What is Right To Use Timeshare (RTU)
There is a significant difference between a deeded contract timeshare, sometimes called “fractional ownership”, and a right to use contract. In a deeded contract, the contract holder is a fractional owner of the property. That fraction belongs to the contract holder forever, unless they fail to abide by the terms of the contract, or, they sell it.
In a right to use contract, the contract holder is essentially a member of the club. The contract gives the contract holder the right to stay on the property. The timeshare sales people are really good about selling “ownership”, so I need to make a very clear point. RTU contract holders do not own anything! In other words, Senor Bulnes and his family still own 100% of Playa Grande, SBC, and Grand Solmar. So, right to use timeshare contracts are really memberships… That expire!
Maintenance Fees and Rental, a 45 Year Example
I don’t know how to say this any other way. Any contract holder who owns at playa grande, or other “older” resort has seen this happen. Their beautiful new resort is hopping, and renting their units for a fair market value is easy. However, over time, owners start renting for lower and lower rates, until the best deal they can make is for maintenance fees alone. This is the time when the resort starts to decline, and the passionate members who helped build the place have been replaced by random guests who have paid nothing to be there. Once owners start renting for MF, more and more people catch on, and think that they deserve to rent at those prices. Next thing you know, a 2 bedroom penthouse overlooking the Marina and the Sea of Cortez can barely fetch $300 / night… That’s less that a postage stamp hotel room at the Westin here in Seattle. How does this work as MF rise? Do the renters then say “well, some guy rented it to me for $800 last year….”
So let’s take a look at a typical 45 year contract for a studio at grand solmar. I’ll use reasonable round numbers for the sake of example, but realize these numbers are realistic. We’ll start year 1 with an $800 maintenance fee and a 2% annual increase in maintenance fees. 2% is low for Cabo, but it’s an easy number to calculate. Below is an image of the annual maintenance fees over the life of a 45 year contract:
As you can see, by the end of the contract, the annual maintenance fees in this example will have risen to just over $1950 per year by the end of this contract. If the owner is only still able to rent for todays maintenance fees, you can easily see that’s a loss of over $20,000 on maintenance fees alone.
A Constantly Devaluing Asset
Remember above how I said the timeshare sales folks do a great job of selling us on ownership. They really have to do this for a right to use timeshare contract. The reason for this is very simple, which is the value of your investment declines each and every year. Unlike a deeded contract which increases in value as the property value increases, your RTU contract is going to shrink, and shrink, and shrink, until it is completely worthless. Let’s use the studio in our above example to show how this works.
Our example is going to start with a Red Winter studio at Grand Solmar. Let’s start with a ball park purchase price of $17,500. Let’s also say for the sake of this example that $12,500 was financed through Solmar at their outrageous lending rate of 10%. Let’s also assume the owner pays their loan in monthly installments for the full 10 years.
After 10 years, the owner will have put down $5000 in cash as a down payment, and paid $12,500 + $7322 in interest, for a grand total of $24,822. If we break that total up across the entire 45 year contract, that’s $551.60 per year in devaluation, and this continues to happen, year after year, until your membership expires worthless.
Ridiculously Terrible Money Management
As you can clearly see, owners who rent out their units for current maintenance fees are taking their $17,500 studio, and turning into a $45,000 loss. That is the difference in the total maintenance fees paid, plus the purchase costs, plus the loan interest.
So please, just stop the debate already. If, as an owner, you wish to rent for maintenance fees to your family or friends, that is awesome, and I highly encourage it. However, if you are renting your units for maintenance fees on Facebook groups, and popular timeshare / vacation ownership rental websites, you need to stop. This practice actively screws over other other peoples membership value, and its not cool.