What Is A Timeshare And How Does It Work?

Everyone has a different idea of where and how to vacation. Purchasing a timeshare is one way to make sure you vacation your way. But what is a timeshare, exactly?

We'll dig into that answer, and because you might have heard some negative things, we'll also unpack more information about timeshare companies.

A timeshare is a vacation property arrangement that allows you to share the cost of a property with others in which several unrelated parties own a fractional share of a property.

This property could be located just about anywhere, including tropical or mountainside locations such as Disney World or a favorite ski resort. In some cases, you can trade your property for another location – you're not always "stuck" going to the same place all the time.

The people who pay for the timeshare take turns using it, typically in week-long increments. Because you share the costs with other people, it takes far less money to purchase a timeshare compared to buying a second home of your own.

First, you pay for the initial cost of the timeshare (those costs are detailed later on in the article) that you either purchase from a sales meeting or through a resale on the secondary market. Then, you'll pay maintenance fees on the timeshare to pay for resort operations throughout your contract. These costs will vary.

You may be most interested in the fun part – the vacations! Some are fixed-week timeshares, which means that you can take your vacation at the same time every year. There are other types of vacations available, which we'll also cover. It's a good idea to understand the vacation opportunities and all the fees involved before you make your purchase.

There are several types of timeshares you can look into, including fixed-week, floating-week and point system timeshares. Let's explore each below.

Fixed-Week Timeshare

With a fixed-week timeshare, each owner receives a specific week to access the property when they purchase it. This means that you'll go on vacation during the same week each year or enjoy predictability when using your timeshare.

If something comes up and you need to reschedule, you must find another owner to switch dates with, which can be tricky if all timeshare owners expect to use a specific date. The management company might not be able to coordinate your newly requested dates.

Floating-Week Timeshare

Floating week timeshares allow timeshare owners to plan their weeks around their schedules. This way, owners can still make regular payments to pay for a week of vacation each year but are not forced to keep to a rigid schedule.

Points System

Hospitality chains also use timeshares, typically through a points system. In a points system timeshare, an owner receives points that can be used at any of a hospitality chain’s properties.

Many hospitality chains have affiliated themselves with timeshare developers to create a vast network of locations available to timeshare owners.

Among the types of timeshares, there are also different types of timeshare ownership, including shared deeded ownership and shared lease ownership. It's important to read over your contract so you understand exactly how this works.

Shared Deeded Ownership

Some timeshares are a real estate purchase by the owner, who holds a deed to a fractional piece of the timeshare property. A deeded property means that you own it for life and can pass it on to your children and grandchildren. For example, if you purchase a week’s worth of vacation at a given property, you own 1/52 of the property (since there are 52 weeks in a year).

Owning a deed to the property may offer some tax advantages. For example, you may be able to deduct the financing interest payments and the portion of the monthly fees that go to taxes.

Shared Leased Ownership

A leased timeshare is a method of acquiring a right to stay at a property for either a fixed or floating week over a specified number of years. A leased timeshare is also known as a non-deeded timeshare. In this arrangement, the deed remains with the timeshare developer, not with you, the timeshare owner.

A leased timeshare doesn’t confer any tax benefits to you as the owner. It’s also important to note that the value of the timeshare decreases over time.

There are a variety of costs involved in purchasing a timeshare, including the following:

• Direct purchase: The direct purchase is the largest part of the investment. The average price of a timeshare transaction is $23,940, according to the American Resort Development Association (ARDA).
• Resale purchase: Because timeshares rarely appreciate in value, you could spend far less for a resale purchase (those on the secondary timeshare market) than one that you buy new directly. Timeshare resales often sell for only 50% of the original purchase price, though you could save as much as 70% of the original purchase cost.
• Annual dues: The annual maintenance fees cost $1,000 on average in 2018, according to ARDA, though it could cost you more or less depending on the size of the unit you purchase. If you have a deeded timeshare, you'll pay these costs indefinitely. The costs usually increase over time due to inflation.
• Exchange fees: If you'd rather head to Florida instead of Las Vegas during your annual vacation, you may have to pay exchange fees to switch locations.

Make sure to ask about your all-in costs per year and when you'll pay them. Some resorts require you to pay monthly, quarterly or twice per year.

It's important to consider whether a timeshare fits into your overall goals. Ultimately, a timeshare is not considered an investment at all because you won't see returns from the funds you put into it. You'll face high initial costs and ongoing fees, low resale value and won’t be able to gain equity in the timeshare like you can when you buy a vacation property.

However, if you've always wanted to own a vacation home but can’t fit the high costs into your budget, a timeshare might make sense for your needs.

Let's take a closer look at the pros and cons for timeshare owners.

Timeshare Pros

The benefits of owning a timeshare include:

• Upscale amenities: Timeshares typically offer spacious accommodations and resort-like amenities.
• Familiarity with the location: Families can return to a familiar destination each year, which can be beneficial if you really enjoy the perks of that particular area.
• Points could be bankable: Some timeshares allow you to take advantage of points that you can use at other properties in the resort chain. You may be able to tap into a vast network of locations and also save up points and use them later in case you want to skip a year.

Timeshare Cons

There are downsides to owning a timeshare, which include the following:

• High upfront costs: You can't avoid the high upfront costs of purchasing a timeshare, so it's important to consider whether you can afford the initial costs (not to mention the ongoing costs).
• Fees: You'll also have to pay annual dues and maintenance fees, which you will pay on an ongoing basis as long as you own the timeshare.
• Inflexibility: You can't just pick up and visit whenever you want. Timeshares operate under strict schedules. You may not be able to ever change the week you go on vacation unless your timeshare operates under a floating schedule. This inflexibility with booking and cancellations can make it difficult when the unexpected happens, like if a family member gets sick, a child's sports schedule changes, etc.
• Tough to get out of: You can't just call up the manager of your resort and say you want to cancel a timeshare. In fact, you'll have to call a lawyer and work with a timeshare exit company to get out of a timeshare. It's also not easy to resell because you would be competing with others who may be trying to get rid of their timeshares, too.
• Will likely lose money: Timeshares go down in value because it's an illiquid asset. You don't actually own anything, unlike if you were to buy a vacation home, where you do own the asset and it will likely appreciate in value.

You can access timeshares typically through a timeshare presentation or through the timeshare secondary market.

Timeshare Presentation

A timeshare presentation, also sometimes called a discovery tour, allows you to learn about timeshare opportunities with a representative.

Timeshare presentations often exchange your commitment with a perk, such as a free gift or a discounted hotel stay. If you don't fulfill all the requirements to get the deal, such as meet specific age requirements or bringing your spouse, you could forfeit the timeshare or have to pay full price instead of getting the deal being offered.

Timeshare Secondary Market

You can also get a timeshare through what's known as the timeshare secondary market. This is a place where timeshares are sold by owners who no longer want them or use them. You can find them on the resale markets online such as through the Timeshare Users Group (TUG). You can also search for them by destination or vacation club.

You may find a better deal going this route, but if you do, it’s important to make sure you work with a timeshare broker or a licensed timeshare resale agent. They can help you identify who is responsible for paying for final fees and who can help you navigate legal documents, such as the accompanying deeds. It’s easy to fall prey to timeshare scams, so be careful who you work with.

If you just purchased a timeshare and have second thoughts, you can use rescission laws to your advantage, which means you have time to get out of the timeshare. You can also try calling the timeshare developer to explain that you’d like to get out of your timeshare and ask about the process of doing so. Please know that you may have to pay the resort to get out of the timeshare.

You can also resell the timeshare on the secondary market, which means contacting an agent or timeshare exit company that has experience selling timeshares.

What is a timeshare alternative? Let's go over a few opportunities you may want to consider.

• Purchase a vacation home.
• Stay in a hotel
• Stay in a home rental service such as Airbnb or VRBO.
• Enjoy a bed and breakfast.
• Go camping or glamping.
• Stay in a cabin.

It’s best to consider all of your options that fit your lifestyle and vacation preferences. The first year cost of a timeshare could be more expensive than a decade’s worth of week-long hotel stays.

Let's go over a few frequently asked questions about timeshares.

What is the point of a timeshare?

Timeshares allow you to split the cost of ownership of staying in a vacation property with many other individuals who are also chipping in to pay for a particular property.

How many years do you pay for a timeshare?

You pay for the timeshare indefinitely when you own a deeded timeshare. However, they are transferable, which means you can sell them, include them in your will or give them away. However, it's important to understand that the person who gets them after you must pay the fees associated with the timeshare.

In a leased timeshare, the number of years you can use the timeshare is outlined in your contract and may range from 20 – 99 years.

Do you ever pay off a timeshare?

No, you never pay off a timeshare. Unlike purchasing a vacation home with a mortgage, you're not set up to own the property.

What happens if I walk away from a timeshare?

If you walk away from a timeshare, you can expect to get calls from a collection agency and take a hit to your credit score. That's why it's important to carefully read through a timeshare contract before you sign up for one.

Is there a way to save money on a timeshare?

Purchasing a timeshare from a current owner is much cheaper than buying one from a timeshare developer.

While some might enjoy the perks of timeshare ownership, it isn't for everyone. That’s why it's important to learn more about the drawbacks of purchasing timeshare before making this type of real estate purchase.

And after researching your options, if you decide to go in a different direction – like purchasing a vacation home yourself – you can take action today and start your mortgage application with the Home Loan Experts at Rocket Mortgage^®.