Share and Share Dislike
November 7, 2017
For some thoughtful buyers with the right circumstances, timeshares might make sense — especially people who like predictability in their vacation destination. But in general, for most people, they carry many drawbacks that warrant careful consideration. Many timeshares are marketed and sold aggressively by promoters with conflicting incentives, so caveat emptor is an important first consideration in these instances. Younger buyers who are attracted by the notion of being able to buy a partial, or shared, ownership in a vacation property that they could not otherwise outright afford should be particularly vigilant. While timeshares have historically been poor investments, there are other benefits like a more limited time commitment, no direct hassle of upkeep and repair, and the enjoyment of a more expensive property than otherwise possible.
Most timeshares are fixed arrangements, and essentially methods of prepaying for annual vacations. The buyer owns rights to a certain block of time during the same week each and every year for as long as the contract stipulates. Other types of sharing arrangements offer more flexibility — like floating units that allow more freedom of use during the year — but these timeslots are not guaranteed and they could be difficult to reserve. Other options, like points clubs, enable trading with other available properties in a network, but these are first come, first serve — like basic hotel reservations. Indeed, as one looks for greater flexibility in timeshare arrangements, it begs the question of why not simply rely on nice resorts — or even standard house rental options — available worldwide without contractual limitations.
Moreover, if buyer’s remorse or boredom sets in, timeshares are notoriously difficult to resell, and usually they will lose significant value if you try. There are few buyers looking for timeshares in the secondary or after market, so demand tends to be very weak. And resale brokerage scams are quite common, too. Adding insult to injury, one typically cannot take a tax deduction for a loss on a timeshare, as one could for most other capital losses. And since they quickly depreciate, most banks do not provide lending to buy them. The sellers/developers often provide financing, but at much higher interest rates than normal; and if the borrower eventually has problems, the property is typically underwater. If one is unable to pay the mortgage or other related ongoing expenses — like special assessments, property taxes, and maintenance and utility charges — this could lead to foreclosure… and possibly a deficiency, which is a condition that might allow the lender to go after other assets or even garnish wages. All of this could have additional adverse consequences, like impacting credit scores or limiting future borrowing capabilities.
Even if contractually permitted, don’t count on renting out a timeshare either, because there are usually far more timeshares for rent in an area than people interested in renting them. Furthermore, if plans include multi-generational use of the facility, be sure that others can afford the time and money to make the trip. If not, then the timeshare might not get used as much as imagined. Also, timeshares in foreign countries often have additional special circumstances and limitations to consider, which could amplify their normal drawbacks. Finally, analyze vacation preferences and be sure that you are locking in a particular destination that really makes sense; and even then, think about possible better alternatives to achieve the same or better outcome, such as similar nearby hotels or resorts.
We understand that there are many reasons we make financial decisions beyond how they may pencil out economically, including convenience, family enjoyment or even an emotional attachment to an area. Our role is to make sure you are fully aware of any potential economic pitfalls from choosing a path outside of economic parameters. As always, there is a lot to think about in any such decision, and we are here as your sounding board whenever needed.
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