Role Reversal between Timeshares and Co-Ops

Before the implosion of the real estate bubble, timeshares were hot and co-ops were not, or something like that. In the year that has followed, both of these trends have essentially reversed themselves: “In 2008, timeshare sales dipped by eight percent—marking the first decrease since the American Resort Development Association (ARDA) began tracking sales 34 years ago.” Meanwhile, “It’s quite possible that we’ll see more cooperatives come about as a reaction to the mortgage meltdown and as one potential solution to the foreclosure mess.” By the way, I don’t mean to impugn an inverse relationship between co-op sales and timeshare sales; rather I just want to use this post to shine the spotlight on two of the more obscure corners of the housing market.

Timeshares surged in popularity over the last decade as consumers flush with disposable income made purchases for their own use and/or to rent out to others. In the wake of the credit crisis, many of these consumers have found themselves unable to make the payments associated with the timeshare and have taken to reselling them at a fraction of the cost that they paid for them. “This is the best time to buy and the absolutely worst time to sell. A few years ago you got 50 cents on the dollar. Now you’re lucky if you get 10 cents on the dollar,” writes one insider.

The problem has been exacerbated by a drought in financing. Banks have always been reluctant to underwrite a mortgage on a property that isn’t fully owned, as as the case with a timeshare. Accordingly, the burden to provide financing typically fell on the timeshare companies that owned the properties, which “now demand that buyers have higher down payments and good credit scores to qualify for a loan. At Marriott International, 80 percent of buyers used to receive financing, but now only half do.”

Compare this to the comeback in cooperative housing, which, “holding over 1.5 million households, comprises less than one percent of the nation’s housing. Largely concentrated in high-density urban areas, cooperatives range from luxury homes in posh urban areas…to suburban town houses and senior high-rises.” As a result both of the economic downturn and mortgage quagmire, buyers are turning to co-ops like never before, due to their low purchase prices and even lower monthly payments.

Just like with timeshares, however, it can be difficult to secure a mortgage on a co-op property because the buyer doesn’t own (even a portion of) property, but rather an equity stake in a corporation. In one recent case, a buyer forfeited a $25,000 down payment for a co-op after the lender discovered it was built on rented land and consequently reneged on the mortgage. [As an aside, it's important that you protect yourself from such an outcome by structuring an agreement to buy a co-op accordingly].

Perhaps a new type of service will help to alleviate this problem. I recently stumbled upon a “points-based way to fund the housing, wherein the owner pays points to a mortgage company and redeems them to live in a particular place during his work assignment or visit with the grandkids.” In other words, a borrower can move between participating properties as long as there is availability.  Whereas a co-op represents a hybrid between renting and owning, this points system seems to represent neither, and both could appeal to the emerging class of people dissatisfied with the current system which forces them to choose between two equally unappealing choices.