Sunday, April 27, 2014

$300,000 mistake

Middle-class and even upper middle-class people simply can't afford to spend hundreds of thousands of dollars on a motorhome.

I posted an article about full-time RVing and was taken to task by members of an RV forum (their motto, "No Shills for the RV Industry Here!") that I was being unduly pessimistic about the practicality of buying a quarter-million-dollar motorcoach as an inexpensive and rational "lifestyle".

And if you drive by an RV dealer, you will see dozens of such rigs on the lot - they sell a lot of them.   But in many cases, purchasing such an expensive toy ends up being a huge financial mistake.

In my previous posting, I mentioned Frank and Shirley who are real people and friends of mine.  Since then, I have met Nancy, who also bought a huge motorhome - with her late husband - and is "upside-down" on it and suffering with $1500-a-month RV payments and a negative equity of $50,000 or more. 

How did this happen?  And was it worth it to have a couple of years of RVing?  I think the answer to the last question is "No" - when you consider that they paid well over $20,000 per year to go camping in their RV (with payments, insurance, fuel, etc.) and if you factor in the negative equity, another $10,000 per year on top of this.   That's a lot of money to camp!

How did they get into it?  Like my friends Frank and Shirley, they had an older motorhome which was nearly paid-for, and decided to "trade up" to a newer coach, as their older coach did not have slide-outs. They paid nearly $300,000 for the coach, trading in their "paid for" motorhome as a down payment.  And when they traded in, they signed a long-term note that was longer than they would realistically own the coach, given their age and health.

As I noted in a previous posting, RV dealers are not shy about financing motorhomes over 10, 15, or even 20 years.  While this may bring the monthly payment down to a level that is "affordable" to folks on a pension and Social Security (who sadly, still look at life in terms of monthly cash-flow), it does not take into consideration the "end game".

And the end game is severe illness or death of one spouse which will force the remaining spouse to sell the coach.   But since it is financed over 20 years, the loan is "upside down" for most of the loan, as I illustrated in the link above.  And since the surviving spouse collects less in Social Security, money for the $1500 monthly loan payment is harder to come by.

A few years of fun, camping, has now morphed into an albatross around the neck of the surviving spouse.

So, despite what the paid shillers and naysayers say on the "Let's all sell our homes and live in an RV!" discussion group, this sort of purchase can go horrifically wrong - and often does.

The question is, why do people do it?

And the only answer I can come up with is that most people (myself included) are not very financially astute.  No one says "No" to us or tells us we can't have our candy and ice cream.   We lack self-control.   And sadly, banks and other financial institutions will loan us money, even if it is a very, very bad idea.  We make a few dollars and then come to believe that we are now "rich" and can afford things on time, as our monthly income exceeds the monthly payments.

And that might work, for a while, provided your income stream never stops or is never decreased (like when a spouse dies) and that you will in fact outlive the term of the loan - or that you will keep the vehicle (or whatever purchase) long enough not to be "upside down" on the loan.  That rarely happens in real life, however.

I think also, some folks think that depreciation will not happen to them.   And I hear this all the time on discussion groups for cars, boats, motorcycles, and RVs.   Most of these motorized toys depreciate 50% in value every five years - like clockwork.   Even a vehicle with "low depreciation" depreciates by about 40% in five years - the difference ain't much.

As I noted in an earlier post, claiming that your vehicle has "low depreciation" is an exercise in self-deception.  Most cars, boats, motorcycles, and RVs, are worth 5-10% less than you paid for them the moment you drive them off the lot.   And there are no exceptions to this rule, period.

I don't care if your RV is a Prevost, or your motorcycle is a Harley, or your boat is a SeaRay, or your car is a BMW - a used one is always worth less than a brand-new one, for the simple reason that any purchaser would be out of his mind to pay as much for a used item as a new one.

And while it doesn't seem "fair" to you, a $70,000 BMW is worth only $35,000 after five years, and the same is true for your boat, bike, or motorhome.   These things simply wear out over time and thus are worth less and less the longer you own them - no matter how well you take care of them, wax them, wash them, service them, or whatever.

But salesmen - and shills on discussion groups - will outright lie and say that the (fill in the blank) that you buy today will "hold its value" while the NADA dealer guide in his back pocket clearly tells a different story.

I feel bad for my friends for their losses in buying motorhomes.   But then again, they wanted these expensive toys, and now they have to pay for them.   And they are paying at a time in their lives when money is scarce, they can't earn any more, and their health and faculties are declining.  It is horrific to watch.

How do you avoid this trap?   Well, again, never "take a hobby too far" and buy that "dream" bike, motorhome, boat, or car.   If you are unsatisfied with your current ride, chances are it is because you have lost interest in the hobby entirely.  Many folks (mostly men) think that by "upgrading" to the next level, their satisfaction will return.  It rarely does.

You can have just as much fun with your existing bike, motorhome, boat, or whatever.   If you aren't having fun, spending more money isn't going to bring the fun back.

It is like the friend of mine who had a beautiful Tiara powerboat.   A beautiful boat with engines so clean you could eat off of them.   But he used it less and less and as he rounded the corner on 70, he decided that maybe getting the "ultimate" boat - a larger model with twin diesels - would solve the problem.  It was a beautiful boat, but it cost "a boatload" of money - with his "paid for" boat serving only as a down payment.  He rarely used it for a year or two before his failing health forced him to sell it - for below what he owed on it.

This happens all the time with old people.  And it is tragic and unnecessary.

If you are getting up there in years, think about your own mortality and how this will affect your surviving spouse - and how a debilitating illness (which is quite likely) will affect your finances.   Chances are, buying a $200,000 motorhome or boat or whatever, simply isn't a very smart idea.   You won't get to use it much, and you'll wish you had the money later on.

And your shiny new toy will be in the back pages of your favorite enthusiast publication with the notation, "Illness forces sale...."

There are cheaper, more rational, and more affordable ways to live!


2 comments:

  1. The reason people buy this junk is STATUS, plain and simple. Yes it is nice to have a fancy RV, or Boat or whatever, but the reason people spend more than they should is STATUS.

    Many folks traded-in their older coaches because they had no slide-outs, and the other campers in the campground had them, and they felt inferior. No, really, people think this way, if not subconsciously.

    For the astute RV buyer, this means there are a lot of cheaper, older coaches for sale with no slide-outs, which is a good thing. After 5-10 years, slide-outs leak, break, and are a general pain in the ass.

    Most coaches with slide-outs can't even be walked through, with the slides in, which means every time you stop, you have to put the slides out just to use the bathroom. Talk about convenient!

    If you really want to TRAVEL in an RV, get one without slide-outs. They are far cheaper and more reliable.

    Unless of course, impressing people you don't even know is high on your agenda.

    ReplyDelete
  2. My friend sold her RV. New it was a $300,000 coach. After several years, she owed $160,000 on the loan. The company who made the coach went bankrupt in 2009 during the recession. The book value on the coach was $120,000. After a year on the market, she sold it for $85,000.

    She tells me that she would like to travel and enjoy her remaining years - if she can ever get out of debt. She had to take out a second mortgage to pay off the balance of the motorhome loan, since the sales price was only about half what was owed.

    Lesson learned here - long-term loans on depreciating assets can be a nightmare!

    ReplyDelete

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