What Is a Timeshare? Pros, Cons & How Timeshares Work

What Is a Timeshare and How Does It Work?

Timeshares are a purchase agreement in which numerous buyers own part of a vacation residence, and each is entitled to a specific timeframe of use. The concept of shared ownership in vacation properties can be intriguing, offering a glimpse into luxurious getaways at a fraction of the cost. But before you jump into the world of timeshares, it's crucial to weigh the benefits against the drawbacks to decide whether the perks are worth the price tag in the long run. When you do, you can make an informed decision before committing to this unique vacation arrangement.

For informational purposes only. Always consult with a licensed real estate, tax, or financial professional before proceeding with any real estate transaction.

Quick Overview of Timeshares

  • Timeshares offer shared ownership of vacation properties.
  • Timeshares may seem more affordable than traditional vacation homes, but this isn't always the case.
  • Resale can be challenging with potential financial losses.
  • Annual maintenance fees are a significant cost consideration.

How Do Timeshares Work?

The basic idea of a timeshare is that instead of buying a second house you don’t use for most of the year, you save money by only paying for the portion of time you’re using. The rest of the time, the property is used by other people, paying for their own portions of time.

Timeshares are generally divided into 52 intervals per unit, corresponding to the weeks in the year. Depending on the ownership style, the developer creates the timeshare development and sells either the units themselves or the right to use them.

Much like condo fees, timeshare owners are responsible for paying a portion of the community’s upkeep and maintenance costs. These costs generally increase each year as the building ages.

Part of the confusion surrounding how timeshares work is that they can work in a lot of different ways.

Deeded Timeshare

Deeded timeshares are a form of fractional ownership; you have an actual deed for your week of time that you can use as you wish in perpetuity, including selling it, renting out the property, giving it away, or willing it to an heir. This type of timeshare was most common when the timeshare industry was just starting out. New timeshares are often part of multi-location resorts, which have largely transitioned to points-based systems. Where deeded timeshares exist, they're commonly a fixed-week arrangement.

Because you own a portion of the property, you’ll pay property taxes alongside annual maintenance fees.

These types of contracts don’t expire, since you actually bought the real estate. However, this can make them difficult to get out of if you decide you don’t want the timeshare anymore, as you’re responsible for selling it to someone else. More about that when we talk about timeshares as an investment.

Right-to-Use Timeshare

When you buy a right-to-use timeshare, you’re not buying the real estate itself; you’re buying the right to use the property for a period of time specified in your contract. For example, you could buy the right to use the property during the second week of June for the next 10 years. These types of timeshares are also called “non-deeded.”

RTU timeshare contracts typically have a specified end date, upon which your right to use the property and your obligations to pay for the property are dissolved. This is great for buyers wary of being locked into a contract they can’t get rid of. However, these contracts can have terms as long as 99 years, so be aware of what you’re buying.

RTU timeshares can be sold, even though you don’t actually own the property. What you’re selling is the right to use. However, the expiration date will remain the same; if your term is 20 years and you sell in year 15, the buyer will only have the right to use the property for five years.

This type of timeshare is not considered real property by the IRS, so you won’t pay property taxes on it. You will, however, still pay annual maintenance fees.

Points-Based Timeshare

This is the most common arrangement among new timeshare developments, as it allows the greatest amount of flexibility. Timeshare owners have a “home resort” where they receive a number of points each year, assigned based on their week’s value. They can then use these points to stay at their home resort, or, by paying a fee, exchange their points for weeks in a different location in the same resort network. Some systems even allow you to exchange points for experiences like cruises or tours.

Different times and locations will have different point values assigned. For example, a summer week in Hawaii is more desirable than a winter week in Massachusetts, so a Massachusetts winter week owner might have to bank multiple years of points to afford the exchange. It’s also important to recognize that the points currency can suffer from inflation over time, and the points cost to visit specific places can be adjusted from one year to the next.

A downside of the points-based system is that generally speaking, everyone wants to vacation in seasonal locations at the same time, so these weeks are booked very quickly. You’ll also still pay annual maintenance fees at your home resort even if you don’t stay there and/or can’t book in your desired location.

Leasehold Timeshare

This is somewhere between a deeded timeshare and a right-to-use timeshare; you’re buying property ownership, but for a limited amount of time. Disney Vacation Club is one of the most prominent examples of this type of timeshare—though it’s also a points-based timeshare that can be exchanged for weeks in other places.

Like a deeded timeshare, you’ll pay property taxes, but like a right-to-use timeshare, you have an expiration date. If you sell a leasehold timeshare, your buyer is agreeing to the original expiration date.

