Archives for the Money category

What I learned about timeshares, and you can, too

Last weekend my wife and I spent a weekend in Las Vegas, with the cost of the hotel partially offset by having to visit a time share presentation. Anybody who has hit a certain income level has probably received a call from a timeshare company at least once, offering a free vacation, free hotel stay, or some other nice-sounding perk in exchange for visiting a “no-strings-attached” presentation. There’s nothing wrong with signing up for those perks, as long as you know what to expect, and what to do during one of those presentations. Here’s some random tips that I gathered after attending a few of those.

What are timeshares?

Whenever a real estate developer builds one of those nice towers in a highly touristy place like Orlando, Las Vegas, San Diego, etc., they would like to sell those condo units to interested parties. However, unless you happen to live in a highly touristy place, your interest in purchasing one is probably quite minimal. Spending vacation there, however, is another story. Hence the timeshare company breaks up a single condo ownership into roughly 50 weeks. Buying a timeshare entitles the owner to one week at the aforementioned property, with 1-2 weeks of the year left for various maintenance work, like replacing the carpet, or installing a new dishwasher.

Ok, I get it, so you buy a week?

The weeks sold can be of different variety, and sell for different prices. It’s a no-brainer that being in Las Vegas for New Year’s or at Lake Tahoe in the midst of the ski season beats Las Vegas in July, or vacationing in Florida during hurricane season. Not all weeks are created equal, and companies selling timeshares know that. They apply different pricing to their weeks, marking them as peak, high and low season. Naturally you pay less for a low season week than what you pay for a peak week.

Some trickier ones (like Westgate) tell you that they’re selling a floating week - the week you can use whenever, as long as you call the company in advance. The trick here is that the concept of peak weeks still exists, and you’ll be charged extra for it.

Some get even trickier, and sell you points. Points are assigned to your account, as you’re making your regular timeshare payments, and they generally seem lavish, as you’re told that you’ll be given 500,000 points each year, which you can then use to reserve the weeks and properties you’re interested in. Naturally, peak weeks cost more points, and generally the only way to get more points is either to skip the vacation this year, and let those points accumulate, or pay up to get more points.

Wait, did you say you could reserve other properties?

As going to the same spot will eventually get tiresome, timeshare companies are doing two things to add variety to your future vacations.

Number one: you can generally work out a deal to stay at a property belonging to the same company, if someone else wants to exchange. This might or might not cost extra, and usually involves calling the company, and letting them know which one of their other properties you’d prefer to visit. During the presentation the sales rep will make it seem as easy as it can be, but note that generally everybody wants to take their vacation during the peak seasons, nobody wants to go on vacation during a dead season. So when you call up the company and tell them you’d like to exchange your Orlando time share for a week in company’s San Diego property, people who own that timeshare in San Diego get a higher priority than you.

Number two: there are brokers on the market, like RCI or Interval, which work out deals for timeshares belonging to different companies. They charge for their services, as they’re not affiliated with the resort developers, but they do allow traveling internationally, since their directories generally include thousands of participating resorts.

What you will be told at a timeshare presentation

1. The general script of any timeshare presentation I’ve been to starts with the sales rep asking the couple to list their favorite vacation spots. You’re told that this will be used for research on where to build next vacation spots, and those destinations will reappear in the conversation, as the sales guy as making a pitch on exchange programs (see above). If you feel like disrupting that part of the presentation, tell them your vacation destinations for the near future include Nepal, Greenland, and Iraq.
2. You will be asked about the vacations you took. From here the script diverges two ways. One - the easiest - is if you haven’t taken any vacation, obviously money is the problem, and the timeshare company is here to help. Second - you list the vacations or trips you took over the past 12 months - involves tedious calculation of how much you spent for it.
3. This is where it gets interesting - you will generally be asked to quote the entire price of vacation. In future comparisons these numbers will be used to compare with timeshare costs, and how much money you could’ve potentially saved, but you’re rarely asked to break down the price of airfare, hotel, and attractions. Most vacations are bought as packages, so rarely you have a clue as to what the exact cost of the component was. Usually you and the sales rep begrudgingly agree that you probably spend $180-200 for that hotel room.
4. If you spend two 6-night weeks on a vacation every year, that means $2,400 of your budget goes towards paying for a hotel (12 nights at $200 each). So far so good. So what’s that going to be over the next 25 years? Well, you say, looks like $60,000 to me. And are the prices of hotels going to decrease or increase, asks the rep. You’re no fool, you know inflation theory, and you’re pretty sure it’s only going to increase. Is it fair to say that the prices of hotel rooms will be double of what they are now in 25 years? Year, pretty reasonable. Boom! Your sales rep multiplies everything by 2, and you’re obviously going to spend $120,000 on just hotel stay in the next 25 years. I will let you figure out what’s wrong with multiplying the whole sum by 2.
5. At this point you’re probably indignant at hotel companies and yourself. Well, it turns out, your sales rep informs you, that you never get that money back. You’re just giving the money away without getting back anything, but a bag of receipts. You’re renting your vacation, spending $120,000 on it in the course of the next 25 years, and receiving 0% return on investment on that money.
6. Introducing the concept of vacation ownership. Each timeshare company claims to have invented this, and according to sales rep, it’s only due to the goodness of their heart, helping doofuses like you and me save that $120,000 over the next 25 years, and also get something back in return. For something like $150 a month, you can be a proud owner of your vacation.
7. At this point it totally makes sense. Why throw your money away to evil hotel companies, when you can be an owner of your own week, be able to own it forever, and gift it to your children, if you choose to (this concept of gifting or willing comes up often).

