|Your Location: Timeshare Users Group Advice: Timeshare Appraisals |updated: 3/17/08|
on “Required” and “Recommended”
By Scott Hakala firstname.lastname@example.org
Last Update: 23-July-1999
Brokers, purported buyers and resellers of timeshares are requesting appraisals prior to listing or purchasing timeshares. Some of the brokers are licensed and appear to use the appraisal to induce you to be more realistic in pricing or may use the referral fee from the appraiser as an implicit listing fee. In many instances, you can expect to pay for an appraisal and end up without an offer for or a sale of your timeshare consistent with the appraised value.
The following are some of my comments from investigating the issues and distilling information shared by various TUG members.
1. In my opinion, you don't need an appraisal to buy or sell timeshare interests and a qualified buyer or broker doesn't generally need an appraisal either (This is not a $100,000 house with a $90,000 home loan.). A fee of even $400 is too large relative to the value of the timeshare in most cases and, at the same time, inadequate compensation for a site visit and adequate transaction research (unless the appraiser has ready access to a transactions database and familiarity with the timeshare being appraised). The possible range of appraisal conclusions is too wide to make an appraisal really useful anyway. Instead, if you are a buyer, call a number of resellers and brokers active in listing and carrying properties in your timeshare and solicit their best asking prices for the specific weeks and properties you are interested in buying. Research transaction prices and asking prices on the internet. Some experienced TUG members may be more than willing to volunteer information as to the price to pay for a specific week and property.
2. Customarily, it is the buyer, not the seller, that pays for the appraisal. Be aware that the recommended "appraisers" may not be qualified (no real estate appraisal credentials or licensing) and a proper USPAP (uniform standards of professional appraisal practice) appraisal would be too costly to be worth the effort. You should always request the resume of the managing appraiser to be assigned to your appraisal and details on the company hired to appraise your timeshare. Requesting and reviewing references, related experience and examples (redacted) of similar work are recommended. If requesting credentials and other information from the appraiser or the appraisal referral company results in an inadequate response, then you should avoid using the services of that company or appraiser. Most ethical real estate appraisers are proud of their credentials and are more than willing to send references and credentials in response to inquiries.
3. If you really want to/have to sell quickly, call a set of brokers/resellers that will tell you how to list and price your timeshare to sell. (There are useful, not complete, lists of brokers/resellers such as on www.timeshares.com or Fern’s geocities web pages.) I would highly recommend that you read the other TUG articles providing advice on buying and selling timeshare interests and take some of the sobering points to heart. You may choose to list your timeshare interest in an auction, but you should expect to receive at best a low liquidation price and no assurance of an acceptable price. Find out from fellow owners or others who is active in your resort/area buying and reselling timeshares and solicit offers.
4. If you really do need an appraisal (usually only for relatively rare financing needs or for exceptional gift and estate valuation purposes), ask the timeshare developer and other timeshare owners who they would recommend. Expect no recommendation or a response such as an "appraisal" is impossible when asking for recommendations. Despite those responses, there are means of appraising timeshares but they not very reliable (due to the range of transaction prices reported) and may not be useful for more than a ballpark estimate value. An appraiser or broker will often indicate the range of values likely to be realized, in addition to the most likely value to be realized, given the wide range of observed results. For financing purposes, use a local, licensed real estate appraiser that preferably is a member of the Appraisal Institute or a similar organization such as an Independent Fee Appraiser (IFA). If you just need to put a value on your timeshare interest to claim or report (even with the IRS), a "broker’s" opinion may be sufficient if you are not attempting to obtain financing. Be conservative by reporting a value below the lowest equivalent asking prices you can find in reviewing listings with the most aggressive brokers/resellers or use the best bid price (what the reseller offers to pay) you receive when you solicit offers. There are brokers that specialize in brokerage and resale of interests in the larger and more actively traded timeshare systems. These brokers and resellers can often establish a range of value and a general price on the resale market and may be willing to help you out.
Fair value: The fair value concept is used in economic loss
and damages cases. Essentially, it is a measure of value to an owner of
an asset for loss or damage purposes and is an alternative to fair
market value. Fair value may be:
1. fair market value
2. fair market value before discounts for lack of marketability
3. fair market value before discounts for minority interests and lack of marketability
4. investment or intrinsic value, depending on the legal issue and the jurisdiction.
