This time of year finds many of our client families vacationing somewhere near the equator. When they return home, they sometimes bring back more than just a tan, returning as an owner of a timeshare and unsure of whether or not to add ‘proud’ to that ownership title.
2018 marked eight consecutive years of growth in the timeshare market. Buying into one is often an emotional and impulsive decision, with pros and cons. Let’s start with some background information about the four basic types of timeshares:
- Fixed Week: The buyer usually owns the rights to a specific unit in the same week every year, for as long as the contract stipulates. There is predictability, but also little flexibility. The owner can rent out his block of time or trade with owners of other properties. This works best if you have a highly desirable location.
- Floating: The buyer can reserve his own time during a given period of the year. This option has more freedom, but getting the exact time you want may be difficult when other shareholders snap up many of the prime periods.
- 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; however, the developer maintains ownership of the property.
- 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.
Positives
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 is more affordable to average people over the long-term. The average sales price of a timeshare is $22,180.[1] If you use that property for 10-years, you average about $2,218/week for your vacations. After 20-years, $1,109/week.
You also don’t need to worry about maintenance. If you like predictability, then you have a guaranteed vacation destination. You may be able to trade times and locations with other owners. There is also the possibility of renting your block of time if you can’t use it, but keep in mind that not all timeshare contracts will give you that option. If they do, website exchange services may charge to play matchmaker for you. Some people enjoy letting their friends use their timeshare for free or offering it at a charity auction.
Negatives
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 fee for a timeshare is $980.[2] You pay that fee whether you use the property or not. In addition, you could be liable for special assessments and, if you don’t pay up, the developer can foreclose on your timeshare.
Timeshares are hard to sell, and used timeshare units are sold at a steep discount because there are so many of them on the market. Thus, it might be a better deal to buy used on the secondary market. If you sell yours at a loss, the IRS does not allow you to claim a capital loss as you would with other investments and real property.
Planning Pointers
- While some timeshares will carry a small amount of resale value, most will not. Because they depreciate so quickly, banks will not lend on them. Often, the developer will arrange financing for you, but at a much higher interest rate. Usually in a foreclosure, the outstanding mortgage balance and the unpaid maintenance fees are higher than the value. This creates what is called a deficiency, and lenders can go after your other assets. If you must borrow to purchase a timeshare, you probably have no business buying one.
- You will have more protections if your unit belongs to what is called an owners’ club or association. These are similar to a condominium board, giving the owners a collective voice and strength in numbers. The owners’ club may also be helpful when you try to sell your unit.
- Be wary of sales people who answer your questions with a question and won’t be upfront at the very beginning about the purchase price. It’s a good sign if you are offered a grace period to change your mind.
- Stick to reputable brands and take care to avoid scams. Never pay an upfront deposit without having first identified and inspected the unit.
- 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? If you envision children and grandchildren vacationing with you, will they be able to afford the travel costs? If not, you may not use your time share unit or points as much as you expect.
- Think of a timeshare as a lifestyle purchase, not a real estate 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 from a time value of money perspective, especially if you must borrow to do so.
Still not sure whether or not a timeshare is right for you? Give us a call. Our team of CERTIFIED FINANCIAL PLANNER™ professionals can help you review the pros and cons that are unique to you.
[1] Ernst & Young, ARDA International Foundation. “State of the Vacation Timeshare Industry: United States Study.” American Resort Development Association, 2018, http://www.arda.org/news-information/industryinformation/overview.aspx
[2] Reed, Brandon. “The Real Costs of Timeshare Ownership.” Timeshare Exit Team, October 8, 2018, https://timeshareexitteam.com/real-cost-timeshare-ownership/