Fixed Week Timeshare

In this form of timeshare, you’re locked into a specific week out of the 52 weeks sold. It’s an inflexible arrangement—if you can’t vacation during that week, you’ll lose your opportunity—but it also allows you to guarantee that no one can reserve your spot out from under you.

Floating Week Timeshare

In a floating week timeshare, you have a bit more flexibility to plan around your schedule. Generally, you can reserve one week out of a specified season, with reservations being on a first-come, first-served basis with the other floating week owners.

Biennial Timeshare

In a biennial timeshare, instead of every year, you’re paying for every other year. They’re sold as odd-years and even-years.

How Is a Timeshare Different From a Vacation Home?

Timeshare vs. Vacation Home

Shared ownership in a timeshare property differs significantly from owning a vacation home outright. With a timeshare, share ownership of a property with many other owners, whereas owning a vacation home entails sole ownership of the property. This has both benefits and drawbacks.

The shared ownership structure of a timeshare allows for splitting costs and responsibilities among multiple owners, providing a more cost-effective way to enjoy vacation properties without the full financial commitment of owning a vacation home. Additionally, owning a timeshare offers greater flexibility in using the property, as you can typically choose from various locations and times throughout the year to vacation.

However, the shared ownership structure also means that you have very limited access to the vacation property. In addition to having only a week to vacation yourself, you also cannot use the property in other ways such as earning passive income by renting it out. Timeshares also near-universally decrease in value on the resale market over time.

In contrast, buying a vacation home limits you to one specific location and requires sole responsibility for maintenance and upkeep. On the other hand, you can offset your expenses (or even earn a profit) by renting it out when you’re not personally using it. Owners can also build equity, and the value of their investments tends to increase over time.

Moreover, you own the whole property, so it’s much easier to sell a vacation rental when you want to dispose of the obligations.

Pros of Timeshares

A few of the reasons that people buy timeshares are flexibility in use and affordability compared to vacation homes and other vacation accommodations.

Flexible Use

With point-based timeshares, the most common type, owners enjoy the advantage of flexible vacation planning. You can choose specific weeks and vary locations year-to-year, allowing you to tailor your trips according to your preferences and availability.

This means you can explore varied vacation experiences and accommodation options, giving you the freedom to switch things up based on your changing preferences. The flexible use of timeshares caters to individuals seeking customizable and diverse vacation opportunities, making it easier to book vacations in highly desirable destinations.

Affordable

The initial purchase price of timeshares is much higher than a standard hotel booking, but depending on your vacation habits, they can prove to be a cost-effective vacation option over time. You’re essentially prepaying for future vacations at today’s prices.

In addition, timeshare accommodations are generally much more spacious and upscale than hotels, often having full kitchens, multiple bedrooms, and other features that are more home-like than a typical hotel. This can give you considerable value for money over a hotel room.

However, when you’re calculating the value of buying a timeshare vs. future hotel costs, it’s very important to factor in annual maintenance fees and consider that maintenance fees will typically increase every year.

Cons of Timeshares

Timeshares Usually Aren't Worth It

When considering timeshares, be aware of the expensive annual fees that can add up over time. Selling a timeshare can be challenging and potentially lead to financial losses.

Additionally, keep in mind that losses from timeshares don't qualify for tax deductions, adding to the financial drawbacks of ownership.

Expensive Annual Fees

Paying the expensive annual maintenance fees associated with timeshares can significantly impact your overall cost of ownership. These fees, which cover property upkeep, amenities, and management costs, are recurring financial obligations that owners must bear to maintain their share in the vacation property.

It's crucial to recognize that these fees are mandatory, regardless of whether you utilize your timeshare during the year. Neglecting to pay these maintenance fees can lead to penalties or, in severe cases, foreclosure on your timeshare. This foreclosure has drastic consequences on your credit report.

When evaluating the affordability of timeshare ownership, you should factor in the ongoing nature of these annual fees and their future increases as the development ages into your decision-making process. Understanding the financial commitment involved in meeting these expenses is essential to ensure that you can sustain ownership without facing financial strain in the long run.

Hard to Sell

The timeshare resale market is highly saturated, making it hard to find potential buyers and leading to lower prices—often, much lower prices. Timeshare contracts with expiration dates inherently decrease in value each year as the end date approaches. Even with deeded contracts, many timeshare developments have a “sunset date” in their CC&Rs, put in place by the developers at creation in case the project failed. At the sunset date, the owners collectively decide whether to extend the timeshare form of ownership or dissolve it, whereupon the development is sold and the proceeds distributed among the owners.

Many find themselves struggling to offload their contracts due to these factors. Additionally, some timeshare companies offer little to no assistance in the resale process, leaving owners to handle it independently. Alternatively, they may exercise a right of first refusal, requiring the owner to offer to sell their timeshare to the company before finding a different buyer.

High maintenance fees add another layer of complexity to selling timeshares. Prospective buyers are often deterred by the ongoing financial commitment associated with these properties—especially if the annual maintenance fees are approaching or have surpassed a breakeven point compared to alternate accomodations. The combination of high maintenance fees, special assessments, and market challenges creates significant barriers for owners attempting to sell their timeshares.

Before investing in a timeshare, it's crucial to acknowledge the potential difficulties that may arise when trying to dispose of it in the future.

High Commitment

Most timeshare contracts, when they’re not in perpetuity, are very long-term. Think decades, not years. To receive the affordability benefits over yearly hotel stays, your vacation habits will have to remain similar to what they are now for many years.

Getting out of a timeshare contract is difficult enough that there are companies who make their living helping owners do so, and there’s a significant portion of the resale market where owners are practically giving away their timeshares to get out of the annual financial obligations. If your preference or ability to vacation for a week every year is likely to change in the next few decades, or your financial situation might change and make rising maintenance fees unsustainable, the long-term commitment to a timeshare may not be for you.

If you want to test out timeshare ownership, you might consider looking at resale timeshares to find one that’s set to expire in a few years. However, be sure you know all of the fees, assessments, and other obligations the current owner is paying.

No Tax Deductions for Losses

Lacking tax deductions for losses, timeshare ownership presents a financial challenge for individuals seeking potential investment benefits. Unlike traditional real estate investments that may offer tax advantages for losses, timeshares don't provide the same tax benefits. This means that any losses incurred from owning a timeshare, such as depreciation or a decline in resale value, can't be deducted from your taxes.

When buying a timeshare, it's crucial to understand that the amount of time you spend at the property doesn't translate into tax deductions for any financial setbacks you may encounter. This can have a significant impact on the overall cost-effectiveness of owning a timeshare as a real estate investment.

Without the ability to offset losses through tax deductions, the financial implications of owning a timeshare may outweigh the potential benefits, making it essential to carefully assess the long-term financial commitment involved.

Why Timeshares Aren't a Good Investment

Despite the allure of guaranteed vacation accommodations (though this becomes more uncertain with certain types of contracts), timeshares are often criticized as a poor investment choice due to their lack of appreciation in value and potential financial drawbacks. When considering a timeshare purchase, it's essential to recognize that these properties rarely yield financial gains. Initial costs, yearly maintenance fees, and the oversaturation of the resale market almost always outweigh any potential appreciation. Owners also face the risk of unexpected special assessments, adding further financial burden and diminishing the investment value.

So, if timeshares are such a bad investment, why do people still buy them? Unfortunately, the high-pressure sales tactics employed in the industry can lead to buyers making hasty decisions without fully understanding the long-term financial implications.

For a certain kind of buyer, timeshares can have significant benefits. However, many of these benefits—affordable stays, flexible times and locations, large units, etc.—can be achieved without a long-term contract, especially after the rise of short-term rentals like Airbnb and Vrbo.

Unlike investing in a vacation home, timeshares are generally not a wise choice for those seeking a profitable investment opportunity—if you buy a timeshare, you should buy it because you intend to use it for enjoyment value. It's crucial to carefully evaluate all aspects, including the total cost of ownership, the limited resale potential, and the price of your vacations without the timeshare, before committing to a timeshare agreement.

Alternatives to Timeshares

Consider exploring fractional ownership or co-ownership arrangements as alternatives to traditional timeshares. These options allow you to own a portion of a property or share ownership with others, providing flexibility in usage and potentially reducing costs over buying a vacation home by yourself.

Fractional ownership and co-ownership can also offer a more tailored and flexible approach to vacation ownership compared to traditional timeshares.

Running a Rental Property

If you think buying a second home is too expensive, consider it again in a different light: you can turn your new vacation home into an investment property.

The difference between a vacation home vs. investment property is that a vacation home is generally left empty when you’re not using it, while an investment property generates income during the downtime.

Owning a rental property can be complicated, such as local regulations surrounding short-term renting and IRS rules surrounding how long you can rent without having to report the income, but it can be an excellent way to defray the cost of vacation home ownership.

