Full disclosure: I've always been somewhat skeptical of timeshares. I understand the appeal of having a guaranteed vacation home in an area you love and the flexibility many timeshares offer of being able to swap your unit for a place halfway around the world.
But I worry that many buyers don't consider all associated costs and mistakenly think timeshares are sound financial investments that will appreciate in value. In fact, sellers rarely make a profit -- some only get pennies on the dollar.
Plus, the waters are filled with sharks eager to rip off people who're desperately trying to unload their unwanted timeshares. In recent years the Federal Trade Commission has shut down hundreds of fraudulent timeshare resale operations that have stolen millions of dollars from timeshare sellers.
Before you buy a timeshare, be sure you know how they work, challenges you may face when trying to resell and scams to avoid:Timeshares are usually either "deeded," or "right-to-use" (a.k.a. "non-deeded").
- Deeded. You own a share of ownership in the property, usually for a particular unit for a specified time period -- typically one or two weeks a year. Depending on your contract, you either own the timeshare for life, for a specified number of years, or until you sell it.
- Right-to-use. A developer owns the resort, where each unit is divided into "intervals" -- either by the week or for a certain number of points. You purchase the right to use an interval at the resort for a specified number of years but don't own any real property. Your share is not necessarily for the same unit or time period each year. Many right-to-use contracts allow you to use your points to stay at an affiliated resort (swapping).
The price for buying a new timeshare from the developer can vary widely, depending on the area and amenities offered. A one-week share might cost anywhere from $10,000 to $25,000 -- or many times that for a posh unit in Aspen or Kauai.Plus, you'll be responsible for various other expenses:
- Annual fees for maintenance, utilities and property taxes typically cost $400 to over $1,000 a year. Maintenance fees usually go up every year, often exceeding the rate of inflation, so ask whether your plan has a fee cap.
- Major repairs or improvements might also result in one-time assessments.
- If you use an outside timeshare exchange company to swap your share for someone else's, you'll likely be charged a fee.
- If you decide to sell your timeshare, the resort usually will charge additional fees for property transfer and recording.
- And don't forget to factor in travel costs to and from the property each year.
- Compare the costs of buying and maintaining a timeshare with renting a similar property. Perhaps rent a unit from a current owner first to make sure you like the complex.
- Evaluate the location and quality of the resort by visiting the facility and talking to current owners about their experience.
- Check for complaints about the seller, developer and management company with the state Attorney General's Office, local consumer protection agencies and the Better Business Bureau.
- Make sure all promises made by the sales agent are contained in the contract.
- Don't act on impulse or be swayed by high-pressure sales tactics. If possible, ask a lawyer or real estate professional to review the contract before signing.
- Get the name and contact information of a company representative who can answer your questions before, during and after the sales presentation, and after your purchase.
- Ask about your ability to cancel the contract (sometimes called "right of rescission"). Many states guarantee your right of rescission, but cancellation periods vary. If the law doesn't require a right-of-rescission or cooling-off period where you're buying, ask that one be included in your contract.
- Use an escrow account if you're buying into a property that's not yet completed to protect you if the developer defaults.
- Be wary of timeshares in foreign countries, since you won't be protected by U.S. laws.
Before investing in a brand new timeshare, consider buying one used. Like new cars, timeshares quickly depreciate. Follow the same due diligence you would when purchasing a new unit, whether you're buying through resale services like Timeshare Users Group, Redweek, MyResort Network or an online auction site like eBay.A few cautions when selling a timeshare:
- If you're going through a reselling agency, don't pay more than a nominal upfront fee for appraisal, advertising, etc. Look for companies that take their cut after the sale. Read this FTC checklist for reseller cautions.
- If you're selling it yourself, try advertising on Craigslist, on the property's bulletin board or newsletter, or in local papers in the vicinity -- or in areas where other owners reside. (For example, if your timeshare is in Florida, consider where "snowbirds" live.)
- Before setting your price, find out what comparable properties (at similar time periods) sell for so you don't overprice.
- Watch out for scams, like: an agency cold calls you and claims it has buyers waiting in the wings; or someone claims you're entitled to a settlement from an FTC lawsuit brought against a scammer. See this FTC site for other examples.
- If you didn't pay cash, remember you'll probably have to pay off your loan first before being able to sell. If repaying is prohibitive, consider renting out your unit until you can refinance or pay off the loan.
- Beware of offers to accept your timeshare as a tax deduction for a fee -- often thousands of dollars. The IRS only allows you to deduct "fair market value," which is probably significantly less than you paid for it. AARP has a good article on this topic.
Bottom line: Before you sink tens of thousands of dollars into a timeshare, make sure you're in it for the long haul, or at least know what you'll be up against when you later try to sell it.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney