Forbes.com (via Yahoo!) lists the top ten cities that are possibly experiencing a housing recovery. To determine the top cities they analyzed areas with high house sales growth rates in the last year but with relatively low foreclosure rates.

The top cities are:
10. San Jose, Calif.
9. Santa Barbara, Calif.
8. Redding, Calif.
7. Denver, Colo.
6. Bremerton, Wash.
5. San Luis Obispo, Calif.
4. Salem, Ore.
3. Colorado Springs, Colo.
2. Lincoln, Neb.
1. Miami-Ft. Lauderdale, Fla.

It looks like California has a strong showing with 4 of the top 10 spots. With real estate in a slump across most of the country, it’s probably a good time to buy a house. The only problem is if you have to sell your house as well. In my state it seems like the higher-priced houses have taken a bigger hit. I have one acquaintance who recently bought a house for about $400k that had previously sold for close to $1 Million before the crash. That’s a change in value of $600k. In contrast, the value of houses in my neighborhood, which are now selling in the $200-300k range, have gone down in value an average of $50k. This would seem to favor a strategy of selling a house in a lower price range (say $100-300k) and buying a house in the upper price range, but that has a much higher potential upswing in value once the economy recovers. Not that I would recommend such a strategy, but it seems to make sense.

Like many of you, we are always looking for a good deal. So when we recieved an offer for 2 nights in a king-bedroom suite for only $69 at a local resort, we took it. In addition, we would receive a $100 gift card good for shopping or fine dining–all we had to do was go to a 90-minute tour and presentation. By my calculations, they were going to pay us $31 for a fun weekend getaway.

Anyone who has attended a timeshare presentation is laughing out loud right now. Because once you’ve been through it, you know the reality is far from the marketing pitch.

Truth #1: 90 minutes takes longer than an hour and a half. In our case it was three hours–and I suspect it would have been longer if the sales rep thought he had any chance of getting us to buy. If you ever choose to hear a timeshare sales pitch, expect to sit for double the time. You also may want to practice your get-up-and-walk-out-of-the-room-while-someone-else-is-talking skills. These sales reps are well prepared to talk around any objection, even “I’m not interested and will not buy.” Getting up and rudely walking out may be your only way out other than being at their mercy for an undetermined amount of time.

Truth #2: A timeshare will not save you money. The first thing our sales rep did was determine how much we spend on hotels per year. We estimated six nights at $100 each, for a total of $600. Multiply that by twenty years, and we will have spent at least $12,000 on hotel accommodations. For that same price we could own a week of timeshare! Sounds good…except for the fact that the yearly maintenance fees alone cost $800, 30% more than we spend right now. And that doesn’t include payments on the property. Not nearly the savings he was trying to make us believe we would get.

It was curious that the price of the timeshare was exactly what we would spend on hotels over 20 years. I wonder what would have happened if we had said we spend $1,000 a year. Would the price have gone up to $20,000 for the timeshare?

Truth #3: You will see a lot of numbers, but not the ones that matter. They gave us a lot of numbers–a white board full of figures floating around. But none really helped us determine if we can afford it. When we asked the sales rep for specifics on costs and fees we were told he would lose his job for disclosing such information. We were told that AFTER we signed we would receive an owners manual with all the details. So we had no way to determine the real cost until it was too late.  ARE YOU KIDDING ME?

After the fact, I came home and jotted down the basic figures we were given. Assuming the numbers he gave me were real and not unrealistically low, I determined that the monthly cost of a timeshare would be at least $225; that’s compared that to the equivalent of $50 a month we spend now!

Truth #4: They want you to finance your “purchase” because it makes the timeshare company more money. The company offered tons of perks and rewards for each year you finance the timeshare through them. Not a surprise since they charge 14.5% interest! Check out these numbers:

• Price: $12,000
• Downpayment: $2000
• Closing costs: $500
• Balance to be financed at 14.5%: $10,000
• Interest paid over the course of the loan: $8993.60
• Principle and interest paid over the course of the loan: $20,993.60

The total cost, including downpayment, closing costs, principle, interest and maintenance fees for 20 years, is $37,494.60.

