The Fractional Ownership and Timeshare Racket
March 21, 2019

The Fractional Ownership and Timeshare Racket

“Can I help you?” asked the woman, as we began to leave the airport at San José del Cabo. “We’re looking for the Cactus Rental Car desk,” I said. “Oh, it’s right over there,” she replied, pointing towards a smiling face behind a nearby counter. Nothing at the counter said Cactus Rental Car. But that didn’t bother us. We’ve been to Mexico before; signage can be spotty.

The guy behind the counter asked for our rental information. The man, whose name was Gerardo, looked over our paperwork and said, “I can get you a better deal.” We still thought he worked for Cactus, so this sounded good.

“Let’s cancel this,” he said, “and I’ll get you a car through our hotel.”

“We already have somewhere to stay,” I said, “and we don’t want to change our reservation.”

“That’s OK,” said Gerardo, “You can go with Cactus and stay at your hotel. But you should see our hotel. It’s brand new, and we just want to show people how great it is. If you want, I can take you to the hotel tomorrow morning. We can provide a free breakfast and give you $150 just for showing up. If you like the hotel, you can tell your friends about it. In a way, we’re just paying for word-of-mouth advertising.”

Ahh… this was finally making sense. He was a tentacle on a timeshare octopus. “Where are you staying?” he asked. “I can come by your hotel at 8:00 am and then you can follow me in your car.”

Truth be told, we’re budget-conscious travellers. We enjoy five-star resorts while I speak at conferences. But we love meeting people who do off-the-wall things, like hitchhiking around the world or riding their bikes to Argentina. Such people don’t stay at five-star resorts. That’s why we prefer a hostel’s vibe.

The Garza Blance Resort, where they wanted to know if we were really married

“We’re staying at Baja’s Cactus Hostel in Cabo San Lucas,” I said. He likely thought we were broke. But that didn’t matter. He knew that if he could bring us to the resort, he would get a commission. I chuckle to think that he almost didn’t.

He met us in the morning, and we followed him in our rental car. “You’ll need to show them two credit cards when you enter the hotel,” he said. This sounded weird, so my wife and I decided not to let them see our credit card numbers.

When we arrived at the Garza Blanca Resort, Gerardo ushered us into a large room with small tables. “Oh, here we go,” I thought. A young woman sat with us. She wanted to see our credit cards, and then she asked us to fill out a short questionnaire. Once completed, she took the paper to a counter where she met two other men. But something wasn’t right. The woman kept stealing backward glances, as if she had seen our mugs on a Most Wanted poster.

Gerardo then slid up to our table. “I won’t get my commission unless you can prove you are married,” he said. This was getting weirder. Gerardo slipped aside when the woman came back. “Do you have a photo of your wedding?” she asked. “We can’t tell you’re married because you have different last names.”

This was classic stuff. Perhaps a married couple (in their eyes) would have deeper pockets and be more likely to buy whatever they were trying to sell. But we couldn’t prove we were married, so Gerardo started to sweat.

Garza Blanca Resort; Photo courtesy of Andrew Hallam

We had walked into the lair of a fractional ownership resort. They’re much like timeshares, but with fractional ownership, those who buy them are supposed to own part of the building. “You’re buying equity” is what the salespeople say. But attorney, Anky Sirkin, says the difference between a timeshare and a fractional ownership might be blurrier than you think. You can read about it here.

Either way, they both share the same creepy sales techniques. Long ago, a sage friend of mine said, “Great investments are bought. They are never sold.” In other words, if you want a great deal, you have to look for it. It won’t find you at an airport or a hotel lounge.

Another gentleman then arrived to show us the resort. He took us to the beachside restaurant. After breakfast, he introduced us to Manolo–the mafia-like guy who would grind the sales screws.

As we expected, he was slick and charismatic. He built rapport right away. Then he began his spiel, using every strategy in Robert Cialdini’s book, Influence: The Psychology of Persuasion.

He wanted to know how much we pay for vacations. “We mostly stay at hostels,” I said. “And we often tour by bicycle.” I wanted him to know that he shouldn’t waste his time.

But Manolo kept pushing. “What if I could get you 7 nights of five-star accommodations, anywhere in the world, for just $800?” I knew this was a ruse. “OK,” I said, “I’ll pay you $800 for 7 nights at a five-star resort each year.”

“It doesn’t work exactly like that,” he said. After digging further, here’s what I learned:

The fractional ownership at the Garza Blanca Resort would cost about $109,000 for two weeks of use a year (1/26th ownership). The buyer would need to provide a $24,000 down payment. No U.S. bank would provide a loan for such a property, so the resort would provide the mortgage. The buyer would then pay mortgage interest of 12 percent per year. Even if they paid it off quickly, over just seven years, they would still pay almost $45,000 in mortgage interest. To top it off, HOA fees would cost $1,300 a year, and such costs would rise with inflation.

Pele Young enjoying breakfast with our resort host

According to Trading Economics, Mexico’s inflation averaged about 5 percent per year, over the past ten years. That’s twice as high as the inflation level in the United States.

Clearly, this would cost more than $800 a year for 7 nights at a five-star resort. The HOA fees, alone, cost $1,300 a year. Manolo’s smoke and mirrors were wispy and cracked.

But he wouldn’t give up, so I shifted the topic. I asked, “Wouldn’t it be great if you owned this resort?”

“Oh man, the guy who owns this thing makes a fortune,” he said.

“Imagine this,” he added, as he punched numbers into his calculator. As the owner, I can sell a fractional ownership unit for $107,000. Let’s say it’s for 2-weeks a year. If I can sell each unit 26 times, that’s almost $2.8 million for each condo.”

That got me thinking about the HOA fees. Imagine collecting $1,300 per year in HOA fees from each 2-bedroom “owner.” That would be $33,800 per year for each condo unit. Even if they sell just half the units, that’s a staggering amount of money for each condo every year. It’s also worth noting that, in Mexico, labor costs for maintenance are far lower than they are in the United States. As a result, the HOA charges are a big money maker.

Plenty of people attend such high-pressure sales meetings. They’re promised free golf outings, whale-watching excursions and car rentals in exchange for just looking at a resort (much as we were promised). If you already own a timeshare, they’ll sweeten the incentive. After all, if you’ve bought one before, they think you might buy again. If a current timeshare owner attends a new sales presentation, they’ll receive $500.

Collecting my $150 at the Garza Blanca Resort

The following day, my wife and I settled into a lovely AirBnB for $25 a night. Our host is an accountant who works for the Hilton. “Plenty of hotels are converting to the timeshare and fractional ownership model,” he said. “That’s why we [at Hilton Hotels & Resorts] are doing the same thing around Cabo San Lucas. We can make a lot more money doing that.” I then asked if he would buy one. “No,” he said. “They always sound like a much better deal than they truly are.” And they come with restrictions that new owners rarely know about.”

If a fractional ownership or timeshare still sounds good to you, let me offer a suggestion: Never let anyone force your hand. Take time to consider your decision. That means stepping away from the sales table for at least a few days. The salesperson will try to make you buy right away. They’re devilishly persuasive, so make sure to hold your ground.

Then crunch some of the numbers. Do the math yourself. Read Deanna Keahey’s book, Winning The Timeshare Game: Buying the Bargains. The author told me, “Nobody should buy a new timeshare. You can find great timeshares on the resale market for as little as a dollar.”

That means you might save a fortune with due diligence.

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