Fair market value: is the price that would be negotiated between a willing buyer and a willing seller both reasonably well informed and neither under duress or forced to sell. Developer’s prices often represent primary market value and not fair market value due to the emotion and lack of education of most buyers. The secondary market/resale market is often used as the measure of fair market value, although elements of distress on the part of sellers and the limited number of buyers may violate the concept of not being "under duress". Appraisers will debate the definition of fair market value and the appropriate measures of fair market value. For IRS estate and gift tax purposes, most appraisers will generally consider the esale/secondary market transactions as the best evidence of fair market value.
Replacement or Reproduction cost: Replacement cost new is a concept that states that the value of an asset cannot exceed the cost of replacing that asset with an equivalent asset. Reproduction cost is the cost of recreating the asset less physical and economic depreciation. Reproduction cost new is similar to asking what it would cost if your house burned down, you had to buy the land the house sits on and then reconstruct the house. The replacement/reproduction value of an existing house is the reproduction cost new less some adjustment for physical and economic depreciation. These replacement cost appraisal concepts tend to work well in certain appraisals of machinery and equipment for commercial use but generally are not applicable to timeshare interests. Actual construction and carrying costs for timeshares average 25% of the primary market prices that developers charge new buyers. Since most of us are incapable of developing a timeshare interests independently the concept of replacement cost is not very relevant. Additionally, the developer must cover certain reasonable general and administrative expenses, marketing expenses and receive a fair return on investment in order to be willing to sell timeshare interests to prospective customers.
Discounts for lack of marketability: A timeshare interest suffers from a discount in value in the resale market relative to the primary/developer’s market. This is similar to the kinds of discounts we often observe in resale markets for limited partnership interests. There is not a ready, liquid market or exchange for the resale of timeshare interests. In valuation, we often apply discounts to pro rata net asset value (primary market prices) when appraising limited partnership interests. This concept is applicable to timeshare interests. Discounts for lack of marketability for limited partnership interests range from zero percent to over fifty percent, depending on the types of interests and the characteristics of the partnership.
Discounts for minority interests: A timeshare interest is a fractional interest (one week) in a single unit (apartment, small house, townhouse or condo) on land that has many such units and may not be legally subdivided with ease from other units. An owner of a timeshare interest is in the minority as a member of the home owners association and the home owners association may contract for management (usually the developer) and have relatively little say over the management of the property. In the secondary market, persons typically pay less for their pro rate real estate interests (in a timeshare or a limited partnership) than one would pay for a general partnership, manager’s or developer’s interest in the property or for the property as a whole. Minority interest discounts for limited partnership interests can range from zero percent to as high as thirty percent depending on the rights and the returns provided to minority owners.
Market approach: A means of valuing an asset by examining actual transactions (primary and secondary), bids (what buyers have offered to pay) and asking prices (what seller’s are asking to receive) in order to determine the price on average in a market transaction for the subject unit. In real estate markets, observed transactions and bids and asking prices must be adjusted into estimates of market prices that are comparable to the specific interest being appraised or useful as guidelines for appraising a specific interest in a specific market context.
Intrinsic or investment value: Intrinsic value is the value of the timeshare interest to the owner or buyer of that interest. Usually, we think of intrinsic value in the context of persons buying timeshare interests with the intention of using those interests for personal enjoyment. Typically, intrinsic value exceeds fair market value. Investment value is not very applicable in evaluating timeshare interests and can vary with the perspective of the buyer (developer, reseller or ultimate owner and user). Investment value is more of a financial perspective on timeshare investments and makes sense only from the developer’s or reseller’s perspective.
Income approach: is based on some measure of the economic income provided by an asset over the expected life of the asset and then discounted to the present date. For timeshares, the economic value is measured by the average enjoyment value or rental value as measured in dollar terms of the timeshare interest less annual maintenance fees and other exchange costs discounted annually to present value. For example, suppose a specific timeshare unit would rent as a condo for $1000 per year or yield that average annual value to the owner in use or in exchange. Subtracting the annual average maintenance fee of $450 and exchange and other fees of $150, then the net annual benefit is $400. If the discount rate is 10% and the risk of default, reduced use or decay is 4% per year and inflation is 3% per year, then the net capitalization rate is 11% (10% plus 4% less 3%). The income approach value is then found by using the net average annual benefit of $400 divided by the capitalization rate of 11%, or $3,636. This is a very simplistic example but provides a general summary as to how the income approach is applied in real estate valuation. I have a more complex excel spreadsheet with examples that can be requested via e-mail.