A good property management company can handle the day-to-day upkeep and guest management, simplifying things further on your end.

Fractional Ownership

Exploring fractional ownership as an alternative to traditional timeshares provides a shared ownership model for enjoying luxurious properties without the full financial commitment of sole ownership. Fractional ownership allows multiple individuals to co-own a luxurious property, with ownership divided into fractions representing weeks of exclusive usage.

Sounds a lot like deeded timeshare ownership, right? The differences are in how fractional properties are typically run. Fractional properties typically have far fewer owners, usually 2–12, compared to 26–52 in a traditional timeshare. This has several benefits:

  • You can use the property for a greater portion of the year
  • There’s more “pride of ownership”—it’s more of a second home than a hotel suite. Traditional timeshares can suffer wear from high traffic and owner apathy
  • It’s easier to negotiate important decisions with fewer owners
  • With more time available to each owner, there’s rental income potential

Fractional ownership can also be divided unevenly, with costs distributed proportionally. So, for example, one owner could own 50% of the property and have six months, while another could own 10% and have a little over five weeks.

By sharing expenses such as maintenance costs, property taxes, and management fees, participants can access high-end amenities and services in luxury real estate markets. This ownership model offers a cost-effective way to enjoy upscale properties without bearing the entire financial burden.

In addition, fractional owners have more of a say in management than in a timeshare. Timeshares are run by the developer or timeshare company; in fractional ownership, day-to-day management is chosen by the owners, and owners can fire managers who aren’t performing to expectations. Fractional properties are usually bought and owned by LLCs or other legal entities, of which the buyers are partners.

Other Forms of Co-Ownership

Split the Cost of a Vacation Home With a Friend

Timeshares and fractional ownership are both forms of real estate co-ownership, but they aren’t the only ways to co-own a property. Sometimes, co-ownership is as simple as buying a vacation home with friends.

So long as you can make and uphold an agreement regarding who gets what and how responsibilities are divided, you can make a luxury property more accessible by splitting the costs with other buyers. Financing is a bit more complicated than with a standard home sale, given that there are multiple people involved, but it’s surmountable with the right assistance.

Co-owning a vacation home with friends, family, or other people you know is often more appealing than co-owning with strangers, and it provides more opportunities to tailor the agreement to the parties involved. For example, the details of how the property will be managed and what happens if one party wants to sell their ownership stake.

Considering the benefits of reduced costs, shared responsibilities, and access to upscale amenities, co-ownership presents a compelling choice for those seeking a collaborative approach to owning a vacation property. Researching and considering alternatives to traditional timeshares, such as co-ownership, can help you make an informed decision that aligns with your vacation property ownership goals.

For informational purposes only. Always consult with a licensed real estate, tax, or financial professional before proceeding with any real estate transaction.

Are Timeshares a Good Investment? You Decide

Overall, while timeshares offer the convenience of vacation ownership without the full financial commitment of a second home, they come with their own set of significant drawbacks.

If you’re looking for a way to secure ongoing vacations and a solid financial investment, consider timeshares alongside other ownership options, from fractional ownership to running your own rental property. Carefully consider your future plans and what you want out of your investment before jumping into a timeshare purchase, and explore alternative vacation ownership options that may better suit your needs.

Frequently Asked Questions

What is the downside of a timeshare?

When considering a timeshare, remember the downsides:

  • High upfront costs
  • Long-term commitment
  • Ongoing, often rising, fees
  • Limited vacation date flexibility
  • Potential special assessments
  • Challenges selling or exiting

It's important to weigh these factors before committing, which isn’t always easy to do when you’re attending a timeshare presentation. Determine whether your needs would be better served through other travel products like short-term rentals.

What are some alternatives to buying a timeshare?

Instead of buying a timeshare, you can explore other forms of co-ownership. If you want to share with fewer owners, look into fractional ownership. If expense is your primary concern, explore your options for renting out a property while you’re away.

Is a timeshare ever a good idea?

Sometimes, a timeshare can be a good idea if you think you will have similar vacation needs every year for a long period of time. It can offer guaranteed accommodations (depending on the contract), long-term affordability, or better amenities than you would get with a standard hotel.

However, it’s important to seriously consider the consequences of what will happen if your vacation needs change unexpectedly a few years in. You should also carefully scrutinize the timeshare contract, as terms change from company to company.

If you're looking for the perfect Breckenridge home, contact Breck Life Group with eXp Realty at (970) 409-4787 to get in touch with a local Breckenridge real estate agent and discover your new dream home today.

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