So why doesn’t it make sense?

The financials presented sound pretty good, right? Generally if you look at the pure numbers, they come to around $60-70 a night, generally pretty competitive rates when you line up the hotels in the same area. Well, the secret is that there are two kind of fees - your timeshare payments and maintenance fees.

The payments go towards collateral and interest (if you chose to finance), the maintenance fees go towards hiring people to maintain the resort (duh!) While your monthly payments are set in stone (a contract, that is), maintenance fees fluctuate from year to year, or so you’re told. Well, unless you’ve witnessed a strike of maintenance workers asking for lower wages, there’s only one way they can fluctuate - up. Those fees are applicable even if you decided to skip vacation for a year, either due to time constraints, or desire to accummulate points. Also, maintenance fees never go away. Even if you’re completely paid up on your timeshare payments, the maintenance fees still have to be paid. If you gift the paid-off timeshare to anybody, they will be stuck with maintenance payments set by the resort.

Another highly objectionable technique used by timeshare companies is points inflation. As the years pass by, and you keep paying stable payments and rising maintenance fees, you will find out that either you get fewer points for your money (few companies do this, as this is pretty obvious attempt) or things cost more and more points, requiring you to buy up some extra ones each year. Combine the payments + maintenance fees + any points fees or any peak/high week fees, and you’re most likely looking at $150-200 a night, the exact price quoted to you by the sales rep, only in reference to the evil hotel industry.

So does it ever make sense to buy a timeshare?

Generally the high dreams of getting any return on investment never materialize, as deteriorating properties require higher maintenance fees each year, and there are always more people selling timeshares than buying them. However, does it make any sense to get one?

1. It seems to be a reasonably good deal for large families, or families taking vacations together. Since most of the timeshares can accommodate two families, in price comparisons you’re looking for 2 hotel rooms or hotel suites, which generally cost much more. But even then, your costs may very.
2. It seems to make sense if you have any recurring travel. Every year I go to a conference in Las Vegas that always happens to be during the same week. But even then a timeshare would not make sense for me - the week is in August, when hotel rooms are cheap, and the conference might move to another location, which would imply getting a different hotel that year.
3. If you happen to have a week in a property that someone else wants to buy out, you might make some money. But even then the investment return will most likely be obliterated by various fees attached by timeshare resorts.

When you think that getting (or not getting) one might make sense for you, make sure to check eBay Timeshares, Sell My TimeShare Now, or places that rent timeshares just to get sense of the going market rate. From reading the forums, it looks like the biggest mistake one can make (outside of buying a timeshare) is buying it retail as a result of a high-pressure presentation, that has a special rate going on that’s going to expire today (isn’t that convenient).

Another good place to do some reading is tug2 - forums for timeshare owners, run by people who actually bought timeshares, not companies that sell them. There’s apparently also a huge market to get rid of timeshares, and Timeshare Relief is the primary buyer for those. Most of people unloading timeshares are willing ti give them away for any price, just to get rid of high maintenance fees and property taxes, and hence you can frequently get a bargain if you’re looking for a secondary market timeshare. Vacation Rentals by Owner site will give you a good idea of what the vacation spots rent for in the markets you’re looking at - would suck to get a timeshare costing you $2,000 for the week, when larger vacation houses rent for half the price at the same location.

The Naked Guide to Bonds review

I always wanted to learn more about the bond market. While the stocks are pretty straightforward, bonds always have this air of mystique around them. Yields, treasury rates, bid and ask spread, ability to avoid taxation - it seems like there’s a special little market of its own. The Naked Guide to Bonds by Michael V. Brandes provides a pretty good and straightforward explanation of how the bond market operates.

US bond market lacks the degree of transparency that US stock market has, and since there’s no New York Bond Exchange, there are certain peculiarities a bond investor should consider. Some of the bond offerings are hard to sell, as they’re generally targeted towards the buy-and-hold crowd that wants fixed income, not opportunities for trading. Nevertheless, the bonds are traded, with prices determined by interest rates and market demand. Since most of the institutions in the market operate with the budget of $1 million and above, there’s actually a separate submarket for anyone trading in the lots of fewer than 1,000 bonds (pretty much all of them are priced at $1,000 to make at least one factor comparable). Effectively you might have two separate markets with two different prices quotes for the bond - a market for institutional (above one mil) and small investor (below one mil) trading. Bad news is that smaller investors get penalized, as prices for buying and selling bonds favor large institutions.

One of the reasons you might be looking into the bond market is tax-free municipal bonds, which are exempt from federal income taxes, and exempt from the state income taxes, if the bonds you buy belong to the same state you’re in. Municipal bonds, typically with lower yields than corporate or agency bonds, typically include the buyer’s income tax bracket in calculating the total rate. The bad news is, as mentioned above, most of the municipal bonds are issued for the period of 20 years, and if you need to sell them before the deadline arrives, you might be stuck with an offer, on which you’re losing the money, since the market is not that saturated. It’s also important not to make a mistake of getting municipal bonds for an IRA account - you’re giving up high yields for no income taxes, but since IRA income is already not taxed, tax-free municipal bonds generally do not belong in retirement accounts.

The book is easy reading. Not light, but definitely straightforward if you’re paying attention to what has been described in the previous chapters. The author then discusses some strategies that might be applicable to the reader, and talks about the common pitfalls, such as chasing the yield, or having no sense of direction in the bond market. Among online resources worth checking out, InvestingInBonds is perhaps the most well-known official resource. Yahoo! Finance also runs a bonds center with basic market data and some tutorials on bond trading. Bloomberg bonds center offers some news feeds for the market. MunicipalBonds is also a great site for researching one particular subset of the bond market, providing both research and news on new offerings.

NetBank has been shutdown by Feds

It’s a rare event nowadays, but nevertheless FDIC shut down an Internet-only bank NetBank, with ING Direct assuming the deposits. The online bank has been a good source for some sweet deals on online deposits, and charged no fees for incoming wire transfers - a rare deal nowadays (but the one that’s still supported by EverBank).

What’s amusing is that the bank has not even had that much exposure to subprime market, it was just a mess as far as execution and business model were concerned. There’s a post-mortem by Wall Street Journal:

But its Achilles’ heel was sloppy underwriting of loans, according to federal regulators. The Office of Thrift Supervision said weak underwriting standards, failed business strategies and a lack of proper controls forced NetBank to suffer significant losses - including more than $200 million for 2006.

Their customer service wasn’t that great either, but I guess that’s expectable when the management is trying to cut losses. Same article also points out how infrequent bank failures have become:

Of 8,600 banks insured by the FDIC, only one other has failed this year - Metropolitan Savings Bank of Pittsburgh. NetBank is the biggest failure since the June 1993 failure of Western FSB, Marina del Rey, Calif., which held $3.8 billion in assets.

I like how FDIC is managing the transition - NetBank site is down for right now, but will be back on Sunday evening in its original shape, although managed by ING Direct. There’s no migration process, no calls to the customer support to verify your identity - the site will just come back as it is, allowing old usernames and passwords.

Java jackets and Jay Jorensen - the history of invention

Every time I get a cup of hot coffee, I am always curious about the coffee sleeve, usually featuring the patent 5,425,497. It’s a pretty simple, yet incredibly useful invention that obviously was scratching an itch that many people have had whenever buying hot coffee.

The inventor is Jay Jorensen and the one-product company is Java Jacket out of Portland, OR. You get the coffee sleeve for free whenever you buy a beverage at a coffee shop, but according to Entrepreneur magazine, the company’s revenues were estimated at $12-15 million dollars back in 2003. The company got started with $15,000, back in 1993 when the patent got granted. The venture got started after an unfortunate accident with hot coffee, Fast Company magazine says:

One morning, I spilled the coffee in my lap. I didn’t get burned badly, but I thought, Maybe there’s a better way of doing this.

High-yield checking now exceeds how-yield savings rates, offers 6% APY

Online savings accounts, like those offered by HSBC, Emigrant Direct, or ING Direct, usually led the world as far as offering the best rates. Recently, however, online checking accounts have been featuring increased rates to attract new money.

