The purchase of a timeshare — a way to own a piece of a vacation property that you can use, generally, once a year — is often an emotional and impulsive decision.
At our wealth management and planning firm (The H Group), we occasionally get questions from clients about timeshares, most calling after the fact — fresh and tan from a vacation — wondering if they did the right thing. We’ve also had to deal with clients in financial distress wanting to get out of their timeshare units.
If you’re considering buying a timeshare, so you’ll have a place to vacation regularly, you’ll want to understand the different types and the pros and cons.
(MORE: Timely Timeshare Tips for Families)
4 Types of Timeshares
First, a little background about the four types of timeshares:
1. Fixed Week The buyer usually owns the rights to a specific unit in the same week, year in and year out, for as long as the contract stipulates. There is predictability, but also little flexibility and the potential for long-range boredom.
With a fixed-rate timeshare, the owner can rent out his block of time or trade with owners of other properties. This type of arrangement works best if you have a highly desirable location.
2. Floating The buyer can reserve his own time during a given period of the year. This option has more freedom than the fixed week version, but getting the exact time you want may be difficult when other shareholders snap up many of the prime periods.
3. Right-To-Use With this arrangement, the buyer leases the property for a given amount of time each year for a set amount of years. The developer maintains ownership of the property, however.
4. Points Club This is similar to the floating timeshare, but buyers can stay at various locales depending on the amount of points they’ve accumulated from buying into a specific property or purchasing points from the club. The points are used like currency and timeslots at the property are reserved on a first-come basis.
(MORE: Watch Out for Timeshare Scams)
5 Advantages of Timeshares
1. Unlike a vacation home which may be vacant part of the year, you only pay for what you use. Thus, the use of a very expensive property could be more affordable; for one thing you don’t need to worry about year-round maintenance.
2. If you like predictability, you have a guaranteed vacation destination.
3. You may be able to trade times and locations with other owners, allowing you to travel to new places.
4. You may be able to rent out your block of time if you can’t use it, although some timeshare contracts may not permit this and website exchange services may charge you to play matchmaker.
5. You might enjoy letting your friends or family use their timeshare for free or offer it at a charity auction.
(MORE: 12 Money-Saving Travel Tips)
4 Drawbacks of Timeshares
1. While you don’t need to worry about maintenance, you will need to worry about the annual fees and your lack of control over their annual increases. The average annual maintenance fee for a timeshare is $660, according to Howard Nusbaum, CEO and President of the American Resort Development Association. You pay that fee whether you use the property or not. In addition, you could be liable for special assessments. If you don’t pay up, the developer can foreclose on your timeshare.
2. Timeshares are hard to sell, and used timeshare units are sold at a steep discount because there are so many on the market. Thus, it might be a better deal to buy a used timeshare on the secondary market. Bear in mind that the Better Business Bureau has been warning about timeshare reselling schemes that defrauded victims out of thousands of dollars.
3. If you sell your timeshare at a loss, the Internal Revenue Service doesn’t let you claim a capital loss as you would with other investments and real property.
4. Buying a timeshare in a foreign country presents special challenges. In Mexico, for example, foreigners are not allowed to hold the direct title to property within 30 miles of the coast and 60 miles of international borders. They are limited to “right to use” timeshares. (There is pending legislation in the Mexican Congress that may change that in the near future.) Also, consumer protection laws in some countries are more lax and lack enforcement.
Pointers for Potential Timeshare Buyers
Still interested in buying a timeshare? Here are a few pointers:
Think of a timeshare purchase as a lifestyle purchase, not an investment. When you consider depreciation, travel costs and maintenance fees — on top of an uncertainty of use — the concept of “prepaying” for your vacations may not pencil out. Run the numbers.
Analyze your vacation patterns over the past few years. Do you really go to the same place at the same time every year? Or do you have a mix of activities and destinations, such as camping adventures, cruises, road trips or organized tours? If it’s the latter, a timeshare isn’t right for you.
If you must borrow to purchase a timeshare, you have no business buying one. Timeshares depreciate in value very quickly, so most banks will not lend you money to buy them. Often, the developer will arrange financing for you, but at a much higher interest rate than banks that do make the loans. What’s more, usually in a foreclosure, the outstanding mortgage balance and the unpaid maintenance fees are higher than the timeshare’s value, which creates what is called a deficiency. Then, lenders can go after your other assets.
Be wary of timeshare salespeople who answer your questions with a question and won’t be upfront about the purchase price. Another tip along these lines: it’s a good sign if you are offered a grace period allowing you to change your mind and cancel before committing to buying.
You will have more protections if your unit belongs to what is called an owners’ club or association. This is similar to a condominium board, giving the property’s owners a collective voice and strength in numbers. The owners’ club may also be helpful when you try to sell your unit.
Never pay an upfront deposit without having first identified and inspected the particular unit. You don’t want any unpleasant surprises when you show up for your vacation.
If you envision children or grandchildren vacationing with you, will they (or their parents) be able to afford the travel costs? If so, you may wind up not using your timeshare unit or points as much as you expect.
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