Owning a piece
of a resort property that guarantees you an annual vacation and the
chance to use exchange privileges for other properties around the world
is an alluring dream that has created the multi-billion dollar
timeshare industry.
Thousands of timeshare buyers have realized this dream and are enjoying
their timeshares in resorts throughout North America and around the
world. However, for some buyers, the reality is far different from the
dream. The promoter's glamorous promises are not fulfilled, projects go
bankrupt, trades for exotic spots don't materialize and those who
bought under pressure come to regret their hasty decisions.
How Timesharing Works
The term "timeshare" was borrowed from the computer industry. It means
that many individuals can gain access to one company's computer bank
for a fee. Timesharing in real estate first appeared in Europe where,
in the 1960's, escalating resort condominium costs prompted developers
to come up with the idea of subdividing individual condominium units
into time interval ownership plans, or timeshares. Vacationers, they
discovered, could better afford to buy one or two weeks at a resort
area than year-round ownership of a condominium unit.
Timesharing intervals have been sold in condominiums, cruise ships,
houseboats, recreational vehicles, campgrounds, buses and airplanes.
Two basic types of timeshare units are sold: fee simple - where the
buyer gets title to a fraction of the unit; and right to use - where
the purchaser is entitled to use the unit for a specified period of
time, but does not have an ownership interest.
In a typical timesharing program, weeks (intervals) are offered at a
golf, seaside or ski resort at prices ranging anywhere from $500 to
$85,000, depending on the season, the quality of the accommodations and
the location. Sales are normally financed over a period of years by the
developer or an outside source. Generally, buyers pay a percentage of
the price down and pay the rest in installments. In addition, they must
pay annual maintenance fees and the cost of a resort exchange program.
Problems
While many timeshare ventures have been successful, problems can arise for buyers in several areas.
Under
a right-to-use (lease) agreement, the investor does not hold title to
any property. If the project is unsound and fails, the entire
investment can be lost. One east coast state government closed a
timeshare company that allegedly did not own some of the property it
was offering and was overselling properties it did own. Investors would
have lost all their money were it not for a special state reimbursement
fund.
Some timeshares are offered before construction has begun or adequate
financing has been obtained. Investors' funds may be part of the actual
construction money and if pre-construction sales of timeshare intervals
are not up to the builder's expectations, the project may fail and
buyers may lose their money. In one Colorado project, timeshares were
being sold even though no construction loans had been obtained. When
the company went bankrupt, the project was terminated and investors
were left out in the cold.
Tips for Prospective Buyers
1.
It's a Vacation.
Don't look at a timeshare strictly as a real estate investment: it's a
prepaid vacation accommodation and should be considered as an
expenditure just like an annual vacation.
2.
What to Look For.
Try to visit the site; if you cannot, consult reliable sources who are
familiar with the area and the development. Do you like the area and
will you enjoy returning to it year after year? Are you buying your
interval for the time of year you usually take your vacation? Do you
like the facilities offered? Is the project completed? Have you asked
your Better Business Bureau for a reliability report on the developer
or the manager?
Timeshares are sometimes sold through promotions offering "free"
vacation certificates, prizes or gifts as inducements to inspect the
developments. With vacation certificates, you may not always get what
you expect. If you receive one in the mail or are offered one by
telephone, find out if the "participating resort" where you will be
staying in indeed "participating"; find out if you will end up having
to pay a lot of money for travel expenses and extra charges for your
"free" trip. Gifts and prizes also may not be what they seem; sometimes
cheap imitations of quality goods are offered or the "prize" is
deceptively described.
Remember that the free gift or vacation certificate is an inducement
for you to listen to a sales presentation for an offer that involves a
large sum of money. Bear in mind that a timeshare is a major investment
and you want to know just what you are buying. Ask questions and do not
sign anything unless you are fully aware of the consequences. Be extra
wary if sales persons pressure you to sign and don't allow enough time
to consider carefully the contract involved. Under New York law, offers
may not be advertised as urgent or require the customer to respond
quickly to the deal.
3.
Nature of Ownership.
Determine whether the unit offered is a fee simple or right-to-use
unit. Fee simple units are usually more expensive, but they may provide
some tax benefits. They also allow the buyer to have a voice in the
management of the resort. Right-to-use units often have a lower price
and less management responsibility, but resale rights may be limited.
4.
Long-term Ownership.
A timeshare isn't a one shot deal. Prospective buyers should find out
how the long-term management of the resort is to be provided for and
should examine the operating budget to make sure it will meet the needs
of the project over time.
5.
Exchange Programs.
Offers of exchanges for the other timeshares are usually an important
consideration for timeshare buyers. But, there may be no assurance that
the program will be able to provide the interval owner with another
accommodation that is desirable or available at the time the owner
wants to swap. There may be no assurance that the development one buys
into will continue its contract with a given exchange, or with any
exchange. Remember that exchanges rate participating units by
desirability and other factors: buyers in a project that is not highly
rated by an exchange cannot expect to "trade up" to fancier units, more
appealing locations or better times of the year.
6.
Maintenance Costs.
Be aware that the timeshare owner faces the risk that the annual
maintenance fees will rise as the property ages and upkeep becomes more
expensive. The fee may not cover major repairs or other costs
associated with normal wear and tear.
7.
Payment. Make sure your money is held in an escrow account until your title to the unit you are buying is free and clear.
8.
Reservations.
Some timeshares do not guarantee that once purchased, you will receive
a specific time interval. These are based on a first come, first served
basis, so owners must wait in line with other owners in order to
receive their reservations.
9.
Consider the Alternatives.
Carefully consider all costs of buying a timeshare, including the
alternative costs of taking a vacation every year. Can you afford the
travel costs and other expenses of a vacation every year, either to
your unit or one you have exchanged for? Ask yourself if a traditional
vacation may be more appealing or less expensive. Investors from out of
state, or out of the country might also find difficulty in suing to
recover their money or for breach of contract without travel, to the
state where the transaction took place.
Government Regulation of Timeshares
Currently, the federal governments of the United States and Canada do
not directly regulate the timeshare industry. Laws bearing on timeshare
transactions vary from jurisdiction to jurisdiction. Potential
customers should check with their state or provincial securities, real
estate, or consumer protection laws and regulations that apply. Some
states do require registration, the issuance of a prospectus by
promoters and a cooling-off period after sales in which buyers may
rescind the sale without penalty.
New York State Laws
New York law requires that for any business transacted in New York, the
offering plan must be registered here, even if the timeshare is
out-of-state or if you are out-of-state. The seller must provide you
with a contract that includes all details of the transaction, including
all limitations and terms of such purchase or agreement. You have the
right to cancel within three business days of your signing of the
contract. The travel promoter must refund all payments made by the
purchaser within ten days from the time of cancellation.
Before You Sign a Sales Contract
Be sure to get answers to the following questions:
- What
is the nature of your right in the property? What is your specific
title? Does your contract give you an ownership, lease, or a security
interest?
- If your contract is for a leasehold timeshare, what is its duration: 20 years, 40 years, or life?
- Can
you transfer the title of your timeshare, or does it revert back to the
developer if you choose to leave? Can you sell your timeshare yourself,
or does the developer have exclusive rights of sale?
- If
your title is for ownership, make sure that the contract waives the
"right to participation" so that another tenant cannot compel the sale
of the whole unit to get cash for his/her share.
- Make
sure that the contract is specific about maintenance fees. If such fees
are not listed, will you be handed a bill for additional costs in
several years? Will the fee increase each year?
- Make sure
the developer owns the property. If he/she holds it under a lease, is
it certain that you can have your right to occupancy every year for the
duration of your contract?
