Why Isn’t There Buyer Finance?
February 26, 2010 by Perspective Magazine | Timeshare & Fractional Reviews
Everyone says the economy is improving and that things are getting better. But what about the timeshare market? For an industry so dependent on consumer lending, the most important issues aren’t simply when travel will pick up and how much consumers are spending – it’s all about the paper.
Here, we interview two experienced financial experts – Charlotte Bailey, operations director, HMC Funding, North Somerset, England; and Nico March, senior vice president – Investments, The March Group of Wells Fargo Advisors, San Diego, California – to find out about the true state of buyer finance.
How would you describe/explain the problems surrounding the lack of consumer financing available? Why isn’t there buyer finance?
Bailey: In regard to UK timeshare, there have never been more than two banks/finance companies in the marketplace and for a great majority of the time in recent years there has only been one finance company. Also finance has only really been available for the British purchases because only a very few people from the banking and finance industry, such as HMC Funding, understand timeshare.
March: I think the question itself is a misnomer. It should really be, “Where is there buyer financing?” While the old-fashioned 10-year-term loan or mortgage type paper is probably history, loans are being made today and lending solutions have been provided even in today’s volatile economic environment.
The sales and marketing of fractional and timeshare are changing with the times as well. We have been making money available for those few who are entrepreneurial leaders and willing to think outside the box. In fractional markets, most prospective buyers are successful high net worth individuals and families with real estate holdings, business ownership and other assets – and all of these folks are still looking to buy, especially today! We are actually lending them money now, at rates as low as 4% (as always, rates are subject to change*).
When discussing the financial criteria and qualifications for the luxury market purchaser, this unique idea fits perfectly within the basic demographics of most of your potential owner profile. In addition, part of our value proposition has been a no cost or obligation analysis of each individual case with a white-glove approach. Once qualified, funds are usually available for your client in as little as 4 days** utilizing various methods currently at our disposal. It is not old school and not everyone is qualified, but in the fractional marketplace would you rather have cash – or paper that may default on you?
What about developers who say they will not open a fractional development if buyer financing is not in place first?
Bailey: For fractional consumer finance, it really depends on a number of factors. We have seen numerous enquiries from socalled fractional clients, most of which have no comprehension of what is required to establish a successful fractional operation. We also have seen developers trying to sell fractional at a high retail price to any nationality without research or investigation as to what constitutes a successful fractional project. The chances of finding a bank or mortgage lender to finance these fractionals are rare because the financial logic does not add up in terms of risk and rewards for the bank or funder. Therefore, finance programs for these projects will be difficult in the current financial economic climate.
The other factor is that there is a fundamental lack of prospect purchasers for second and vacation homes in places like Spain and parts of the U.S.A., as well as other parts of the world. The assumption made is that if they will not buy whole ownership, then they will buy fractional. This is a flawed proposition. Most fractionals are sold to existing timeshare owners.
Developers with existing unsold projects are looking for alternative ways of selling these properties as fractional purchases (a posh name for timeshare) at a profit. Regrettably, the price point for some of the fractional are totally unreasonable in the current climate, and that is why banks and financial institution will not finance these projects. You do not need a degree in applied mathematics to realize that a property which originally would sell for $500,000 two years ago which is now valued at $250,000 and still on the market can now be marketed as quarter share for $125,000 per share, which is what developers are trying to achieve. In today’s real world, a bank or funder would look at that property and currently fund a maximum of 60% of the value of that property as a whole ownership sale ($150,000), so why would they finance four quarter shares at $125,000? In terms of risk, the bank or funder would be over exposed by over 100%.
The only solution is to start from a very different prospective: Understand what banks are prepared to lend and to what price point, and then price your product accordingly.
March: When a developer is considering a fractional development, the end-user financing is always a major consideration. In the future, I believe developers will have to consider several changes to the economic landscape:
• The “banking” model of earning 14% cash on receivables plus selling real estate at a nice profit is no longer as viable as it was in the past. I am certain that some institutions will come back into the market (some securitizations have actually taken place recently) however, time will tell how many players can afford the risk.
• Cash sales will become the vehicle of choice for “preferred properties”. As I mentioned before, buyers are out there, the “baby boomers” are starting to retire and travel and they have the assets to be able to afford to purchase today.
It’s a team effort; innovators and developers who embrace this change will be the winners in the next few years.
As an example of some of the clients we have dealt with, the following represent a baseline profile of individuals (including spouse) that might be considering a purchase. With an asset mix similar to these we are able to arrange consumer financing for the full purchase price.
Profile 1: $200,000 Purchase
Age 45-65
$200k Annual Income
Net worth: $2 Million
$1 million Home/Property
400k 401k/IRA
600k Investments & Savings***
Profile 2: $500,000 Purchase
Age 45-65
$300k Annual Income
Net worth: $3 Million+
$1 million Home/Property
500k 401k/IRA
1 million+ Investment Portfolio***
Profile 3: $1 Million Purchase
Age 40-70
$500k Annual Income (including interest and
dividend income)
Net worth: $8 Million+
$2 million+ Home/Properties
1 million Retirement Accounts
3 million++ Investment Portfolio***
2 million+ Business Interests
As to the differences between or across the pond, I believe that the global economic situation has created an enormous opportunity to create new models applicable by developers on a worldwide basis. Many individuals today have global banking, financial services and lending capabilities through various institutions. The trick is finding the right connection, and making certain the development is one that has sales appeal. The rest is just paperwork.
*Variable rates based on assets, subject to change
**Using Asset Backed LOC with marginable securities
***May also include highly appreciated assets (equities/fixed income/international and income generating bonds such as USD-denominated municipal bonds).
For More Information
HMC Funding
HMC Funding is one of the leading providers of financial products to customers, marketers and developers in the leisure industry. The scope of our funding includes vacation and cruise finance, timeshare, fractional and whole ownership. Our reach includes the U.K. Europe, North America, and both the Middle and Far East.
Telephone: +44 (0) 1934 751850
E-mail: charlotte.bailey@hmc-funding.co.uk
Website: www.hmc-funding.co.uk
The March Group
The March Group works with clients globally providing asset and liability analysis, banking, investments, lending and services typically done in the past through many diverse, small or sometimes local institutions. In addition, The March Group developed and coordinates some unique software and financial management processes exclusive
to their corporate clientele.
Telephone: 858/523-7923 | 800-538-8301
E-mail: nico.march@wellsfargoadvisors.com
Website: www.home.wellsfargoadvisors.com/nico.march
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