The basics of timeshare ownership and loan financing

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Ask a Lender
November 8, 2017 | Updated November 10, 2017


Key Points

The basics of buying or financing a timeshare

  • Timeshares aren’t for those seeking to make money on a real estate investment.
  • Timeshares can be difficult to sell, so be ready for long-term ownership.
  • These properties are not eligible for capital-loss tax exemptions.
  • Loans for timeshare properties have shorter terms and higher interest rates compared to home mortgages.
  • U.S. timeshare purchases usually involve a deed of trust; leasehold and right-to-use agreements are common in other countries.

Timeshares are popular accommodations for vacationers, and are a lucrative business for the developers and operators of these properties.

A timeshare is a property, typically a resort condo unit, that allows many individuals to share ownership rights. Each owner has an allotted period of time to use the property each year. Timeshares may offer benefits that vacation homes, rental property or hotels do not.

According to the American Resort Development Association (ARDA), the U.S. timeshare market grew for a seventh straight year in 2016, with total sales and rental revenue exceeding $11 billion. The U.S. has more than 1,500 timeshare properties with more than 206,000 individual units. Nearly half of all timeshare purchases were for less than $10,000. The average owner is 47 years old with a median household income of about $81,000, ARDA reported.

Timeshare structures

There are three basic types of timeshare agreements:

  • Deeded. These agreements are similar to home purchases, as the buyer receives a deed of trust, giving them the right to rent, sell, exchange or pass their property to heirs in perpetuity, as long as they pay the maintenance fees on time. Deeded agreements cover the vast majority of U.S. timeshare properties.
  • Leasehold. These are similar to deeded agreements in the rights, protections and obligations of the buyer, but leasehold agreements have an expiration date. They are common in Hawaii, where resort companies have underlying ownership rights.
  • Right to Use. These are common in foreign countries. A right-to-use agreement gives the owner a stake in the timeshare unit, but not the underlying real estate, and only for a certain number of years. In Mexico, for example, foreigners may not own land within 30 miles of a coast or 60 miles of an international border, so many timeshare agreements have a right-to-use framework.

Additionally, timeshares have specific structures to divvy up time between owners:

  • Fixed week. The buyer owns the rights to a specific unit at a specific location during the same time period each year for the life of the contract. You may be able to rent or trade your time block with other members of the ownership group.
  • Floating. The buyer may schedule time at their unit during any point of the year, offering added flexibility for vacation plans, although it may be difficult to get time during busy seasons.
  • Points. Owners earn points that function like currency in their timeshare club, allowing them to purchase time at different properties in other locations throughout the year. Again, this offers flexibility, similar to floating timeshares.

Pros and cons

If you go on at least one major vacation a year, you may spend a lot of time comparing hotel prices, then pay a lot of money to secure a room. This may be enough to make you consider a timeshare. Essentially, a timeshare allows you to prepay for lodging costs. Many timeshares are sold through brokerage or marketing companies and the sales process can be aggressive. It’s important to not let your decision get overly emotional or impulsive.

A timeshare should not be considered an investment property, since it depreciates quickly, so you shouldn’t go into it thinking you’ll make money in the end. Also, the travel and maintenance costs may become overly burdensome. The average annual maintenance fee for a timeshare is $600, according to ARDA, and you’ll pay whether or not you use the property. Timeshares with ownership clubs — which essentially function like homeowners associations (HOAs) — may offer you a voice in how the property is maintained or help if you choose to sell later.

One advantage of timeshare ownership is that, unlike a vacation home, you’ll only pay for the portion of time you use the property. This can make an expensive property more affordable. You’ll pay for maintenance, but you won’t spend time doing it. If you have a fixed-week agreement, you may be able to rent or trade with another property owner, allowing you to travel to a new destination at a more convenient time. It’s also possible to allow friends or family to use your property free of charge.

Along with the potentially sizable maintenance fees, some timeshares require special assessments for repairs or improvements. If you don’t pay, you may put yourself at risk of foreclosure. Timeshares are historically difficult to sell, so be prepared to own for the long haul or wind up selling at a loss. Additionally, timeshares do not qualify for capital-loss tax exemptions like other types of real estate.

Timeshare loans

Lenders may limit timeshare financing to certain locations, such as the U.S., Canada, Mexico and the Caribbean, as foreign real estate laws can be onerous. Lenders also may restrict the types of timeshares they’ll finance, but some fund both deeded and right-to-use properties, as well as fixed-week, floating and points-based contracts.

Some lenders waive origination and processing fees, down payment requirements and prepayment penalties. Other lenders charge a one-time origination fee of $150 to $200, and some require down payments of 10 percent to 20 percent of the loan amount.

Repayment terms can run from one to 10 years, with three to seven years being common. Loans often have a minimum financing amount of $4,000 or $5,000 but can max out at $100,000, occasionally more. Interest rates may be the key factor, as they’re much higher than traditional fixed-rate home loans. Some lenders will go as low as 6 percent, but 10 percent to 15 percent is common.

Finally, consider a secondhand timeshare. New timeshares are typically more expensive due to the cost of marketing and sales. Buying a previously owned timeshare, however, is similar to buying a used car. Work to learn about any problems, such as existing liens. Hire a title-search company to ensure the seller is the legal owner and that any current mortgages are in good standing.

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