A timeshare is a form of joint ownership or a right to the use of a property. It is a plan where multiple parties share the use or the rental costs of a property for a specified time every year.
The properties involved in a timeshare, most of the time, are usually vacation homes or condominium units. However, they may also come in other forms of dwelling like residential or commercial properties. Participants (called sharers) in the contract are entitled to use the property for a set period of time each year. Depending on the agreement, the length may span a few weeks or months.
Timeshares are further divided into two kinds: deeded plans or non-deeded plans:
- Deeded timeshares means buying the legal title to a property. The owners then can use the property just like any other property investment—for personal use, rent it out, give it away, sell it, or pass it on to their heirs—as long they follow the specified timeframe for each participant in the contract.
- Non-deeded timeshares, also known as the “right of use” timeshares, means buying only the rights to the use of a property, but not the legal deed. This kind may be a license, a lease, or a club membership. The owners can use the property for only a certain number of years. When the contract expires, the rights are reverted to the original property owner.
An Investment or a Purchase?
Most of the time, timeshares are being referred to as a form of investment. However, this may not be the case.
Basically, people invest on something in order to increase the amount of money that they invested in the first place. Investment experts, however, agree that timeshares should not be treated as investments in the context of monetary value. Rather, it is a form of purchase.
For one, the resale value of timeshares is not as high as when a person invests on stocks, mutual funds, and the like. In fact, the value of the property from a timeshare plan depreciates when the owner tries to resell it.
Why do some people then refer to it as a form of investment?
The return on investment (ROI) of a timeshare does not come in monetary form. Since timeshares are mostly bought for recreational purposes, the ROI here refers to the memories and the time spent with loved ones. It is not monetary but an emotional ROI. With that being said, timeshares are not in the same league as real estate investments, stocks, or mutual funds.
Facts about Timeshares
Purchasing anything, especially if it is for the long term, requires research and much consideration. If timeshares are on your agenda, make sure to devote ample time in analyzing both the pros and cons before taking the plunge.
5 Facts Buyers Must Learn About Timeshares
Buyers need to know five facts when purchasing timeshares:
- Purchasing requires research.
Whether you are still considering or have already decided to purchase timeshares, arming oneself with enough research can save you time and effort. There are a few things buyers need to look at:
- Decide whether it is a deeded or a non-deeded timeshare that you want. Look up the legal proceedings required in purchasing both, as well as the advantages and disadvantages of each.
- If you are buying from a resale company, ask for their license number then double check it with the local government handling similar transactions. How the company fared in the past is also important.
- Negations should be properly documented.
This is a rule a thumb. Make sure that every meeting and agreement with the property owner goes into official writing. The effort required to do paperwork, tedious they may be, will be worth it. It is always better to play on the safe side, when it comes to transactions.
- Be wary of assurances.
Don’t take assurances and promises hook, line, and sinker. Brokers are talking to you with the intent to sell. This does not mean that they are lying; it simply means that buyers should not immediately fall for promises, such as good financial returns or well-kept facilities. Returns, for one, are dependent on a lot of unpredictable factors. Claims that your property may earn more in the future should already be a red flag for you.
- Ask about the exchange program.
Exchange programs allow buyers to exchange their units with another unit from a partner company. This provides flexibility for you, in case you decide to change the location of your vacation.
- Read the agreement thoroughly.
Do not immediately sign on the contract. Once you have seen the document, read it and make sure you feel comfortable with the agreement. Take note of the additional fees and taxes. In the case of non-deeded timeshares, clarify the number of years. Ask the broker, and point out provisions that you wish to change.
5 Reasons Why Timeshares are Horrible ‘Investments’
There are buyers who have good stories after purchasing timeshares. However, as a form of “investment”, timeshares are generally seen as more of a loss than a gain.
- Additional fees
When you buy a property through timeshares, there are additional fees involved. This includes the maintenance fee which the developers need to maintain the upkeep of the property. Moreover, this fee increases every year. This fee, in fact, amounts to as much as the money spent if owners simply decide to rent the property.
- The value of the property depreciates.
Owning timeshares for personal use is generally fine, if you are not looking for additional income from it. However, if you are planning to resell it in the future, think again. Similar to purchasing a new gadget, its value depreciates the moment you leave the store. Most properties that are up for reselling are actually 50 percent below the retail prices. You actually have a higher chance of earning more with high interest savings.
- Low rental rates.
Since reselling may be out of the picture, rents come in second. If owners cannot use their properties for that particular time in a year, most of them rent it out. However, timeshare owners are renting out their properties for either less than the price they bought it or even less than the maintenance fees they pay every year.
- The disadvantages involved in exchanges.
Exchanges are problematic because it’s going to cost the buyer more money. Timeshare owners also need to pay additional fees to the company they are going to exchange their property to. Moreover, the exchange value also diminishes. Once the resort (for example) has been running for more than a decade, less and less people would be willing to exchange your property to theirs.
- The time value of money.
This is the core of financial theories referring to the value of money in the future. This concept asserts that the value of money now is worth more in the future, due to its capacity to earn more or gain more interest. Simply put, it’s better to have $100 now than $100 in two years. Although it is the same amount, having the $100 now means it has the potential to earn the value of $110 (for example) in two years. This is in contrast to having only the $100 in two years.
Timeshares are the complete opposite of the time value of money. Paying for a vacation house now, for example, does not mean it will be worth more in two years time. As have previously stated, the value depreciates once the purchase is made.
Every buyer needs to be aware of all the risks involved in purchasing timeshares. As with any kind of purchase, buyers must look at the long-term effects carefully in order to make informed decisions.