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How Timeshares Work


Image Gallery: Paradise Timeshares are one way to vacation and invest. See more pictures of paradise.
Photo courtesy morguefile.com

Some people see them as the chance of a lifetim­e, ­an opportunity to own a piece of a beautiful resort where they c­an have a dream vacation every y­ear. Others think they're shady deals to be avoided at all costs. And lots of people sit through the sales pitch just to get the free gifts.

Most of us have either been approached by someone with an offer to buy a timeshare, or we know someone who has. Although they have a reputation as scams, most timeshare deals are genuine, legitimate real-estate offerings. However, that doesn't necessarily mean they're a good idea for everyone.

In this article, we'll find out how timeshares work, how you get them, how you get rid of them and whether or not they are a sound financial investment. We'll also find out about some timeshares that are scams.

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Buying Property a Week at a Time

Madeira Beach, Florida
Madeira Beach, Florida
Photo courtesy NIST Boulder Laboratories

­Usually, when you think about buying real estate, you envision an entire piece of property that you own by yourself. You can use it whenever you want and do whatever you want with it.

A timeshare is a different kind of real-estate purchase. Instead of paying full price for the property and owning it yourself, you pay a share of the price. This share allows you to use the property for a certain period of time every year. The rest of the year, other people who purchased shares get to use the property. How long you get to stay there depends on your share. A 1/52 share will get you one week per year.

There's really just one kind of property that people only want to use once a year -- vacation property. That's why you'll find the vast majority of timeshares in vacation hotspots like Florida, Colorado and Mexico. A timeshare provides a nice place to stay while on vacation, so people who tend to return to the same vacation spot year after year are prime candidates for timeshare ownership. They never have to worry about finding accommodations for their annual trip, and the property is maintained for them, although share owners do have to pay maintenance fees.

Most timeshare purchases are deeded (or "fee simple") timeshares. This means that the purchaser is buying an actual share of ownership in the resort. Non-deeded timeshares, also known as right-to-use, certificate or vacation-interval timeshares, are more like a club membership. The purchaser owns the right to use the property for a specific time period but doesn't own any real property. The terms of a non-deeded timeshare can include an expiration date, while deeded timeshares confer permanent ownership.

While a 1/52 share is average, there are smaller shares (1/104, or one week every other year) and larger shares (1/12, which gives you an entire month to use the property each year). Larger shares can usually be split up for use at different times of the year. The specific time of year that a share can be used can affect the price -- a share in the middle of prime tourist season will be more expensive. The specific time when your share can be used is scheduled ahead of time, although it may be possible to trade shares with other people at the same resort or even with timeshare holders at other resorts. We'll discuss timeshare trading in more detail later.

Next, we'll break down the dollars and cents of owning a timeshare.

The Cost of Owning a Timeshare

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Timeshare prices can vary tremendously based on share size, location and time of year, not to mention all the variables that affect any other real-estate value, ­such as condition of the property and the market for timeshares at the time. A new (or retail) timeshare usually sells in the neighborhood of $10,000, although that can vary by thousands of dollars in either direction. Purchasing a used timeshare can be significantly cheaper, with prices as low as $1,500.

The initial purchase price is not the only cost to consider, however. All timeshare resorts charge share owners annual fees for maintenance, utilities and taxes. Annual fees in the $300 to $400 range are typical, although larger shares or peak-season shares can have higher annual fees, often more than $1,000 every year. These fees are due whether the share owner uses the property or not. Resorts can increase the fees each year -- the initial fees at the time you buy are not locked in. However, some timeshare contracts include a specific clause that limits future fee increases. Sometimes, the annual fee does not cover property taxes, so share owners would then be responsible for those costs, as well.

Timeshare resorts will also tack on extra real-estate fees when the share is sold, such as a transfer fee and a recording fee. If the resort decides to make a major improvement to the property, or it has to make major repairs, it might be able to assess a large fee to the shareowners to cover the costs. Check the terms of your timeshare contract carefully to see if the resort could hit you with a large, unexpected assessment fee in the future.

Another hidden cost that is easily forgotten is the cost of travel. Owning a timeshare is useless if you can't afford to get to it. Flying to Mexico or Florida or Colorado every year could grow very costly.

Next, we'll learn how to get the most out of a timeshare.

Using Your Timeshare: Flex and Points

Once you've read the contract, weighed the pros and cons and compared the total cost of the timeshare to other annual vacation packages, you just might decide to take the plunge and buy a timeshare. How can you get the most bang for your buck?

If you are content to visit the same place at the same time each year, then a standard, static timeshare will work out just fine. You'll have the same property waiting for you each year, with no worries about finding a place to stay.

However, if you'd rather visit different places each year, or you're not always sure you can vacation at the same time every year, then this arrangement might not work out. Flex plans and points systems can provide some options.

Under a flex system, the purchaser buys a share in a particular season at the resort. This season is a window of one or more months during which the share owner can schedule his or her vacation each year. Weeks are assigned on a first come, first served basis, so you need to book your week far ahead of time (up to two years) to get the week you want, especially during peak season.

A points system is more flexible. Each share owner has a certain number of points that can be used for different types of accommodations at different times of the year. If you want a large suite at peak tourist season, it might cost 500 points, while a small hotel room during the slow season might only cost 200 points. This allows owners to alter their vacation plans from year to year, although early booking is still a good idea.

For even more freedom than flex and points systems, you'll have to get into the world of timeshare swapping.

Using Your Timeshare: Swapping

If you want to vacation in a different location each year, timeshare swapping is a possible option.
If you want to vacation in a different location each year, timeshare swapping is a possible option.
Photo courtesy morguefile.com

The con­cept of the timeshare swap is simple: You have a week of time at a resort in one place, but you'd rather take your vacation someplace else this year. All you have to do is find someone with a timeshare in the place you want to visit who is willing to vacation at your timeshare, and then you trade. Finding a willing trading partner, however, is the complicated part.

Some resorts are owned by companies that own several other resorts. They may provide a completely open system, in which you can schedule flex weeks or spend points at any resort in their system, or they may offer an internal swap system, in which you can swap shares with anyone at any of their resorts.

The next option is an exchange company. These are companies that facilitate the trading of shares, matching people's wants with what others have to offer. If you have a static share, you simply sign up for an exchange company, put your share into the exchange pool and indicate potential times and places you'd be willing to trade for. If all goes well, you'll be notified when a match is found. The transaction can then be completed by mail or fax, or even by phone if time is short.

If you participate in a flex or points system, you'll have to reserve a share at your "home resort" before you sign up for an exchange. Shares in nicer rooms at peak times of the year have more trading power than off-season shares, so booking early for desirable vacation times can result in better trade offers.

If you don't have time for a vacation, you can also rent out your timeshare. You're free to set the cost and terms of the rental, although some of the details can depend on the contract you have with your home resort. Most exchange companies also offer rental listings. Keep in mind that the exchange company will charge a fee for any swaps or rentals that take place through its own channels, and all share-swap agreements must be cleared with the resorts in question.

In the next section, we'll learn about selling a timeshare.

Selling a Timeshare: Resale Value

Timeshare resale can be a sticky subject, because many resorts tout timeshares as sound financial investments. They will often encourage potential share owners by talking about the "hot" timeshare market in the area and give a few anecdotal examples of people who sold their timeshares for more than they initially paid for them.

Unfortunately, timeshare owners rarely make money when they resell their share. Virtually every objective review of timeshares cautions interested owners against buying a timeshare as an investment. The Federal Trade Commission Web site states, "You should know that the value of is in their use as vacation destinations, not as investments." Florida has even considered passing a law that would make it illegal to mention the phrase "investment opportunity" in a timeshare sales pitch.

Why do timeshares lose their value? Even if you're only looking at initial purchase price, the market is flooded with thousands of resorts and millions of shares. It isn't a seller's market. Once you take into account total costs, including annual fees and the fees that timeshare brokers charge to facilitate the resale, it becomes very difficult to recoup the initial purchase price, much less make any money on the deal.

