What Is a Timeshare?
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How Does Timeshare Work?
In general, a timeshare is a way to own a vacation property without the hassle of maintaining it year after year. With a timeshare agreement, an owner shares ownership of the property with other owners, with a stipulation that one has exclusive rights to own and use the property at a specified time and duration, usually in one-week increments.
A timeshare agreement can work in two ways. First is deeded, where one of the owners buys fractional ownership of the property. In this scenario, one owner purchases a fraction of ownership interest, hence the name. Deeded agreements grant the owner tremendous control over the property, including selling or transferring it to others, making these kinds of timeshare agreements highly expensive.
The second is a non-deeded timeshare, where an owner leases the property for a certain period but without actually owning it. A non-deeded contract has more restrictions and lasts for a limited number of years.
Fixed vs. Floating Timeshares
Using a timeshare property can be further categorized into fixed or floating.
A fixed timeshare contract allows an owner exclusive use and access to the property, but only for the exact same time and duration every year. By contrast, a floating contract allows the owner to pick a different timeslot and, in newer timeshare agreements, even their length of stay.
For most floating timeshare contracts, reserving an ideal time can be difficult. Many co-owners likely want to reserve prime periods and holidays, and to do so, they need to beat their co-owners to the punch.
Traditionally, timeshare agreements worked on a fixed-week basis, where the duration that an owner can use the property is up to a maximum of one week. While many timeshares still use this model, newer timeshares have implemented more flexible, floating systems in terms of time and duration.
Vacation Club vs. Timeshare
Like timeshares, vacation clubs or vacation rentals make it possible to book desirable accommodations over a certain period in advance. Their members accumulate vacation time by buying points.
However, unlike timeshares, vacation clubs offer a more comprehensive set of options. Their members can experience different destinations within the resort’s network. This model is perfect for people who want to travel to new places every year.
Moreover, vacation club members can save their unused time for future use. For example, they can borrow points from the following year when they max out their credits in the current year.
What Are the Pros and Cons of a Timeshare?
Timeshares can be appealing to some people, but they are not without drawbacks. Some people are attracted to buying a timeshare property because of the following reasons:
- Convenience. Guaranteed accommodations characterize timeshares. Owners do not have to book their favorite vacation property every year because they have already bought the right to use it for a predetermined period.
- Cost-effectiveness. Timeshares offer buyers an opportunity to own desirable property in a tourist hotspot and pay only for the time they need to stay in it. It is a practical alternative to full-fledged vacation homeownership since such a unit can be costly.
- Rentability. As long as the contract permits it, one can rent out the reserved block of time to an interested party and earn some cash on the side.
- Shareability. Other than transient tenants, one can let family and friends use the timeshare property for free. One can even put it on the auction block for charity.
Here are the downsides to timeshares.
- Inflexibility. To maximize timeshare ownership as vacationers, they have to go to the same destination every year. However, some exchanges accommodate trading timeslots or locations with other timeshare owners.
- Cost. Timeshares can be pricey. Plus, they have an annual maintenance fee that applies whether one occupies the unit or not. Even worse, the developer may raise it at its sole discretion; missing this payment can result in a timeshare foreclosure.
- There is more supply than demand. Timeshares are not exactly in demand, so their owners almost always have to absorb a loss to attract buyers. Deeded timeshares are real property, but the IRS does not let sellers claim capital loss after the sale.
BY THE NUMBERS: The average price of a brand-new one-week timeshare is $23,000, which can double when financed with a 10-year loan.
Do Timeshares Make Money?
Strictly speaking, timeshares are not an investment because their value does not increase over time.
That said, timeshares can still generate income for their owners as rental properties. One reason is that timeshare rentals are more competitively priced compared to other types of lodging.
The problem is that timeshare rentals can be profitable for only seven days (or even fewer in some timeshare agreements). They do not bring in cash 51 weeks a year, so they are an unreliable source of income.
BY THE NUMBERS: According to the timeshare industry, timeshare rental rates can be 12% to 25% lower than those of hotels and travel booking sites.
Source: Wealth of Geeks
Is Buying a Timeshare a Good Idea?
A timeshare can be a good purchase when bought for the right reasons. For instance, a timeshare makes sense for a person that goes on vacation in the same location every year, for a specific week, and does not mind staying in the same exact unit.
In addition, the timeshare owner also avoids the hassles of the booking rush. This is especially true if the property is situated in a popular tourist area and serves as primary lodging during peak season.
However, a timeshare becomes a bad purchase when viewed as an investment. Its original value tends to shrink by as much as 80% at resale, so it will likely produce a negative return.
Moreover, a timeshare is a money pit. If a buyer has to take out a loan to buy it, this asset will literally become a liability.
Finally, on top of its relatively expensive price tag is a timeshare property’s upkeep costs. A buyer should also expect to pay increasingly steeper maintenance costs year after year.
Alternatives to Timeshare Agreements
Apart from vacation clubs, the most popular alternatives to timeshares are travel clubs, hotels, bed-and-breakfasts, campgrounds, and recreational vehicles. Here is how they stack against timeshares:
- Travel clubs do have a membership fee, although some may waive annual fees. These clubs are suitable for individuals who like to travel with like-minded people.
- Hotels have a reputation for being expensive, but their rooms are available at different price points and negotiable rates. A seven-night stay in a hotel may cost less than a timeshare’s annual maintenance fee. Plus, hotels are commitment-free.
- B&Bs provide services with a personal touch. Booking inns is an effective way to support local businesses, unlike timeshare sales that go to multinational timeshare companies.
- Camping does not always mean spending the night in the woods without access to food and other modern conveniences. Glamping is a modern take on traditional camping, where campers can access and stay in specially designated campgrounds with running water, electricity, and restaurants.
- An RV imparts a deep sense of freedom to travel anywhere. However, high-end RVs can cost several times more than the average timeshare.
- A timeshare is an agreement where multiple individuals own a vacation property, with one having exclusive right to use it at certain times of the year over a specified period.
- Some timeshare agreements are deeded, which allows the owner for that period to transfer it or sublease it to others.
- Despite this, timeshares are poor investment choices because their value depreciates by over half of its original value at resale. Therefore, timeshares are more of a lifestyle purchase than an investment.
- Club memberships, hotels, B&Bs, and campgrounds are some alternatives to timeshares.
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