Many buyers come to regret their decisions.

Presented by Marc Aarons @ Money Managers Inc.

Thinking about buying a timeshare? You may want to think twice about it.

While some people buy timeshares and love them, many question their choice after an initial honeymoon period. Years later, they realize that they have bought more than part-time use of a resort property – they have also bought into a cycle of aggravating fees and maintenance charges, adjusted for inflation.

In the wake of the recession, demand for timeshares has waned. Many of them are proving hard to sell, and some owners are nearly giving them away.

Timeshares can yield a great ROI – for the resort. At a glance, these properties seem so glamorous – and impressive infomercials, brochures and DVDs commonly announce a free night’s stay or a free weekend if only you will meet with a salesperson.

A profit motive fuels this spectacular sales pitch. Timeshares can be lucrative for a resort community, especially one looking for a source of financing on the way to completion or expansion.

Too many people end up paying more than fair market value for such investments. In a prime resort area, two weeks use of a condominium that might sell for $350,000 in today’s market may end up going for $5,000-6,000. A little math will tell you that a developer can make a nice chunk of change this way.

They may not represent a great investment for you. In spring 2012, an eye-catching blog post appeared at SmartMoney.com, reporting that the number of frustrated timeshare owners selling their investments for $1 (or even giving them away for free) had doubled in the past year. “Very few timeshares increase in value,” admitted Alisa Stephens of RedWeek.com, an online marketplace for these properties. In Q1 2012, FSBO postings on that website had doubled from Q1 2011.¹

In 2010, the American Resort Development Association reported annual timeshare maintenance costs averaging $731; they have likely risen since.¹

The timeshare resale market is currently very soft. Owners have been desperate to unload properties, and that has created a glut. In contrast, the latest yearly data from the National Association of Realtors shows that sales of vacation homes increased by 7% in 2011.¹

Is buying a timeshare akin to buying a condo? It depends on the nature of the ownership option. There are timeshares that are legally considered real property, and there are also vacation interval plans.

When timeshare ownership is deeded, you buy real property with a monthly mortgage attached if there is no cash sale. You and your fellow timeshare buyers collectively own the resort and have a say in its upkeep and its management.²

Alternately, the developer owns the resort and what you actually buy is a “right to use” option, which is legally considered personal property. In this arrangement, you commonly buy a window of time per year – it may vary annually, it may not – to use the property. In a few of these arrangements, you buy the right to use a portion of the unit with the option to rent out the unused portion. There are even right-to-use arrangements that allow you to buy weekends or weeks at multiple resorts.²

If you are seriously thinking of buying a timeshare, read the contract more than once. Look for a rescission clause. Ask to see the current maintenance budget for the resort. Ask about closing costs, broker commissions, and finance charges. Lastly, ask if annual maintenance fees can be capped (some timeshares do offer this feature).

How do I get out of a timeshare? You can put it up for sale online or through other media channels, but before you do, you need to check if the resort has restrictions or fees that may affect your capacity to sell it (or transfer its ownership). You can try the FSBO route – many do – or you can contact a firm that specializes in timeshare resales. (Some of these resellers may come looking for you before you look for them.)

If you go with a reseller, make sure you are dealing with licensed real estate brokers or agents. If the reseller demands a fee upfront, that’s a red flag. If you have only owned your timeshare for a couple of years and it is located outside of a prime resort area, you might be looking at a significant loss if you sell it. A timeshare appraisal service – one licensed in the state in which it is located – could help you determine its present market value.

What price paradise? Standing on that shore or that fairway, it may seem like you are buying a little piece of Shangri-La – a few weeks of it, anyway. You may be buying into a resort’s long-term financing strategy as well. If you fall completely in love with a resort destination, then you may end up loving your timeshare. For others, that is not the case.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com.

www.ocmoneymanagers.com

Citations.

1 – blogs.smartmoney.com/advice/2012/04/04/timeshare-prices-plummet-to-1/ [4/4/12]

2 – www.ftc.gov/bcp/edu/pubs/consumer/homes/rea15.shtm [3/05]

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