That isn't to say that timeshares are a bad idea -- as vacation destinations, they can be the perfect plan for people with certain vacationing patterns. They just aren't a good way to make money.

Selling a Timeshare: The Sale

Sample "for sale by owner" ad
Sample "for sale by owner" ad
2009 HowStuffWorks

When it does come time to sell a timeshare, it is possible to avoid broker fees and post it "for s­ale by owner." There are timeshare newsletters and Web sites frequented by people who are looking to buy. Placing an ad in one or more of these places is a good first step.

If you do go through a broker, make sure you check his or her credentials thoroughly. Try to avoid brokers who ask for an upfront fee, and be wary of resellers that approach you first. The FTC recommends checking with the Better Business Bureau and state real-estate licensing agencies. You can also ask for references from the broker. Find out exactly what the broker will do to promote your property and how often he or she will report to you.

It can be difficult to set the price of your timeshare at the correct market rate. There are timeshare-appraisal services available to help with this.

Finally, remember that a timeshare resale is a large real-estate transaction. All agreements should be made in writing. The buyer's address and phone number should be available. You'll also need all the proper paperwork regarding the fees, rights and limitations of use associated with the property and the resort that it belongs to.

Next, we'll find out how to avoid timeshare scams.

Avoiding Timeshare Scams

Some timeshare brokers offer great prizes just for sitting through a "short presentation," which turns out to be a very long, very aggressive sales pitch.
Some timeshare brokers offer great prizes just for sitting through a "short presentation," which turns out to be a very long, very aggressive sales pitch.
2009 HowStuffWorks

Most timeshare offers ­are legitimate, but enough scams and shady deals have lured people in that timeshares have developed a bad reputation. Some timesh­are brokers also use hard-sell tactics and other practices that aren't necessarily illegal but are definitely unethical.

The first thing to watch out for is the sales pitch. Sellers often encourage people to stay for one of their sales presentations by offering extravagant prizes if they just stay for the entire pitch. Free vacations, cash rebates or new cars have all been offered. It pays to read the fine print, because often the free gifts aren't what they seem, or you will actually have to pay some kind of fee to qualify to win. There have been reported cases in which a free boat that was offered as a prize turned out to be a toy boat. Sometimes, people who already own a timeshare are convinced to buy another one with promises that their old one will be easily resold, when in fact the broker has no intention of selling the old timeshare.

Hard-sell tactics are easy to spot if you know what to look for, and that makes it much easier to resist. The broker may suggest a very attractive discount, but only if you sign a contract right now. The broker might attack your pride by suggesting that you "apparently aren't the right kind of person for this deal." The key to avoiding bad deals is to never make an impulsive decision. No matter how good the offer looks, never sign anything on the spot. Take the information home with you. Read the contract. Better yet, have a lawyer read the contract. Get the name and phone number of someone at the broker's company who you can call with questions. Weigh the costs -- and make sure they're disclosing all of them. Ask if you can visit the property you're buying -- it's not a good idea to spend thousands of dollars on something sight unseen. Photographs in a glossy brochure don't count.

Sometimes, new timeshare units are sold before the property has been built. If the financing for the construction falls through, it might never be built. Use an escrow service to hold your money until you're sure everything is in order.

If a property is poorly maintained, it won't be much fun to visit each year, so make sure there are terms in the contract outlining exactly what maintenance the resort will take care of. If they cut corners on upkeep, you'll have legal rights if they've violated the terms of the contract. If it isn't in writing, you might be out of luck.

For more information on timeshares and related topics, check out the links on the next page.

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More Great Links

Sources

  • BBB, "Timeshare Sales and Resales." http://www.bbbsilicon.org/topic163.html
  • Scambusters.org, "Timeshare Scams." http://www.scambusters.org/timeshare.html
  • FTC, "Time and Time Again: Buying and Selling Timeshares and Vacation Plans." http://www.ftc.gov/bcp/conline/pubs/homes/resales.htm
  • FTC, "Timeshare Tips." http://www.lawpublish.com/ftctmshr.html
  • Holiday Group, "Glossary of Timeshare Terms." http://www.holidaygroup.com/terms.php