Who doesn’t love a vacation? If you’re thinking about the smartest way to use your travel funds, you may have heard of timeshares as a savvy vacation home alternative.
But what’s a timeshare exactly? And does investing in a timeshare really make fiscal sense? Let’s take a look.
What’s Ahead:
A timeshare is a real estate program for residential property at a vacation destination or resort. As the “share” part indicates, multiple owners share the cost of the property. In return, each owner gets the right to stay in the property for an assigned period of time.
For instance, you can purchase a 1/52nd share of a unit—a room, suite of rooms, condo, etc.—which lets you stay there for a week each year. A week per year is the standard amount of time resorts sell to one owner, though some resorts let owners buy larger or smaller annual time blocks.
There are two types of timeshare contracts: Deeded and non-deeded.
Deeded or “fee-simple” contracts are similar to buying a house—you get a share of ownership. You can resell or rent your timeshare, or pass it down to your children. About 90% of timeshare transactions are fee-simple or deeded.
Non-deeded or right-to-use contracts are similar to signing a lease. You buy the right to use the property for a certain number of years, but you don’t own outright. Ownership reverts to the original owner at the end of your term.
Once you’ve bought the timeshare, how can you use it? There are four typical systems for usage: Fixed-week, floating-week, right-to-use and points-based.
Fixed-week systems
A fixed-week timeshare lets you use the unit for the same specific week each year. These are usually deeded transactions.
This arrangement works best if you like predictability, since you can’t switch your week. You can rent out your block of time or trade it with other owners. Fixed-week arrangements are becoming less common as customers seek more choice.
Floating-week systems
A floating-week timeshare gives you ownership of one week per year, but the timing is up to you. You can either book your week whenever you want or within a specified time period (like June to August). These are also typically deeded transactions.
The floating-week option gives you more flexibility than the fixed-week option. But you’ll have to deal with competition for popular time periods.
Right-to-use systems
Right-to-use systems or non-deeded transactions, as described above, give you a lease for your share of the property. You’ll lease for a set amount of years—between 20 and 99 years. The developer maintains ownership.
Points-based systems
In a points-based system you purchase a certain number of points each year, which you can trade in for reservations at timeshare properties. A points-based timeshare at a hotel, for example, would let you stay at any of the hotel’s participating locations worldwide. These timeshare systems are also called vacation clubs.
Points work like currency. The number of points you use depends on when and where you visit. Longer stays, more popular locations, and peak vacation times like weekends and holidays eat up more points, similar to a higher rate for a hotel room. And you may have to compete with other shareholders for coveted destinations and times. You can often “bank” points, roll over unused points from a previous year or borrow from a future year.
Points-based systems are becoming more common. They give travelers options and variety with their investment. It’s a good idea to make sure points are inflation-proof so their value stays the same over time.
For an additional fee, owners can join a timeshare exchange company where they’ll swap locations with other timeshare owners. The two largest timeshare exchange companies are RCI and Interval International.
No matter which type of timeshare you buy, you’ve got two fixed costs. You pay a fee up front, and you pay a maintenance fee every year.
Exact costs vary based on many factors, including the location, the unit size, the property’s condition, and the timing of your stay. But the American Resort Development Association estimates the average up-front cost at $19,000, with around $660 in maintenance fees annually.
Maintenance fees
The maintenance fees represent the biggest financial headache for most timeshare owners. Usually if you buy a deeded timeshare, there’s no expiration date. This means you’re paying the maintenance fee indefinitely, even if you don’t use the property every year. And maintenance costs rise with inflation.
Additional fees
Additional fees add up too. You’re required to help pay for mandatory property assessments, which determine any upgrades or repairs the resort needs. If the property gets damaged in a storm or the management decides the place needs an overhaul, timeshare owners get another bill.
Tack on closing costs and any taxes you pay on the property, and a timeshare can cost over a thousand dollars a year—after the initial payment. You’re responsible for the bill whether or not you use the timeshare.
The biggest difference: A vacation home is a financial investment. A timeshare isn’t.
When you buy a vacation home you own the entire property outright. You can sell, rent, make upgrades, and use the home whenever you want. If you choose to sell, you’re likely to make a profit. A home, though, requires a larger initial investment. Since you won’t occupy the home year-round, you’re often paying for vacant space (unless you choose to rent).
Timeshares tend to offer bigger, nicer spaces in more popular destinations than vacation homes. They also require less cash up front. You only pay for the time you actually spend at the property. And you don’t have to perform maintenance work yourself.
But if you no longer want to use the timeshare, you’ll have a much harder time selling it—and you probably won’t profit at all. While the money you spend maintaining a vacation home can improve its resale value, the money you spend on a timeshare doesn’t appreciate in the same way.
A timeshare works best for a very specific kind of vacation-taker.
If you look forward to an annual trip, and vacationing is a significant part of your lifestyle, a timeshare might be a good bet. Timeshares work best for those with a traveling “pattern” who like to visit the same place each year. You can lock in your annual holiday ski trip or beach vacation, and you’ll know the price in advance. Or you can join a points-based program and try different destinations.
Over time you’ll spend less than you would if you took individual vacations. For instance, if you rent two hotel rooms for a week every year, a timeshare in the same location could save you as much as $14,000 over 10 years, according to the American Resort Development Association. The timeshare’s likely to have nicer accommodations than a hotel, too.
To get your money’s worth out of a timeshare, however, you have to be committed to an annual trip. Essentially you’re prepaying for several years’ worth of vacations. If you aren’t sure your work schedule or other obligations will allow you consistent time off, you might not want to pay for a timeshare. Similarly, if your traveling style is more spontaneous, you may want more variety than a timeshare can offer.
