The Hanover Collaboration

Courtney and I were in The Canyons, Park City, UT on the first day of our ski vacation when opportunity knocked. We were planning on skiing 8 days and were trying to do it on the cheap. We had USST gold passes (the $7000 season pass to everywhere) but we would have to give them back after the third day. So when the “consierge” asked us if we were interested in getting free lift tickets, he had our attention.

All we had to do was listen to a sales presentation at the end of the day and we would each get a coupon for a lift ticket. There would be food. Seemed pretty obvious. To sign up we had to lie about our age, income and the hotel we were staying at (actually there were probably more lies in there too since there was a long check-yes section). The consierge didn’t seem to mind that we were lying. He got a bonus for sending people down.

We skiied all day. That day had my best single run of the trip, a run out of bounds off ninety-nine 90 in waste deep champagne, and as a day was seconded only by a day in Honeycomb canyon at Solitude. We only barely returned our rental skis (airplane screw up) by 4:30 and headed over to the sales presentation.

It was in a posh new resort, The Westgate, right at the base. They had slippers by the door, which Courtney had to explain were for people to go out in, not for us to put on to keep from tracking mud around. We’re both in our sweaty ski cloths which means Courtney looks pretty nice and I look like I’ve been to too many garage sales. If I take my understated but warm jacket off, it’s the purple zebra, if I take that off it’s team USA Cycling (size S). If I take my snow pants off, it’s team Mid Atlantic stars-and-splotches-forever.

Anyway, we’re wet and smelly and we’re smiling to eachother about how funny it is that they are going to give us free food and lift tickets, despite the fact that we’re probably not the sort of people who would buy anything that they would advertise in a place like The Westgate. Then our saleslady comes. Our’s as in private pitch. This makes our appearance even more akward and, at least to me, funny.

We get our food and settle in for the long haul. Like a mormon going door-to-door, she’s got a big binder, ready to blast into the presentation. Once I’ve gotten myself a bowl of chili that I’m hoping will keep me interested for a while, she rips into it.

Apearantly, she doesn’t know that we don’t know what she’s selling. We don’t ask lest we trip up her wirlwind pace. It takes so long for me to figure it out, I am genuinely intregued as to where she is going with all this. In retrospect, I see that this was deliberate on her part. If she had just come out and said “timeshare” I probably would have clamped down on the listening.

Her thesis was as follows: It is better to own your home than to rent it. The same is true, in fact more true, for hotel stays.

While her brow-beating was tedious, her thesis had merit. If we were staying where we claimed to be, it would have been a compelling argument. After 9 days there, we would have paid enough to permanently own a day and a half at the Westgate. But since we were staying at Courtney’s brother’s, the “you’ll save money” argument wasn’t holding up. The only interesting aspect to me was, what kind of a rate of return would an investment like this make.

This isn’t an unusual question. Anyone who buys real-estate to rent it would be familiar with it. Inflows:rent, physical revaluation, Outflows:mortgage interest, taxes, maintainance. Then you factor in (I forget the term) the cost of not investing in something else, which in my head I was using an index fund at 6%. My sister tried this with a beat up old building and is profiting despite grossly underestimating maintainance. My parents have rentals that net a fair bit of income even though the property value is somewhat static.

This one seems easier, property values in Park City are going up strongly and the average mountain condo in Park City stays on the market for about 20 minutes. Not losing money on the equity seems easy, and in my head I was calling it a 3% profit. Comparing to comparable resorts, the rent would be about $2500. Taxes $75, maintainance determined by holding company and voted on by owners: $533. The mortgage: 9% of $20,000 (but 0% for 16 months).

Now keep in mind that I’m just sitting there, no internet, no calculator. In my head I’m estimating that at minimum payments rent would cover the interest and expenses and you’d make 3% on the equity. Although perhaps safer, thats half of what I was imagining you would get with the index fund.

I never trust salespeople, so I hit her with the hard question “So why aren’t you in the hotel business?” She had a sloppy answer that involved kindness and she could tell that she had lost me so I immediately got handed off to the manager. The manager seemed to understand their business model. Their company builds the buildings. Then they sell the building and go build another (Las Vagas next). They make about %20-%50 more by selling the rooms as timeshares than as condos. This makes sense because condos sit empty most of the time. For whatever reason, he led be to believe that selling the building to a hotel company (or creating their own hotel company) wouldn’t be as profitable either. I didn’t buy it.

Then it sort of comes out, they are in the hotel business. Not all the time is sold. The extra time is needed as swap space, but they are free to rent it out at the last minute. So you buy a week at the resort. You own it, but it isn’t a specific room at a specific time. So you call them up and ask for an instantiation of your week. You need to do this long in advance or pay a fee. This gives them a window during which to try and rent out any vacant rooms. But there’s more.

You can trade your week to be at a different resort. The most obvious example is to trade your instantiated week to another resort. They can find a specific person with an instantiated week and just switch them… but they don’t have to. They can nearly as easily trade uninstantiated weeks, and this is where a little swap space will come in handy. This makes it easier for the holding company to find traders and buyers for the unused weeks. Most people find this part a little overwhelming.

So think about it this way. Condos sit vacant most of the time, a hotel is doing well if it is %80 full. This scheme serves to have the building as much as %96 occupied. I guess that lets them sell it for more.

Finally theres a perk. Once you are an owner you get first dibs (at special rates) on vacancies not only in your own physical building but also in any resort in the network. If you’re okay with last minute we’re talking 100-450 per week at five-star places. If I were rich and like to stay at places like that, that would be pretty awesome perk, but as it stands now, I don’t really see how to leverage that feature — it’s against the rules to rerent that time. You can, however, transfer it to people as long as it isn’t in exchange for compensation.

At this point, I’m thinking the right thing to do is to put the money into the index fund and then at the end of the 10 years buy the place in cash. At this point we’ve got both the manager and the salesperson and they go into sale-mode. At this point we get to see the 20k number (it was more earlier), we find out about the 16 months with no interest and they will pay all of the real-estate fees (when people talk about closing costs, I really didn’t appreciate that means like a hundred different 10-20$ fees).

Then they hit us with “but you have to act now”. That got me pissed. I knew the price-drop was just a game, but the claim he made (and the attourney corroborated) was that price and the lack of a closing cost was for a specific deed, that they had just rebought and would avoid having to pay those same fees again themselves if they transferred it directly. So the no-fees-tonight-only bit was the truth, but the rest was gamesmanship.

To do it I would have to break two of my personal rules. No spending money without checking the internet and no investing in anything on the same day as you find out about it. Redo the math and take into account the interest amnesty. If I can rent it out this year, I can make substantial profit initially. And, only dumbasses plan on making minimum payments. If I can get the principle down by half before the interest even starts, it looks like a much better deal.

Sensing that their cake was baked, they pulled out the icing: lift tickets, $300 worth. Really, I must admit that their salesmenship was masterful to the last. Although I still think it is a good investment, it’s hard not to feel like we got had.

So two things, 1) if you are looking to vacation somewhere but have some flexibility as to where (e.g. “the caribean”, “Germany”) I can maybe hook you up and 2) if you invest in this thing too and tell them I told you, I get $200.