Timeshares: Are They a Good Investment?

    Timeshares are a dicey option, but are they a good investment?A timeshare, also known as vacation or fractional ownership, is a real estate program in which a residential property is divided among many owners who have purchased the right to use the property for a specific period of time.

    It is believed that the idea of timeshares originated in France some 50 years ago when a resort developer in the French Alps decided to sell shares in his property rather than trying to rent out individual rooms. That original timeshare model proved to be eminently successful, increasing in popularity in Europe throughout the 1960s, when escalating property prices made it difficult for most people there to afford an individually owned vacation home.

    Today, more than 9 million timeshare owners worldwide have access to more than 6,000 resorts in 95 countries. An estimated $10 billion in timeshares are sold every year, making them one of the top money producers in the global travel and hospitality industry.

    And the United States has a booming timeshare industry, as well. According to the American Resort Development Association (ARDA), a Washington, D.C.-based trade group, in 2011, there were 1,548 timeshare resorts in the United States, with approximately 194,200 units. An estimated 8 million Americans – 7 percent of U.S. households – own a timeshare.

    Types of Timeshares

    A timeshare typically involves a room or suite of rooms at a resort or vacation destination. Instead of paying full price, each owner pays only a share of the property’s total cost and can only occupy it during an assigned interval, based on the number of shares bought. For example, a 1/52 “share” entitles a purchaser to “own” – and use – the property for one week per year.

    Most timeshare purchases are deeded — or “fee simple” — transactions. This means that the purchaser is buying an actual share of ownership in the property in perpetuity, and can resell, rent, give it away or bequeath it to heirs, just as with any other type of real estate. The share may be for a specific week (fixed week system); a specified season (floating week system); or one where the usage week changes from year to year on a fixed schedule (rotating week system).

    In contrast, non-deeded timeshares, also known as right-to-use, certificate or vacation-interval timeshares, more closely resemble a lease. The buyer owns the right to use the property for a specific period of time, and usually for a specified number of years, but doesn’t actually own it. At the end of the term, usage rights revert to the original property owner.

    Two variations of the timeshare concept are vacation clubs and points-based programs. A vacation club is an organization that owns multiple timeshare properties in different locations, which are rented to its members. Club memberships can be bought, sold or passed to heirs.

    Membership in a points program provides the buyer with a specified number of points that can be exchanged for timeshare usage at various properties owned or contracted by the operating companies, which are often hotel chains or well-known resort brands.

    How Much Do Timeshares Cost?

    According to the American Resort Development Association, the average sales price for a one-week timeshare is approximately $19,000, plus average annual costs of $660 for maintenance, utilities and taxes. Larger shares or peak season shares can have higher annual fees, sometimes more than $1,000, and fees are due whether or not the property is used.

    In 2008, 482,000 timeshare intervals were sold, with 27 percent of the buyers paying cash; 19 percent financing through the developer at interest rates that hovered around 16 percent; and 16 percent putting the expense on a credit card. The rest financed their purchases with conventional mortgages.

    Timeshare owners who wish to exchange accommodations with other timeshare owners need to join a timeshare exchange company, like RCI or Interval International, the two largest. Membership costs an average of about $125 a year, and there is also an exchange fee of about $100 to $200 per week each time a trade is facilitated.

    Timeshare prices can vary tremendously based on many factors, including:
    • The location of the property (shares in more desirable destinations are more expensive).
    • The time of the year the timeshare will be occupied (during prime tourist season, a share will cost more for the same accommodation than it might cost at a less desirable time).
    • The condition of the property and what amenities are available.
    • The condition of the economy and the real estate market.
    • Whether the timeshare is new or a resale (used timeshares can be significantly less expensive).
    • Whether the timeshare is deeded in perpetuity or for a specified number of years.
    • Whether the timeshare is part of a well-known brand (Disney, Marriott, etc.).

    Are Time Shares a Good Deal? Pros and Cons

    In its earliest days, the timeshare industry was plagued by unethical developers and operators who employed high-pressure, and often deceptive, sales tactics that lured customers who couldn’t afford their purchases. Potential consumers were wined and dined, given all manner of gifts and freebies, and promised amenities that never materialized. Consequently, timesharing still has a bad reputation with many people.

    While those practices have largely been purged from the industry, there’s still debate over timeshares as an investment. Whether a timeshare can be considered a good deal depends on many factors – costs, usage, type of timeshare, flexibility, owner expectations, etc. – and the pros and cons of any particular deal need to be weighed by the potential buyer.

    For some people, a timeshare can be a very good deal. In fact, it can be the perfect plan for families with certain vacationing patterns – those who want home-like accommodations at a guaranteed price and location every year. They may have the ability to exchange shares and accommodations with other owners worldwide; and with long-term use, timeshares can cost less than years of vacations paid for individually.

    Timesharing also has significant drawbacks, including:
    • Paying upfront for something whose greatest value is long term ties up money that could be used for other purposes.
    • Taxes, closing costs, broker commissions, finance charges, maintenance fees and assessments are all mandatory expenses, even if the timeshare goes unused.
    • Owners often feel forced to occupy their units even when the timing may be inconvenient or money for travel is scant.
    • Timeshares do not generally appreciate in value. (In fact, a timeshare will often sell for less than 50 percent of its original purchase price, if it can be resold at all in a crowded marketplace.)

    Timesharing is almost always a good deal for the developer. Consider a unit that goes on the market for $15,000 per week. Selling 50 weeks a year, a developer can make $750,000, plus tens of thousands of dollars in annual fees, on a unit that might have cost less than one-third of the total amount to build. It’s no surprise, then, that timeshare companies spend so lavishly – upwards of 50 percent of their gross income – on marketing and sales incentives.

    How to Avoid Timeshare Scams

    Even though the most unsavory sales practices in the timeshare industry are largely a thing of the past, most operators still rely on the “hard sell.” Potential buyers are encouraged to stay for a lengthy sales presentation with the promise of extravagant prizes like free vacations, cash rebates, airline tickets, etc., if they endure the entire spiel. However, the gifts aren’t always what they seem, and often come with some kind of fee.

    Moreover, timeshare salespeople are taught to wear down potential customers, overcoming their objections and reluctance to buy by offering attractive discounts – but only if a contract is signed on the spot. As with any other sales pitch, the key to avoiding a bad deal is to never make an impulsive decision and never sign anything simply to escape the pressure.

    Instead, interested parties should take the information home, read the contract over carefully and make sure all of the costs – including maintenance fees and assessments – are explained. It is also advisable to visit the property and not depend on a glossy brochure or video to provide an honest portrayal of the hotel or resort where one may spend years of vacation time.

    If buying an undeveloped property, consumers should put their deposits in an escrow account and get a written commitment from the seller that the project will be finished as promised. That document will act as a protection should the developer default or go bankrupt.

    Buyers should also understand the benefits of legally mandated rescission periods, during which a contract can be unilaterally cancelled within several days of its signing. Knowing that a sale is reversible and that all upfront monies are required to be returned, can protect a consumer from his or her own impulsive decision making. Rescission laws vary from state to state, so information needs to be obtained from each state’s attorney general’s office.

    Timeshare owners also need to be aware of scams in the timeshare resale market. Sometimes, people who own a timeshare are convinced by a dishonest broker to buy another one with the promise that their old timeshare will easily be resold – even though the broker may have no plan to do so. Timeshare owners are warned against dispersing any upfront funds – taxes, commission fees, etc. – to a company offering to purchase their shares. All too often, these are scammers who will simply disappear with the cash.

    Finally, buyers are advised to be wary of purchasing timeshares in foreign countries, as they will not be protected by U.S. laws in cases of fraud or malfeasance.

    Where to Buy Quality Timeshares

    There are many quality timeshares available – both new and used. The best way to find one is to do some basic online research. Many timeshare user groups maintain websites that contain owner reviews of companies and properties, lists of resale opportunities, and helpful tips from long-time timeshare owners.

    Most major hotel chains and resort companies offer vacation clubs and/or point-based programs, and are more than happy to explain the opportunities that exist. Real estate agents can also be helpful in explaining timeshare laws and regulations to potential buyers.

    In the final analysis, whether a timeshare turns out to be a good deal will depend primarily on the good business sense of the timeshare purchaser. As in any financial transaction, there is simply no substitute for good research and prudent decision making.

    Al Krulick

    Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

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