The Truth About Time-Shares
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The Truth About Time-Shares

This vacation option is more popular than ever, but is it really a smart investment?

The Pitfalls of Time-Share Investments

Time-shares -- those vacation deals that let you purchase in perpetuity a week or so every year at a given destination -- have changed a lot since the bad old days of the 1970s. Back then the market was unregulated: Among the developers who snapped up unsold condos and sliced them into blocks of time to sell to vacationers there were some dishonest operators who sold promises they couldn't keep -- nonexistent amenities such as spas and pools -- for cash they didn't return. What's more, their unsavory sales tactics included high pressure and outright lies, the biggest being that time-share units were lucrative real-estate investments.

The time-share industry has come a long way since then. Today, thanks to changes such as new consumer protections, increased flexibility, and the emergence of established hotel chains as time-share providers, this vacation option is more popular than ever, with 3.9 million American owners. But one important factor has not changed: Most time-shares are still not a good investment because they do not appreciate. In fact, pitching a time-share for investment purposes in most states (unless the company selling the property is registered with the SEC) is now prohibited by law in this country, according to David Sampson, a time-share attorney at Baker & Hostetler, a Los Angeles law firm. "If you buy a time-share, it should be solely for your own consumption and use, not for any resale value," he says.

Technically a traditional time-share is real estate -- you actually receive a deed for a fraction of the property you share with all of the many other owners. But don't be fooled: In most cases, time-shares sell for a mere fraction of their original value. "Just as any product on the secondary market, resold time-shares don't come with the same warranties and bells and whistles and may not be eligible for certain developer benefits, such as frequent guest services and preferential rates," explains David Gilbert, executive vice president of resort sales and marketing at Interval International, a vacation exchange company. Buyers are also wary because taking on someone else's property can mean assuming any past-due fees or mortgage payments. Owners who want to get rid of a time-share frequently feel they have no recourse but to take a significant loss if they want to free themselves from the ongoing financial obligations.

On average, when you purchase a new two-bedroom time-share, you pay about $17,000 up front, according to the American Resort Development Association (ARDA). In addition, you're responsible for annual maintenance fees, which average $505 nationally, and property taxes, which run approximately $75. Periodically, assessments may be made to fix a leaky roof or upgrade a swimming pool. By contrast, if you had simply invested $17,000 in an average S&P 500 stock portfolio 10 years ago, calculates Maury Harris, chief U.S. economist at UBS Securities, in Stamford, Connecticut, you'd now have almost $40,000. For the same outlay, your 10-year-old time-share would be worth much less if you sold it.

But even though a time-share isn't generally an investment, it can still add up in terms of savings when you calculate the cost of paying for a quality hotel year after year, because having prepaid for your stay protects you against the room-rate inflation at hotels. "If I buy a time-share at $15,000 and I spend $500 a year in fees and taxes, then over 10 years it will cost me $20,000 to vacation," says Howard Nusbaum, president and CEO of ARDA. "Had I rented two rooms in a gorgeous two-bedroom resort each year, it would have cost me $42,000."

A New Kind of "Point" Plan

Nevertheless, time-shares are not necessarily a value for everyone, and vacationers should look closely at all the financial factors before signing on the dotted line. For instance, although it's comforting to have the reputations of recognized brand names such as Disney, Marriott, and Hyatt underwriting your time-share, these institutions operate on point systems, rather than as traditional properties you purchase. Points are vacation currency that can be redeemed at any of a company's resorts, and buying a point does offer vacationers flexibility -- you can frequently stay at a variety of resorts and room types at different times of year. However, point programs often do not protect against inflation, says Lisa Ann Schreier, author of Time-Share Vacations for Dummies. "That means if you buy 100 points a year for the next 40 years based on the current cost of a Hawaiian vacation, and your plan isn't inflation-proof, you may need 110 points the next year, and even more in years to follow, just to afford the same vacation," she says. "And that means spending more money every year." If a point plan you're considering isn't inflation-proof, Schreier advises scrutinizing the plan's cost-increase records for the past few years to gauge what kind of raises you should expect.

Facts on Financing

Another potential pitfall is financing. Prospective buyers who attend time-share sales presentations will invariably be offered financing, says Schreier, but beware. These loans are often in the 17 percent interest range. "Before you sign anything, check to make sure there's no penalty for paying off the loan early," Schreier recommends. "That way you can find alternative financing at better rates."

The Long Haul

Above all, you need to consider the long term. With a traditional time-share, you're an owner for life and your heirs, and theirs, will inherit the property -- and its liabilities. If you're not sure that you'll want to continue resort vacationing and paying fees for more than 20 years or so, or if you think that your children will see the time-share as a financial burden, you may want to reconsider or look for a right-to-use time-share. Common in Mexico, these allow you to have a reserved week at a resort, but only for a specified number of years.

If you do need to unload a time-share, your choices are limited. You will most likely lose money on a resale. Another option is to donate your time-share to charity, which is possible only as long as it is mortgage-free. "The IRS lets you treat a time-share gift to charity as a real-estate donation," says Lisa Tisdel, donations coordinator of Donate for a Cause, a Bozeman, Montana-based organization that facilitates these transactions. "That means you can take a $5,000 charitable deduction without getting an appraisal. If you think the donation is worth more, you can claim it, but you'll need to have the property appraised." Your final option is simply to return the property to the developer -- for nothing.

Originally published in Ladies' Home Journal magazine, June 2006.