Private Residence Clubs and Luxury Fractional Property

In theory, the condo-hotel purchase sounds like a solid investment. Pay an amount up front, and get money back monthly when the hotel rents out your unit. Many investors couldn’t wait to get into this market. They whole-heartedly believed that their monthly costs would not only be covered, but that they would have money to put back in their pockets.

Unfortunately, it looks like some of these buyers were misled—condo hotels were never meant to be a pure money-making business for the purchaser. It was and still is meant for people who want to own and continue to use a vacation home. The fact that they can get some rental money back is simply a perk, not a given.

As a little background, a condo-hotel is an actual hotel that sells some or all of its rooms or units to individual owners. The owner can use the units themselves or have the hotel company rent out the room when they are not in residence, and the hotel and owner then share the income.

Currently, some luxury condo-hotels are under pressure from law suits by disgruntled buyers. In the heyday of the 2005 market, wealthy Americans were looking to spend their money in real estate, scooping up whatever they could find. But according to the writers of an April, 2008 article in the Wall Street Journal Online: “Condo-hotels were one of the most dangerous investments of them all. Hotels are risky investments in real estate because occupancy can swing with the weather or the economy.”

Las Vegas condo hotels are especially taking a hit right now. MGM Mirage spokesman Alan Feldman told In Business Las Vegas: "Part of the challenge of condo hotels as a product type is that it is being positioned by some people as an investment. I don't know that is an accurate thing to do. This is a real estate purchase. You are getting a luxury, hassle-free vacation home that has one of its attributes being a rental property."

Developers are standing firm saying that the buyers should have known what they were getting. The hard fact is that everyone in real estate is taking a hit right now. No one wants to admit that they didn’t do their due diligence or was quick to believe misleading statements prior to purchase.

Vacation Home vs. Income Generator

Of course, the people who bought units strictly for their own pleasure and vacation usage are still content with their decisions. It’s the ones who wanted to make profits that are jumping up and down in anger.

Luxury Realtor Bruce Hiatt told In Business Las Vegas, “Condo-hotels are intended as vacation homes that give the buyer the potential to offset some of its cost” not for profit ventures. 

The condo-hotel is perfect for those who have a substantial income and want to repeatedly return to the same destination. In Business Las Vegas interviewed Barbara Granati-Smedley, a residential real estate broker in Las Vegas who bought a condo in Trump “for use when her children come to visit, but she also views it as an investment. She said she hopes that having her unit in the rental pool will help cover a portion of the mortgage.”

In the same article, Granati-Smedley said: "I look at it as a great investment over a period of time. It can't do anything but appreciate given that it is a quality Trump project. But this is not for someone who is not a risk-taker."
This is the outlook that all condo-hotel unit owners should have. However, this is not the case. Many are upset and are looking to get out of their original contracts. But the market looks unfavorable.

Financing and reselling are near to impossible in today’s market. If a buyer has cash, then a sale is possible. But with all the bad press condo-hotel ownership is getting, a buyer might be hard to find. Also, “with the real estate market in free fall, few lenders are approving loans for condos, much less condo-hotel units,” said Bill Davis, a private lender and former president of Palm Beach County Mortgage Brokers (PalmBeachPost.com).

Because of the falling economy, it will be tough for condo-hotel unit owners who did not foresee a profitless investment. “For those who keep their units, not only do they have their mortgages, there are maintenance fees that can run hundreds of dollars and even more than $1,000 a month. Some fear the condo hotels will generate even less revenue with tourism slowing and the nation's economy slumping,” reports Brian Wargo.

So what happened? Why did investors believe they were entering into a great deal three to four years ago? “In many cases, developers underestimated construction costs and overestimated how much each hotel unit would make. For instance, to make the numbers work, they estimated that rooms would be occupied 90 percent of the time and command $300 a night. Instead, the rooms were occupied 60 percent of the time at $150 a night,” writes Jane Musgrave.

There are numerous reasons for the current turmoil and abundant condo-hotel law suits—greedy developers, buyers with unrealistic expectations, and a sliding real estate market—no wonder some owners want to fight back.

In light of these recent battles, fair warning has surfaced:  Do your due diligence before putting large sums of money down on a “fashionable idea”. As long as you know for sure what you are purchasing and understand the ebbs and flows of the real-estate market, you will be at peace with your decision long-term.

Article Resources:

Corkery, Michael, Sara Lin, and Ruth Simon. “Condo-Hotel Buyers See Investments Sour.” Wall Street Journal Online April 08, 2008

Musgrave, Jane. “Buyers of condo-hotel hybrids who lost big are now suing.” PalmBeachPost.com Sunday, April 20, 2008:

Wargo, Brian. “Luster fades for condo hotels.” In Business Las Vegas April 18-24, 2008: