There’s Gold in Them Thar Receivables

“The key to timeshare financing…is to get cash as fast as possible from poor credits and as slowly as possible from good credits.”

For most seasoned developers, the largest asset on their balance sheet is their notes receivable. The incremental benefit of improving portfolio performance can be huge, yet it seems that most developers spend more time thinking about sales and marketing than about their receivables. A thorough analysis of the way in which your portfolio is managed may identify some low-hanging fruit sitting right before your eyes and allow you to boost the return on your biggest asset.

Get Them on Automated Payments

Probably the most important thing you can do to increase portfolio performance is to get as many customers on automatic payment plans as possible. Give them an interest rate incentive, incent your salespeople to sign them up, and solicit existing “pay by check” customers to switch. Stress ACH payments over credit cards, since you will have to pay a merchant fee on the latter.

Not only will automated payments improve the currency of your portfolio, they may delay pre-payments from credit-worthy customers. When someone sits down to write a check each month, they might decide to pay in full if they have excess liquidity, but when payments are deducted automatically, they don’t have that potential trigger point every 30 days. They may think about paying off the loan, but the inertia that affects all of us often works in your favor. The key to timeshare financing, one that is not easily accomplished, is to get cash as fast as possible from poor credits and as slowly as possible from good credits.

A common cause of delinquency is payments that are rejected due to the fact that an authorized credit card has passed its expiration date. Create a program that tracks expirations and have your staff follow up by email or phone to get the new expiration dates and keep the payments flowing.

Third Party or In-House Servicing?

One of the most common mistakes made by developers is under-estimating the cost of effectively servicing a receivable portfolio in-house, particularly in failing to recognize the significant required capital investment in software. Off-the-shelf software or an Excel spreadsheet won’t do the trick, and changes in regulations, as well as evolving conditions, require continual maintenance and updating. An independent servicer, with its economies of scale, can afford the IT investment that a developer cannot, unless they have a very, very large portfolio. When comparing the cost of in-house vs. third party servicing, you should also look at the discount you would be charged by a merchant processor versus that charged to the outside servicer. Their volume will probably allow them to negotiate more advantageous terms, and the differential is a hidden cost of maintaining the portfolio in-house.

Even if you employ an independent servicer, it’s your responsibility to manage the portfolio. The servicer will process payments and provide reports, but collection efforts are usually done most effectively by your own staff. Late payments on timeshare notes are frequently related to product problems rather than credit issues, and your staff is much better equipped to solve them. And don’t wait until someone is 30 days delinquent before starting collection efforts. A gentle reminder at 15 days can avoid a 30-day delinquency.

Charge a Monthly Service Fee

It’s expensive to process payments, and you can pass the cost through to your customers. Many developers do so, and it doesn’t seem to affect sales. A service fee is a cost of financing, so be certain to disclose it as part of the APR.

Tread Carefully with Your “B” Credits

Notes from “B” credits default at a much higher rate than those from “A” credits, but most developers sell to some buyers who have what is gently referred to as “scratch and dent” credit histories. The key is to pick who you sell to, what you sell them, and how you structure their notes. A credit score is an excellent tool on a portfolio basis, but two individuals with the same score may have very different propensities to pay. Look at the histories and try to differentiate between those who had incidents such as divorce, illness, etc. that caused a temporary problem and those for whom defaulting is a way of life. Pick those with some potential and eliminate the hopeless cases.

Don’t sell prime inventory to people with substandard credit. Put them in a sampler program, a biennial, or some lower-priced product to allow them to prove themselves and to keep the monthly payment relatively low and manageable. You may also want to get a higher downpayment from these buyers, or charge a higher rate of interest to compensate for the additional risk. And you may want to require them to sign up for automatic payment methods.

Be Careful with Upgrades

With tour flow a challenge for most developers, the in-house sales line has become critical to profitability, with some developers generating 60% or more of their sales from in-house sources. Upgrading existing owners, however, may result in higher delinquency if not handled properly. Owners who are enjoying their interval may, during the euphoria of family bliss, want to buy more vacation time than they can realistically afford.

Look at the credit score, income, and payment history of prospective purchasers before you automatically upgrade them, or you might turn a performing $15,000 note into a defaulted $40,000 obligation, while paying commissions in the process.
These are a few of the techniques you can employ to squeeze a little more profitability from your portfolio. Some are quick fixes, and others require continuing diligence and analysis. Sales and marketing will always be important, since without marketing, you won’t have any customers. But putting in a little extra effort toward the biggest asset on your balance sheet is invariably time well spent and can yield significant rewards.

Reprinted with permission from the Colebrook Chronicle.