In the end, you would pay 75% more to finance through them. No wonder they offer perks!

Truth #5: You are investing in vacations, not real estate. Our sales rep kept explaining that we are investing in real estate. True, timeshares sell you a piece of property during a certain period of time each year. You do get some sort of deed for the property. But the real estate comparison ends there. If the value of a timeshare will increase over time and is in such demand, why is it so difficult and expensive to sell a timeshare? As I looked for information online, there was twice as much information on selling timeshares than on buying timeshares.

Truth #6: You are signing up for a one-on-one (or one-on-two, if married) high-pressure sales pitch, not a lovely tour of the property.. When we entered the sales offices, we were impressed by the lavish decor and saw beautiful glassed-in rooms where people were watching sales videos. We also saw sales reps touring people around the property. “That won’t be so bad,” I thought. Well, it turns out the videos and tours must be for people who’ve already purchased or expressed interest in purchasing. In our case they put us in a small office for the entire three hours with no discussion of the resort facilities or amenities. We were exposed to a high-pressure pitch from a sales rep who wouldn’t take no for an answer. It was excruciatingly painful, and I frankly felt a little violated. For an idea of what the experience was like, check out this article about what a timeshare presentation is like and how to avoid pitfalls.

Truth #7 Timeshare presentations are about buying, not about learning. Don’t make the mistake of thinking you can go to a presentation to become informed. You must go prepared to buy, or not buy. Timeshare companies offer incentives that are only good RIGHT NOW, TODAY; tomorrow is too late. You cannot have a night to sleep on it, you cannot consult your accountant or lawyer. Tell me, who makes real estate purchases for tens of thousands of dollars in such a way?! To learn about timeshares, you might want to read a book, like Surviving a Timeshare Presentation, or Timeshare Vacations for Dummies by Lisa Ann Schreier, a former timeshare sales rep who offers an “insider” look.

Truth #8 Timeshare sales reps are friendly, but they are not your friend. And the friendliness only lasts until it’s clear you’re not going to buy. The way our sales rep framed things, buying a timeshare seemed to make so much sense; it was in our best interest; our sales rep was only trying to help us make a sound financial investment. Don’t be fooled! These are highly trained professionals and they are only trying to help themselves out with a nice commission on a sale. All his friendliness abruptly ended towards the end of the three hours when it became clear we wouldn’t purchase TODAY. In fact, it was odd because we expressed interest in the timeshare and said we would consider it, but wanted to have more time. I would think a good sales rep would take our information and follow up in few days. Instead there was no interest in following up; it was as though he knew the deal would crumble under scrutiny.

For an inside look, read sales tips that timeshare sales reps share to help each other out. In this article, entitled Timeshare sales techniques-Warm up the author says that the first step is to make friends with your clients. There’s also an entire blog dedicated to the subject or timeshare sales techniques.

Truth #9 A timeshare will always cost you money, not make you money. Even once you finish making payments on a timeshare, you still have to pay maintenance fees, whether or not you use the timeshare. They explain that one of the great benefits is that you own it forever, and can pass it along to your children. Ironically, it seems that some children don’t want the financial burden that comes with a timeshare. In fact, I found a company called Timeshare Relief that specializes in taking over timeshares – ones that are paid in full – to relieve the owners of the financial responsibility. Among the testimonials is a video testimonial of some “satisfied clients who realized Timeshare Relief was their only answer to receive financial freedom and escape their a life long burden of their Timeshare.”

Truth #10 A timeshare might be a great choice for your family. I won’t argue that timeshares may be a great decision for some people. But making a decision about purchasing a timeshare is not one you want to make while on vacation, under pressure, with no time to think about or discuss it. The package we were offered seemed like it might be a good fit for us–in about three to five years. Right now we take a lot of smaller vacations; long weekends instead of week-long trips. Also, we don’t have an extra $200 per month to dedicate to travel (which does not include the extra gas, airfare, food, and excursion costs). When we are ready and a timeshare makes sense, we will do a lot of research, and then make a purchase if it makes financial sense.

There’s really no reason to make a timeshare purchase decision under pressure. There are plenty of companies that specialize in re-selling time shares. Not only can you purchase them for a fraction of what you’d pay in a high-pressure sales pitch, but you can have the time to browse and find the deal that best meets your needs. I have relatives who have purchased a few timeshares. The first one they purchased under pressure at a sales pitch. Within a couple of days, they saw an ad for a timeshare re-seller and were able to find the exact same timeshare at about half the price. Luckily, they were able to cancel their original purchase and take advantage of the lower-priced offer.

In summary, I won’t say if it’s worth it to take advantage of these great timeshare offers or not. For me personally, having to sit for three hours in a high-pressure situation, wasn’t worth the essentially-free nights stay. On the other hand, I know people who don’t mind going through the process and they will take advantage of such offers regularly. If you know the pitfalls to avoid, more power to you. For me, after sitting for three hours and considering the possibility of spending nearly $40,000 on a timeshare over the next 20 years, a piece of Japanese wisdom rings true: There is nothing as expensive as free.

Resources:

• 7 Timeshare Tips Every Consumer Should Know
• Timeshare Tips (includes FTC article on buying timeshares)
• Is Time-Sharing Ready for Prime Time? and Time-share Tips by Business Week
• Timeshare Buying Tips
• 7 Tips for Buying a Timeshare

For this installment of the Financial Peace University series, I’ve summarized some of Dave’s main tips about buying and selling real estate (along with my commentary) into list form.

Dave is a proponent of purchasing your own home, but only in a very responsible manner. He points out that real estate is a good investment for the following reasons:

1. Home mortgages act as a forced savings plan.
2. Owning a home is a hedge against inflation.
3. If you live in a house for 2 years or more you don’t have to pay taxes on the appreciation (limited to $250,000 per person).

However, Dave doesn not recommend using real estate as an investment unless you can pay cash outright.

The most powerful point Dave makes about buying or selling a home is that these are the largest transactions most people will make in their lifetime. As a result, it’s possible to lose or make a lot of money depending on how you do it. It’s well worth putting in some extra effort and hiring expert help to ensure you maximize the benefits and gains of real estate transactions.

Here are Dave’s tips on buying and selling real estate.

Tips on selling a house

1. Don’t “live” in your home when it’s on the market – You have to think like a retailer and market your home. When your home is on the market, you must constantly be thinking about how others will percieve it. You can’t really live in your home as usual when it’s on the market – it has to be ready to show at a moment’s notice. Don’t require the buyers to use their imagination.
2. 50% of real estate sales come from the sign out front and curb appeal – Make sure the outside of your home looks nice and well groomed. Tear out overgrown shrubs and trees. Paint the outside. Repair damage in the concrete. My own personal tip is to take a photograph of your home; you tend to see flaws much more easily looking at a photograph for some reason.
3. Get a good realtor. He/she will make your more than what they cost you. A good realtor knows how to market your home, negotiate (good cop, bad cop), and evaluate the value of your home better than you do. Don’t hire a relative as your realtor. Interview realtors. They should be in the $1 million club (have sold $1 million in real estate in the last year). They should present to you their plan and referrals.
4. Don’t buy home warranties unless it’s a condition of the sale.. They’re not worth it.
5. Appraisals aren’t the law, but they’re better than your “feelings” – Appraisers give only an opinion and don’t have the final, difinitive value for your home. However, their estimate will still be more accurate than your gut feelings.