Premier Valley Bank Online offers 6.01% APY on balances up to $25,000, if you have at least 10 debit transactions on their debit card, have a direct deposit, and sign up for Internet banking and electronic-only statements. EverBank FreeNet Checking Account offers 6.01% APY on any account for 3 months of its introductory promotion. The best one of them, however, is First National Bank of Omaha Direct offering 6.00% APY on any balances with no particular restrictions.

Price optimization popular in retail industry

Even if you spent a single day in an Economics class, you’re probably familiar with a concept of supply and demand, where the price for a product has an impact on the demand and subsequent sales of it.

Associated Press runs an article on retailers employing mathematical models for price optimization, where some products are priced higher to generate higher margins, and some are discounted to generate larger volumes even at the expense of per-product margins. DemandTec, Oracle and SAP are some of the companies producing those mathematical models for retailers around the country, with AP listing some of the pricing optimizations employed currently.

Most of the time, according to the article, the calculations are not made in vacuum, but in comparison with existing sales and current product selection. So three power drills selling for $90, $120 and $130, all generate certain among of profit for the retailer. The higher the price, the higher the profit, as markup is universal among all the models. High-end consumers go for the $130, while bargain hunters think there’s nothing wrong with $90 drill. Result? $120 drill doesn’t sell that well. Pricing optimization places the second drill at $110, where it’s suddenly affordable for those who used to buy $90 drills. After all, it’s only additional $20.

There’s an older article in CFO Magazine justifying the cost of price optimization systems for CFOs.

Amazon: screw the simplicity, stick to what sells

I was reading a presentation by Ronny Kohavi and Matt Round from Amazon.com on Amazon using analytics for deciding on what the site looks like, what the top-level navigation looks like, and what the front page of Amazon.com looks like. Hat tip to Greg Linden for linking to it.

Amazon has been widely known for throwing a gauntlet to all the widely accepted Web 2.0 maxims. Standards support? Nah. Using simple URLs? Event front page directs to something like http://www.amazon.com/ref=topnav_gw_gw/104-6121055-7037564, although, granted, it doesn’t have the obidos links with a bunch of hyphenated nouns that it used to.

What’s interesting in that set of slide is defying another maxim - simple is beautiful. Granted, the implementation of simple might differ depending on what function you’re trying to accomplish. There are two slides discussing experimenting with Amazon front page in order to make it simpler. So why is the front page of Amazon such a hodge-podge of suggestions, recommendations, related items, new additions, shakers and movers and other recently viewed items? The answer is simple - it sells better.

Simple design in Amazon’s case generated higher cart abandonment and statistically significant decreases in customer conversions. Which is all that matters in data-driven e-commerce company. So it looks like in Amazon’s case its customer not only do not do not appreciate simplicity thrown upon them, they actually enjoy and celebrate complexity, partying with their dollars when the front page is complex.

HSBC Direct offers 6.00% APY on new money till April 30th

From now and till April 30th of this year HSBC Direct will offer 6.00% APY on new money. If you already have money with HSBC Direct, the old APY of 5.05% will apply to whatever was on the account by January 26 end of day, and all the new deposits will get the preferential 6.00% APY. I am a happy HSBC Direct customer myself, and one of the advantages of having an Online Savings account with them is ability to link up to 8 external accounts.

6.25% CDs starting at 3 years

For a fairly liquid high-yield money-parking option check out Pentagon Federal Credit Union, which is currently offering FDIC-insured certificates of deposit at 6.25%. The catch is that their smallest term is 3 years, and breaking the CD opened for a term up to 5 years requires forfeiting 180 days’ worth of interest, but the 180 day interest loss is pretty typical for any of the longer term accounts.

The promotion runs till January 31st, 2007, and the minimum to open a CD is at $1,000, while the maximum is at $10,000. To join Pentagon Federal Credit Union, your or one of your family members (doesn’t matter if it’s grandpa’s uncle’s adopted half-brother) have to be in the US military. Alternatively, you can join NMFA for a quick membership fee of $20. Joining Pentagon Federal Credit Union will offset you another $5, since you need to get a basic savings account with them, and $5 is a minimum balance to keep the account open. You can pay the fee of $25 (if you choose to join NMFA) right on PenFed site, but be careful to pay with your debit card, not credit card, as all credit card transactions are treated as cash advances, and therefore subject to (usually high) fees from your friendly credit card issuer.

The application process is pretty straightforward, and if you have a debit card with $25, you will be a PenFed member in less than half an hour. After that you need to call them up to establish your online PIN as they verify it’s indeed you. The process takes less than 15 minutes. With online PIN you can set up a username+password for penfed.org and apply for a CD as well as immediately fund it from external checking or savings account.