What Is a Timeshare?
A timeshare is a shared ownership model of vacation real estate in which multiple purchasers own allotments of usage, typically in one-week increments, in the same property. The timeshare model can be applied to many different types of properties, such as vacation resorts, condominiums, apartments, and campgrounds.
- A timeshare is a shared ownership model of vacation property whereby multiple owners have exclusive use of a property for a period of time.
- Timeshares are available for various types of vacation properties such as resorts, condominiums, and apartments.
- Timeshares are available for a fixed week–a buyer has a set week each year, or a floating week–use of the property is limited to a season.
- Timeshare benefits include vacationing in a professionally-managed resort in a predictable setting.
- Timeshare drawbacks include a lack of flexibility in making changes, annual maintenance fees, and difficulty reselling one.
How a Timeshare Works
Timeshares confer upon buyers the right to annual exclusive use of a vacation property for a defined period that is generally measured in one-week increments. Timeshares typically use one of the following three systems:
A fixed week timeshare gives the buyer the right to exclusively use the property for a specific week (or weeks) every year. While the advantage of this structure is that the buyer can plan an annual vacation at the same time every year, the other side of the coin is that it may be exceedingly difficult to change the fixed week to another period if required.
A floating week timeshare gives the buyer exclusive use of the property for a week or weeks during a predefined period or even throughout the year. While it is more flexible than the fixed week system, the "floating week" may not be available during the busiest times of the year and may need to be reserved well in advance to ensure availability.
The points system uses points to represent timeshare ownership, based on factors such as resort location, size of the vacation property, and time of availability. Points are used by developers to facilitate timeshare exchanges either within their own resorts (internal exchange) or with other resorts as well (external exchange). While the points system provides users with increased vacation choices, there is a wide disparity between the points allocated to various vacation resorts due to the aforementioned factors involved.
Types of Timeshare Ownership
Timeshares are typically structured as shared deeded ownership or shared leased ownership interest.
Shared Deeded Ownership
Shared deeded ownership gives each buyer a percentage share of the physical property, corresponding to the time period purchased. A resort condominium unit that is sold in timeshare increments of one week can technically have 52 total deeds. In other words, buying one week would confer a one-fifty-second (1/52) ownership interest in the unit while two weeks would give a one-twenty-sixth (1/26) interest and so on. Shared deeded ownership interest is often held in perpetuity and can be resold to another party or willed to one's estate.
Shared Leased Ownership Interest
Shared leased ownership interest entitles the buyer to use a specific property for a fixed or floating week (or weeks) each year for a certain number of years. In this structure, the timeshare developer retains the deeded title to the property, unlike the shared deeded ownership structure where the owner holds the deed. Property transfers or resales are also more restrictive than with a deeded timeshare. As a result, a leased ownership interest may have a lower value than a deeded timeshare.
Based on the above, it is apparent that holding a timeshare interest does not necessarily imply "fractional ownership" of the underlying property. According to the American Resort Development Association (ARDA), the trade association for the timeshare industry, "fractional ownership" is usually associated with the luxury segment of vacation properties that offer more service and amenities, and is sold in intervals of more than one week and less than full ownership. The concept of fractional ownership has also been extended to other assets, such as private jets and recreational vehicles.
According to ARDA, 2019 was the 9th straight year of growth for the U.S. timeshare industry, with $10.2 billion in sales and $2.4 billion in revenue from its 1,580 resorts.
Timeshares vs. Airbnb
Are timeshares even relevant in the era of the sharing economy as exemplified by Airbnb and Uber? A 2018 survey by the International Society of Hospitality Consultants (ISHC) revealed that 69% of members surveyed believed that the appeal of timeshares is diminishing. However, in any debate of the merits of timeshares vs. Airbnb, the reality is that both have specific attributes that appeal to two divergent and massive demographic cohorts.