An example as to the various concepts of value: In theory, buyers in the primary market will pay close to (sometimes more than) intrinsic value for a timeshare interest when they pay $20,000. The developer/marketer (if not the original developer and not buying in a distressed sale) may have paid on an allocated basis between $5,000 and $10,000 to buy and manage that same timeshare interest, defining that value as the cost basis for that interest. The average buyer in the resale market may pay between $1,000 and $15,000 for that same interest, depending on the supply and demand for that specific interest. The average resale price generally determines the fair market value for the interest. Depending on the jurisdiction, fair value could be defined as the $20,000 primary market price, the $5,000 to $10,000 allocated cost paid by the developer/marketer for the right to sell timeshare interests in the property or based on the average observed resale price for an equivalent interest in the resale market.
The examples of Swiss American Bank ("SAB"), R.I.T. and M.L.S. of Florida
Both SAB and RIT allege to purchase timeshares and require an independent fee appraisal prior to making a purchase. MLS claims to be an appraisal referral company for the timeshare industry. SAB refers potential customers to MLS for appraisal recommendations and referrals. Not one of these three companies has an established credit history or appears to be a long-standing company. Both SAB and RIT were confirmed to be under investigation since May 1999 in Florida when I contacted a representative of Florida’s Bureau of Timeshares in June 1999. Florida officials represented that SAB had a $50,000 judgment against it for failing to comply with discovery under a Florida investigation. SAB then reportedly moved from Florida to the Bahamas. RIT has a formal complaint against it in the state of Florida as of June 1999.
The following is a summary of some postings I have reviewed and conversations I have had with others:
1. The required appraisals do not appear to result in actual offers from either SAB or RIT to purchase the timeshares being appraised. I’m still looking for a TUG member or other individual that actually received an offer from SAB or RIT that was consistent with the "appraised value". The Florida officials contacted commented that they have yet to find a customer with an appraisal that actually resulted in a sale to SAB or RIT.
2. MLS is not a multiple listing service and does not list timeshares for sale or transactions involving timeshares. It is a "private company" that refers SAB and RIT clients to appraisers. Only four appraisal companies were referred to by MLS.
3. None of the four MLS recommended appraisal companies is an actual appraisal company. They are referral services that purport to subcontract the actual appraisal to a local, licensed real estate appraiser. However, when the identity of the appraiser is requested or credentials are requested, no response is provided or one will be told "I will get back to you/fax to you that information." All four quoted a fee in the $400 range for a single timeshare appraisal. This fee is inadequate given the referral fees and subcontracting fees normally expected and a site visit (often promised). None of the recommended appraisers are listed with Dun & Bradstreet as having a long and stable credit history or corporate history with an established business address and/or phone number. At least one of the appraisal companies has been operating under different names and locations at different times (none current). The sales representatives in these companies do not appear to generally understand certain basic appraisal concepts or to know the appraisers they intend to subcontract with to perform the "local" appraisal. Requests for names, credentials and references of the appraisers actually assigned to appraise the timeshare interest were routinely ignored in phone calls. The four "recommended" appraisers were:
Appraisals at Auburn Hills, Michigan (although the 800 number directs
the caller to a Florida sales office)
2. International Appraisals at Providence, Rhode Island
3. Resort Certified Appraisals (RCI Appraisals) at Hyannis, Mass.
4. World Certified Appraisals at Tavares, Florida (changed phone number in the past year and left no forwarding address or phone number after the change)
I have had colleagues licensed in real estate appraisal review an appraisal by Associated Appraisal. That appraisal was performed by a person not licensed in the state of the property interest and apparently not qualified to appraise real property. Additionally, the appraisal had material errors (the interest was a biennial and not an annual interest), was not certified and failed to comply with USPAP (Uniform Standards for Professional Appraisal Practice). Another appraisal from one the other three appraisal companies had the same flaws and appeared to follow the exact same format as the report by Associated Appraisals. None of the "appraisals" reviewed or referred to us would even be considered reasonable "broker’s opinions".
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