The Truth About Time-Shares

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

Continued on page 2:  A New Kind of "Point" Plan

 

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