The main appeal of Airbnb and other home-sharing sites is in their flexibility and ability to provide unique experiences–attributes that are cherished by the Millennials. The downside, as regular Airbnb users will attest, is that the quality of accommodation is not always guaranteed, and there's a possibility that the haven you thought you were booking is actually a hovel. In addition, because most Airbnb rentals are residential in nature, the amenities and services found in timeshares may be unavailable.
Timeshares typically offer predictability, comfort and a host of amenities and activities–all at a price, of course, but these are attributes often treasured by Baby Boomers. As Baby Boomers with deep pockets begin retirement, they're likely to buy timeshares, joining the millions who already own them, as a stress-free option to spend part of their golden years.
Advantages and Disadvantages of Timeshares
Although timeshares are not for everyone, they have some advantages for those looking for a vacation spot that's convenient and reliable. However, there are some distinct disadvantages that investors should consider before entering into a timeshare agreement.
Most timeshares are owned by large corporations in desirable vacation locations. Timeshare owners have the peace of mind of knowing that they can vacation in a familiar location every year without any unpleasant surprises.
Timeshare properties often have resort-like amenities and services and are professionally managed. In comparison to a typical hotel room, a timeshare property is likely to be significantly larger and have many more features, facilitating a more comfortable stay.
Timeshares may thus be suitable for people who prefer vacationing in a predictable setting every year, without the hassle of venturing into the unknown in terms of their next vacation.
The drawbacks of a timeshare are that the ongoing costs can be significant, after factoring in the substantial upfront payment and annual maintenance fees, with the latter generally trending higher on a percentage basis year after year. For a deeded timeshare, the owner also has to the proportionate share of the monthly mortgage. As a result, the all-in costs of owning a timeshare may be quite high as compared to staying for a week in a comparable resort or hotel in the same location without owning a timeshare.
There is also little flexibility to change a fixed week timeshare; a floating week has to be reserved well in advance as confirmation is generally on a first-come-first-served basis, and even so, might be unavailable during the busiest times of the year. In addition, a timeshare contract is a binding one; the owner cannot walk away from a timeshare contract because there is a change in his or her financial or personal circumstances.
It is notoriously difficult to resell a timeshare–assuming the contract allows for resale in the first place–and this lack of liquidity may be a deterrent to a prospective investor. A timeshare resale may fetch a much lower price than the initial cost for two reasons. Timeshares tend to depreciate quickly, and there is a mismatch in supply and demand due to the number of timeshare owners looking to exit their contracts.
Familiar location every year without any unpleasant surprises
Resort-like amenities and services
Avoids the hassle of booking a new vacation each year
Ongoing costs can be significant
Little flexibility when changing weeks or the contract
Timeshares are difficult to resell
Aggressive marketing practices
Special Considerations Before Buying a Timeshare
The timeshare industry is infamous for its aggressive marketing practices. Many timeshare acquisitions are impulsive and emotional purchases made by consumers who are swayed by slick marketing and tall promises.
For example, Las Vegas is filled with timeshare marketers who entice customers to listen to an off-site timeshare presentation. In exchange for listening to their pitch, they offer incentives, such as free event tickets and complimentary hotel accommodations. The salespeople work for property developers and frequently employ high-pressure sales approaches designed to turn "nays" into "yeas." The prices developers charge are significantly more than what a buyer could realize in the secondary market, with the developer surplus paying commissions and marketing costs. Timeshare marketers may also frequently conceal the actual cost of timeshare ownership and exaggerate its potential benefits.
Because the timeshare market is rife with gray areas and questionable business practices, it is vital that prospective timeshare buyers conduct due diligence before buying.
The Federal Trade Commission (FTC) outlined some basic due diligence steps in its "Timeshares and Vacation Plans" report that should be perused by any prospective buyer. In the report, the FTC notes:
"The value of these (vacation ownership) options is in their use as vacation destinations, not as investments."
Overall, it is debatable whether timeshares' significant upfront costs, ongoing maintenance fees, and limited liquidity make them suitable investments for the average investor. For those looking for a timeshare property as a vacation choice rather than as an investment, it is quite likely that the best deals may be found in the secondary resale market rather than in the primary market created by vacation property or resort developers.