Several of them are. An American Resort Development Association survey reported 83% of timeshare owners are happy with their decision and would buy a timeshare again. Many owners report the timeshare motivates them to take vacations they’d skip otherwise.
For those who aren’t satisfied, increasing maintenance fees are the biggest downsides. Disney resorts, for example, raise their maintenance fees 2% to 3% each year. Owners who resell or exit their timeshares often can’t or don’t want to keep paying—66% of former timeshare owners cite rising fees as their reason for leaving.
Booking issues are another common complaint. Owners can’t always snag a convenient vacation time when bookings get competitive. Since it’s hard to sell a timeshare, many owners feel stuck in a commitment they no longer want to keep.
Investigate the unit before you buy
This basic advice bears repeating: Don’t buy sight unseen. Visit the resort or building where you’re considering buying a timeshare. Evaluate the quality of the space. Talk to other timeshare owners and see what they recommend. Check with the state’s attorney general to see if there have been any complaints about the management or developer handling your timeshare unit. Research and read reviews online in timeshare user groups.
Plan ahead
Timeshares do save money in the long run, but only if you use them consistently. Book your vacation as far in advance as possible. Timeshare experts recommend booking a full year in advance. Remember, you’re competing with other timeshare owners for the same space. Timeshare companies frequently sell more shares than there are dates available—so act quickly.
Learn the rules if you’re buying a timeshare in another country
Most timeshares outside the United States are only available to purchase on a “right-to-use” or non-deeded basis. Also, timeshares in other countries aren’t covered by United States law. If you’re considering a foreign purchase, learn the consumer protection laws in that country and how they’re enforced.
Timeshares are notoriously hard to sell. The timeshare industry’s full of owners selling their shares at a deep discount. Developers sometimes buy back timeshares, but you’re usually on the hook for maintenance fees until the developer finds a new buyer.
Even if you do manage to sell your timeshare, you’ll probably sell for much less than you paid. Since a timeshare’s not considered an investment, the IRS doesn’t let you claim the sale as a capital loss.
Know your options if the time comes to sell
Several resort companies now offer take-back, resale and exit programs. Others are willing to work with members who want to exit their timeshares.
Buy a used timeshare
Think resale, not retail. The difficulty of selling used timeshares means the market is great for buyers. Buying a used timeshare from its owner, rather than from the developer, can get you a 75% discount off the original price.
Go through a reputable timeshare resale network, though. Reselling scams do happen. When in doubt, call the resort or hotel to ensure the seller owns a timeshare there.
Rent before you buy
Timeshare owners who can’t use their allotted week will often look for a week-long renter. The timeshare community Redweek is a good place to start shopping.
When you rent you can check out the amenities of the resort without making a commitment. You’ll get a chance to research the pros and cons in case you choose to buy.
Don’t pay full price
Even if you do buy retail, the price is almost always negotiable.
Don’t take out a loan
The high initial costs to buy into a timeshare may make it tempting to borrow money. But a loan will probably backfire. Most banks won’t offer loans for timeshare purchases, since timeshares depreciate quickly. You’ll be responsible for loan payments on top of maintenance fees. In the event of a foreclosure, you’ll still need to pay any outstanding balance on the mortgage. For best results, don’t buy a timeshare unless you can afford to pay up front.
How can you protect yourself legally if you buy?
Read the timeshare contract carefully and study the fine print. Before you sign anything, you should know:
- What your total financial responsibility will be
- What all the costs cover, including maintenance and assessment fees
- Do you have options if you want to exit the timeshare?
- What will happen if the timeshare management company shuts down
- What your legal rights and obligations are if you’re buying a timeshare in another country
It’s not a bad idea to run the contract by a timeshare lawyer.
You should know your options for backing out of the sale as well. Each state has a different right of refusal or “right of rescission” period for timeshare contracts. This period, usually between three and 10 days, is the amount of time a buyer has to cancel without penalty after signing. Consult this chart to find the laws for the state where you’re making the purchase.
Make sure you sign the contract documents in the state where you plan to buy the timeshare. Some states have stronger right-of-rescission laws than others, and companies have been known to get buyers to sign in states with weaker laws on purpose.
If you do end up canceling, you should send a letter by certified mail and request a return receipt. Keep records of any correspondence in case you need them.
For extra legal protection, see if your unit belongs to an owners’ association—a group, like a condominium board, that protects owners’ interests.
A few final words of caution
Beware the hard sell
Timeshares used to be infamous for their heavy-duty sales presentations, where salespeople plied potential buyers with free food, drinks, and accommodations. Buyers often ended up signing contracts they didn’t fully understand.
These sales tactics are less frequent now that consumers are wise to them. But you should still keep your eyes open. Make sure your salesperson tells you the purchase price directly and doesn’t evade your questions.
Sleep on it
A timeshare shouldn’t be an impulse buy. One expert advises anyone who attends a timeshare presentation to avoid buying anything on the first day.
Watch out for fraud
The timeshare reselling industry has a few well-known scams. Some scammers will call timeshare owners and offer a buyer at a too-good-to-be-true price. Others promise to sell the timeshare for you—but they charge a fee up front. One common word of advice is “Never pay for a promise.” Go through a legitimate, licensed timeshare broker if you want to sell.
Summary
A timeshare purchase can be a great way to save money on a lifetime of vacations. But think carefully before signing on the dotted line. Once you buy it, you have to use it.
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