When you want to purchase a vacation property, a timeshare may seem like an easy, worry-free way to own property in a popular destination. However, timeshares aren’t right for everyone, and before you make a purchase, it’s important to know exactly what you’re getting into.
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Owning a timeshare means that you are a partial owner of a property, and as such you have the right to use it for a specified amount of time. A timeshare is not an investment, as it will not make you any money and often loses value over time, but rather a lifestyle purchase. When you own a timeshare, you’re essentially paying for usage rights on a property. The cost of the property is split between all of the owners, all of whom are guaranteed a certain amount of time there.
How that time is allocated depends on the type of timeshare arrangement.
Timeshares fall into one of four categories: fixed week, floating, right-to-use, and points clubs.
A fixed week timeshare is what most people think of when they hear “timeshare.” Owners of these properties are allowed to use a specific property for a designated week (or however many weeks they purchase) per year for the duration of the contract. Owners may also be able to trade their week with other owners to visit a different location or during a different period, or rent their week to someone else if they won’t be using it.
A floating timeshare guarantees owners the right to stay in a property for an allotted time, which they can schedule at their convenience. Although this arrangement allows for flexibility in vacation planning, it can also mean competition with other owners for the most desirable weeks.
A right-to-use timeshare is a bit different. Instead of actually buying the property, you agree to lease the property for a set amount of time each year during the length of the contract. The developer or owner of the property retains ownership, and your right to use the property may be on a fixed week or floating basis.
Finally, some timeshares are points clubs, in which members purchase a set number of points that can be used for stays at any time at any of the properties owned by the developer. How many points are used for each stay depends on the specific property, the dates of travel, and length of stay.
For some people, a timeshare is a perfect way to guarantee a vacation every year. For example, if you have a favorite destination you visit every year, and purchasing a standalone vacation property is cost-prohibitive, a timeshare can make your vacations more affordable.
For others, a timeshare isn’t such a great deal. As with any purchase, there are pros and cons to timeshares.
- Guaranteed vacation accommodations.
- May present a more affordable option than a hotel or vacation rental for desirable locations.
- Access to larger and/or more luxurious properties than you might be able to afford otherwise.
- You aren’t responsible for maintenance.
- Some timeshares allow enough flexibility for you to use your time in different destinations or during different times of year.
- You may be able to rent/sell your annual portion to someone else, recouping some costs.
- Timeshare weeks can be transferred to friends and family for their use.
- If you don’t want to vacation in the same place every year, it may become predictable or boring.
- Not a potential source of income like a traditional vacation home.
- Annual maintenance/membership fees may be expensive.
- You may be charged additional “special assessments” for major projects.
- There can be stiff competition for prime weeks.
- You may not be able to switch your week or property due to availability or company policies.
- Buying a timeshare outside of the U.S. means you aren’t protected by U.S. laws.
- It’s difficult to sell timeshares, and they are often sold at a loss.
- If you sell your timeshare at a loss, you cannot deduct those losses on your taxes as you could with other properties.
Ultimately, the decision of whether to purchase a timeshare is a personal one, and should be based on your vacation habits and your financial situation. Often, buying a timeshare is an impulsive decision, and it’s not uncommon for buyers to regret their investment soon after.
The fact is, timeshares are notorious for the hard sell, enticing potential buyers with offers for free stays, meals, discount attraction tickets, and more. After spending hours touring the property and listening to the sales pitch, buyers agree to the purchase under pressure. And while on the surface, the idea may seem like it saves money on vacations, you must do the math on the total cost to determine whether it’s actually a great deal. Timeshare purchase agreements don’t include the cost of travel to and from the destination, for example, and maintenance costs often increase annually.
Consider, for instance, a timeshare that’s purchased for $25,000 for a 15-year contract. The annual cost of the week is about $1,667, but there are also maintenance costs, which add an additional $1,000 per year. Assuming you spend six nights per year in the property, you’ll spend about $445 per night — plus costs for transportation, meals, and any other activities. If you typically spend at least that amount on vacation accommodations, a timeshare might be a good idea. If you don’t, then a timeshare could cost you more in the long term.
Other Financial Considerations
How you purchase the timeshare is also a determining factor in whether it’s a good idea. Simply put, if you need to borrow money to make the purchase (especially if you’re financing from the developer) then it’s not a smart money move.
Traditional banks typically will not lend money for timeshare purchases because their value normally depreciates quickly. You may be limited to developer financing in that case, which is often provided at a significantly higher rate than a traditional mortgage, increasing the overall cost of the property.
Another danger of financing a timeshare is the risk of foreclosure. If you can no longer afford the property, or no longer want it, it can be very difficult to sell, and there’s a good chance that if it does sell, you’ll take a loss. If the property doesn’t sell, and you can’t make the payments or cover the fees, then it goes into foreclosure.
It’s common for the amount of the unpaid mortgage and fees to exceed the value of the property in these situations, and the resulting deficiency means that the developer can go after your other assets to recoup their losses. At the end of the day, an annual vacation isn’t worth potentially losing your primary home or other assets, or the damage that borrowing money can do to your credit.
Therefore, a timeshare may only be a good idea if you have the money upfront to purchase it, are certain you can cover the annual fees, and have done the math to determine whether it aligns with your vacation preferences and habits. Otherwise, you may be better off to save up for a vacation, and invest the cash you would have spent on a timeshare elsewhere.
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