Tips on buying a house

1. When buying a home buy title insurance – Title insurance is worth it. It covers you when there’s unclear ownership of house (e.g. aunt suzy never signed off on sale of house and still has rights to the home). It also covers undiscovered liens against house.
2. Get a survey when buying – Oftentimes, the advertised property boundaries and the actual boundaries are quite different. This is particularly true on a property without clear boundaries such as fences.
3. If you use an agent to buy, get a “buyers” agent – a “buyers” agent is an agent that only represents you, the buyer. Some agents represent both sides – the buyer and the seller – and therefore have an inherent conflict of interest. A buyer’s agent will only have your best interest at heart.
4. Don’t buy at the top of the neighborhood, but at bottom – The crumbiest house in a nice neighborhood will inherently be worth more by virtue of the neighborhood. If you fix it up at all, the value of the house can significantly increase. In contrast, if you buy the nicest house in the neighborhood and fix it up, the value can only increase so much because it will typically stay within the range of the value of the other houses in the neighborhood.
5. Houses tend to appreciate most in locations with views and on the waterfront
6. Look for houses that don’t look nice and you can get a bargain – This is the inverse to the principle of marketing your house – you want to look for owners that haven’t marketed and presented their house very well. If you can use your imagination and overlook cosmetic flaws that can be easily fixed, you can often get the best deals. A little imagination and elbow grease can go a long way.
7. Always buy a home that is attractive from street and has a good basic home plan – It’s very hard and costly to make changes to the bones of a house. Unconventional home plans and lots can be very hard to sell.
8. Get an independent house inspection when buying – Getting an independent house inspection will not only protect yourself against hidden flaws and problems, but you can also use it in the contract as a way out of the deal if things don’t line up to your expectations. In many cases you can negotiate to have seller pay for home inspection
9. Don’t take out a mortgage for more than 25% of take-home pay (e.g. after taxes, 401k, etc.) – Dave recommends putting down as much as you can on your house. His suggestion to take out a mortgage for no more than 25% of your take-home pay is radical but would save people endless financial headaches if followed. See my earlier post about calculating how much of a mortgage you can afford.
10. You should put at least 10% down – Dave ideally recommends paying cash for your home but recognizes that most people won’t do this. Instead, pay as much down as possible. Most people follow the opposite advice and try to pay as little down as possible.
11. Never get a 30 year mortgage – get a 15 year mortgage instead – Again Dave goes against common practice with this recommendation. If you already have a 30 year mortgage, he recommends you keep it and pay it down like a 15 year mortgage. If the current interest rate is lower now, re-finance to a 15 year mortgage. The idea that you’ll take out a 30 year mortgage and pay extra is statistically not true. In the end, you’ll just pay what is required. Sam’s note: I agree that most people won’t pay extra on their mortgage. However, if you have a proven track record of controlled budgeting, go ahead and do it. Because my wife and I keep to a tight zero-based budget, we are successful following this strategy.
12. Never get an adjustable rate mortgage – Adjustable rate mortgages are meant to protect banks against decreasing interest rates, not to protect you. Particularly in today’s environment interest rates are historically very low and for the most part have nowhere to go but up. Another reason to avoid ARMs is that 35% are calculated inaccurately. If you already have one, make sure you audit it. Dave recommends refinancing your ARM if you have one.
13. Put 25% down to avoid paying Private Mortgage Insurance (PMI) – PMI costs roughly $75/mo for every $100k in loan value. If house appraises to 20% equity, call the mortgage company to remove the PMI. The bank may require an appraisal. Once your equity reaches 22% of the value of the house, the mortgage company is required to drop the PMI without notice.
14. Avoid FHA and VA loans – FHA (Federal Housing Administration) and VA (Veteran Administration) loans are not good deals and are meant for people without enough money to get into a home otherwise. They are guaranteed by the government. FHA and VA loans charge an MIP which is just like PMI, but it’s carried throughout the life of the loan so they are more expensive.