purchased resale. If you purchase direct, you lost 20-50% the day you closed and need to adjust your net downward from there.

The second fundamental fallacy is the assumption that it doesn't matter what you pay to acquire DVC. In this line of reasoning, if you pay $130 per point instead of $65 per point it really doesn't matter because if you amortize it far enough out in the future the difference is trivial.

That's nonsense. That's rationalization, rather than reason or financial acumen. Anyone who follows that strategy should buy some other never-ending timeshare, because you can amortize it out to infinity and reduce the difference to zero...in a make-believe world.

If you can buy 200 DVC points for $130 direct or $65 resale, no matter what kind of voodoo you use -- that is a difference of $13,000.

Unless you receive some HUGE benefit truly worth the extra $13,000 rotfl2, you have made a foolish financial decision. You have sent $13,000 down the urinal...no matter what kind of financial gymnastics you try to use to justify your silliness.

 

[supersnoop]

I have a friend who loves to say, "If you let me frame the discussion, I can win any argument." I think his strategy applies perfectly to this discussion.

The amortization of acquisition cost over the life of the contract argument depends entirely on two fundamental fallacies.

The first is that the prospective buyer will hold the contract to expiration -- or if not, will receive the FULL pro-rated return from any sale of the contract. That is a Magic Kingdom assumption -- specifically Fantasyland.

You will not hold your DVC contract until expiration, and when you sell it you will take a substantial loss. I know all the arguments about folks who bought in 1993 making profits, etc, but if you believe you will break even, you are living in a dream world.

A much more realistic assumption is that you would hold your DVC contract for 10 years, and sell it for a NET (after commission and other costs) of 40-50% of your acquisition cost IF you purchased resale. If you purchase direct, you lost 20-50% the day you closed and need to adjust your net downward from there.

The second fundamental fallacy is the assumption that it doesn't matter what you pay to acquire DVC. In this line of reasoning, if you pay $130 per point instead of $65 per point it really doesn't matter because if you amortize it far enough out in the future the difference is trivial.

That's nonsense. That's rationalization, rather than reason or financial acumen. Anyone who follows that strategy should buy some other never-ending timeshare, because you can amortize it out to infinity and reduce the difference to zero...in a make-believe world.

If you can buy 200 DVC points for $130 direct or $65 resale, no matter what kind of voodoo you use -- that is a difference of $13,000.

Unless you receive some HUGE benefit truly worth the extra $13,000 rotfl2, you have made a foolish financial decision. You have sent $13,000 down the urinal...no matter what kind of financial gymnastics you try to use to justify your silliness.

That's a nice frame.

First, many people plan to hold the contract to its term. Others plan to sell at some point in the future. Either way, the total current value of the contract must be based on the remaining term; that is main basis for valuation, so I can't imagine how you could call that a "fallacy." You will certainly lose some value when selling, but that lost value should only be the transaction costs, not underlying contract value.

Second, when you recognize that the net present value of all direct costs associated with a theoretical 160 point contract, assuming a $5 maintenance fee and $80 per point upfront cost, is $44,800. If your up front costs increased to $100 per point, that would add $3,200 to the net present value of all costs associated through the term of the contract; around a 7% increase. Remember, this is based on the net present value, so the time value of money is already factored in. I recognize that some people do crazy things to get a 7% discount at Disney, but, in the grand scheme, it's not that significant. Even if we use your crazy example of someone who paid twice the current value, that represented a 25% premium on the net present value of the total costs associated with the contract. Which shows that maintenance fees have a much larger impact on the "value" of a contract than the initial purchase price.

 

[JimMIA]

First, many people plan to hold the contract to its term. Others plan to sell at some point in the future. Either way, the total current value of the contract must be based on the remaining term; that is main basis for valuation, so I can't imagine how you could call that a "fallacy."

Many people may "plan" to hold their contracts to expiration, but I think in the overwhelming majority of cases, that is an unrealistic expectation and certainly not an assumption I would use for any type of objective financial justification of a DVC purchase.

You will certainly lose some value when selling, but that lost value should only be the transaction costs, not underlying contract value.

Depends on what you mean by "underlying contract value." I'm sure you don't mean you expect to pay $100 per point going in and sell for $100 per point going out -- that would be incredibly naive, which you are not.

If you are talking about NPV, the validity of the expectations depends entirely on the validity of the underlying assumptions. My experience over the years with DVC purchasers using those rationalizations is that they use the best-case assumptions, which of course give them the answer they are seeking.

Also, we should not forget that DVC is not the only vacation timeshare option. If one is looking for a timeshare that will not depreciate, they should buy a different timeshare on eBay for $1 and then sell it or give it away when they are done with it. That is a very realistic, truly low-cost, route to timeshare ownership.

Even if we use your crazy example of someone who paid twice the current value, that represented a 25% premium on the net present value of the total costs associated with the contract. Which shows that maintenance fees have a much larger impact on the "value" of a contract than the initial purchase price.

Not a crazy example at all. A person buying direct is very often paying double the current resale value, depending on which resort they purchase. The differences people pay are not typically the $100 vs. $80 you chose, but $130-$150 vs. $75 (or less).

My point is, regardless of any of our MBA financial calculations, paying double for something is a waste of money.

We can crunch the numbers any way we want, if someone pays $26,000 for something they could have gotten for $13,000, they threw $13,000 away unless they got something really worthwhile in return. And the reality is they got absolutely nothing of value for paying double.

If you want to look at it as "only" a 25% premium on NPV, go ahead -- the person still threw away 25% even using your figures.

Of course maintenance fees are the lion's share of any timeshare ownership. MF's will be several times the purchase price over the course of the contract. Hopefully everyone reading anything about DVC knows that.

But that has nothing to do with my contention that throwing money away is throwing money away...no matter how we try to dress it up.

 

[Dean]

That's a nice frame.

First, many people plan to hold the contract to its term. Others plan to sell at some point in the future. Either way, the total current value of the contract must be based on the remaining term; that is main basis for valuation, so I can't imagine how you could call that a "fallacy." You will certainly lose some value when selling, but that lost value should only be the transaction costs, not underlying contract value.

Second, when you recognize that the net present value of all direct costs associated with a theoretical 160 point contract, assuming a $5 maintenance fee and $80 per point upfront cost, is $44,800. If your up front costs increased to $100 per point, that would add $3,200 to the net present value of all costs associated through the term of the contract; around a 7% increase. Remember, this is based on the net present value, so the time value of money is already factored in. I recognize that some people do crazy things to get a 7% discount at Disney, but, in the grand scheme, it's not that significant. Even if we use your crazy example of someone who paid twice the current value, that represented a 25% premium on the net present value of the total costs associated with the contract. Which shows that maintenance fees have a much larger impact on the "value" of a contract than the initial purchase price.

I think you're assuming that the sales options remain the same or at least consistent going forward, I'm not personally willing to make that assumption for more than 10 years out, that's ONE of the reasons I assume return of principle over 10 years rather than the full RTU. I didn't include that portion because I was trying not to confuse it further. IMO basically all of these type calculations assumes near best case scenario and generally ignore many of the risks and essentially all of the biggest risks.

 

[crisi]

Future value of money calculators can be found easily on the Internet, you don't need to know how to do the math. Google future value of money calculator.

Let's say you buy a resort resale and pay $50 a point less than the direct cost for 200 points, or $10k. You hold the contract for 30 years. You invest the $50 a point in an S&P index fund. No one can say what the future holds, and stocks are volatile, but you think over the long term 8% is a conservative rate of return for that investment (and it is over that time period).

You plug those numbers into an Internet future value of money calculator. In thirty years you have a little over $100,000.

Inflation will make that worth less than its worth today...how much less...at a 3% inflation rate it has the spending power of about $75k. Now...if you can afford to throw $75k away as you enter retirement, good for you (the general you). I think that I might find something to do with that money.

If you finance, the whole thing looks worse.

 

[crisi]

By the way, I agree that dues are a bigger deal. Bigger yet for our family is the additional costs - airfare, park tickets, food. Vacationing is a huge financial deal, and will change our net worth at retirement by seven figures over having just saved it. But just because dues are the bigger deal, doesn't mean you can pooh-pooh the buy in costs.

 

[chalee94]

Agree chalee94. I don't think anyone is saying that a dollar in 2014 will have the same value in 2030.

the people who argue that they paid $100 per pt divided by 50 years equals $2 per pt each year are saying that.

the people who argue that $20 per pt for annual dues in 2030-something is astronomical are saying that.

it's built into those arguments that a dollar in 2030 is equal to a dollar now.

 

[Dean]

Future value of money calculators can be found easily on the Internet, you don't need to know how to do the math. Google future value of money calculator.

Let's say you buy a resort resale and pay $50 a point less than the direct cost for 200 points, or $10k. You hold the contract for 30 years. You invest the $50 a point in an S&P index fund. No one can say what the future holds, and stocks are volatile, but you think over the long term 8% is a conservative rate of return for that investment (and it is over that time period).

You plug those numbers into an Internet future value of money calculator. In thirty years you have a little over $100,000.

Inflation will make that worth less than its worth today...how much less...at a 3% inflation rate it has the spending power of about $75k. Now...if you can afford to throw $75k away as you enter retirement, good for you (the general you). I think that I might find something to do with that money.

If you finance, the whole thing looks worse.

I agree, FV is easy. It's the depreciation for each interim vacation and it's integration that I have trouble integrating.

 

[JimMIA]

I think it is also worth noting that, for most of us, the financial aspects of the purchase are not the real reason we buy DVC or any other timeshare.

The real reason many of us buy is the intangible benefit to our families -- the guaranteed (even forced) vacations, the time together, better accommodations than a hotel room, etc, etc, etc.

I know in my case, it was not the DVC timeshare saleswoman, nor the number crunching, that persuaded me.

I did the tour while we were there, but what convinced me to buy was the excited expressions on my DD's (then 2 1/2, going on 20) face in all the pictures we reviewed on our return home. That was all the net present value I needed.

 

[bakerworld]

I agree, FV is easy. It's the depreciation for each interim vacation and it's integration that I have trouble integrating.

do you mean the vacation decreases in value?

 

[Dean]

do you mean the vacation decreases in value?

No, I'm assuming the money comes from the same pot for vacations for DVC vs non DVC purchase for the room accommodations. Therefore if one doesn't buy DVC but stays with cash, the pot gets a little smaller each year. It's the truly apples to apples comparison on a buy or not buy for WDW vacations. For resale vs retail, it's not nearly as applicable or not applicable at all.

 

[crisi]

No, I'm assuming the money comes from the same pot for vacations for DVC vs non DVC purchase for the room accommodations. Therefore if one doesn't buy DVC but stays with cash, the pot gets a little smaller each year. It's the truly apples to apples comparison on a buy or not buy for WDW vacations. For resale vs retail, it's not nearly as applicable or not applicable at all.

And its really hard to do because owning DOES change things. You can do it - people do it all the time - they create a spreadsheet and then they have a column of "what their money would be work at 8% in the stock market" or some such thing - and then a column that takes out the value of whatever lodging they would have booked - or the value of their DVC to them - in some cases they use rack rate on a DVC rental, which I only think would be valid if that is what you would have booked. And they track over time. But I don't think human beings have the ability to really say what "would have been" and give a good column of the real costs they would have incurred. Would they have skipped that trip when Alyissa was a Senior in High School - it was such a scheduling hassle. And maybe the next couple of years, when the college bills were rolling through. And that year they rented a house on the beach with the family, but went to WDW anyway because "we have the points."

My big question for us - when we bought we were onsite snobs - big ones. And then I took a few business trips to Orlando, as did my husband, and learned the roads a little better - and if I didn't own DVC, I think we'd rent Bonnet Creek. It wasn't even announced when we bought - but its convenient, its very nice. We'd lose easy bus access and extra magic hours - which we've never made much use of. And I'd need to rent a car - which currently we don't bother with. But if I didn't own......I'd be looking seriously at that - and would that save me money over owning - taking in the car rental....? Don't know.

 

[bakerworld]

~ its convenient, its very nice. We'd lose easy bus access and extra magic hours - which we've never made much use of. And I'd need to rent a car - which currently we don't bother with. But if I didn't own......I'd be looking seriously at that - and would that save me money over owning - taking in the car rental....? Don't know.

This is one - there was a list - reason DH dragged his feet towards DVC ownership. We're not TS people (too changeable - not big planners). While we love to return to the same vacation stops, our variety was usually time, lodging and eateries, with some surrounding activity added to the mix.

FYI: scheduled RT transfer for 2 from MCO/WDW is $68+tip

 

[Dean]

And its really hard to do because owning DOES change things. You can do it - people do it all the time - they create a spreadsheet and then they have a column of "what their money would be work at 8% in the stock market" or some such thing - and then a column that takes out the value of whatever lodging they would have booked - or the value of their DVC to them - in some cases they use rack rate on a DVC rental, which I only think would be valid if that is what you would have booked. And they track over time. But I don't think human beings have the ability to really say what "would have been" and give a good column of the real costs they would have incurred. Would they have skipped that trip when Alyissa was a Senior in High School - it was such a scheduling hassle. And maybe the next couple of years, when the college bills were rolling through. And that year they rented a house on the beach with the family, but went to WDW anyway because "we have the points."

My big question for us - when we bought we were onsite snobs - big ones. And then I took a few business trips to Orlando, as did my husband, and learned the roads a little better - and if I didn't own DVC, I think we'd rent Bonnet Creek. It wasn't even announced when we bought - but its convenient, its very nice. We'd lose easy bus access and extra magic hours - which we've never made much use of. And I'd need to rent a car - which currently we don't bother with. But if I didn't own......I'd be looking seriously at that - and would that save me money over owning - taking in the car rental....? Don't know.

I agree there are other factors besides the math of owning. I feel the psychology of both debt and timeshares are larger than the math component by about 80/20. I also believe that there are many who assume they'll only be happy on property where that's not really the case. While we prefer on property, there are a number of off property systems that give a better overall set of options when you combine DVC and NON DVC trips and look at the systems as a whole.