Client Investments: Think Twice About a Timeshare
Some clients never cease to amaze you. One day, a client lets you know that they had a great time on vacation and they are thinking of buying a timeshare in that resort community. They feel it would be a good investment. What do they need to know?
Timeshares developed a very bad reputation back in the 1970s and 1980s. They have been reborn as fractional ownership, interval ownership, or timeshares with deeded and vacation points structures. Large companies, such as Marriott Vacation Club, Hyatt Residence Club, Hilton Grand Vacations Club, and Westin Vacation Club, are in the business.
In many cases it has evolved from ownership of a week in a resort to the deeded/vacation point structure mentioned above. This gives purchasers significant flexibility. They still aren’t investments.
What is Your Client Considering Buying?
Timeshares come in many varieties. The plain vanilla model is ownership of a specific week at a specific resort. The investment rationale your client sees might be a 100-room resort where each room is owned by 50 different weekly owners, which means there are 5,000 shares. Owning one means they own two-hundredths of 1 percent of the operation. If the resort was ever sold, they would get their proportional share. In practice, this rarely happens.
They might be entering into a vacation points structure model where they own a certain amount of points available each year. This can be spent on vacations at their new favorite resort. The points can be spent at other properties managed by the company. The points can be banked. It’s still not an investment.
Pros and Cons of Timeshares
You might wonder what got into your client. Logically they could stay at hotels of their choosing, spending money as necessary. Why buy into a timeshare?
Here are some reasons why:
1. Desirability. You absolutely love the location. You want to come back every year, forever. The extra space means you can bring the extended family or invite friends as your guests.
2. Sense of ownership. You want a place you can consider “your own,” yet do not want the headaches of property ownership, especially in a foreign country. You want to avoid dealing with real estate taxes and maintaining a property you will likely only use two weeks a year.
3. Exclusivity. We assume timeshares are in resorts with dozens of hotels and other timeshares. Sometimes, that’s not the case. Areas like the Cotswolds in England, which has severe restrictions on development, might have comparatively few timeshares or large hotels. Countries like Bermuda put severe restrictions on outright foreign ownership of real estate.
4. Bragging rights. You announce at the country club that you are going to “your place in the Caribbean.” Hopefully your friends don’t ask too many questions.
5. Exchangeability (the good). Organizations like RCI operate as timeshare exchange programs. In many cases timeshare owners can bank the units they already own and swap for a week’s vacation in another locale. Members pay a fee to belong.
6. Ability to rent. In some cases the timeshare’s parent organization or an exchange company may provide the service of renting out your week on your behalf if you choose not to use it.
7. Charity auctions. A one-week stay at a luxury property in a resort area can be a great item to donate to a charity auction if you aren’t using your week that year.
Here are some reasons why you shouldn’t buy into a timeshare:
1. What’s your property actually worth? Timeshares developed a bad reputation for extremely high upfront commissions and marketing expenses. That’s built into your purchase price.
2. Length of ownership. Do you own your slice of heaven forever? Twenty years? Obviously any underlying value would decrease as the ownership time shortens.
3. Cost to carry. You pay annual maintenance fees to the parent company or resort operator. This covers cleaning, upkeep, property taxes, electricity, etc. However, if the annual cost is $800, plus the cost to carry your initial purchase expenditure, could you have stayed in a hotel for the same amount?
4. Difficulty reselling. Timeshare units are notoriously illiquid. However, the maintained fees remain the obligation of the titled owner. If you can’t sell it, the best way to get out from under the maintained costs may be for you (or your heirs) to turn it back to the parent company. You probably lose your investment, but you are no longer paying maintained fees.
5. Assessments. Like condo buildings in big cities, sometimes serious maintenance work must be done. Owners may be assessed for their proportional share of the expenses, in addition to their annual maintained costs.
6. Exchangeability (the bad). If your timeshare unit has a traditional structure, ownership weeks are divided into low, mid-, and high season. Desirability of the location plays a role. Hawaii might be popular year-round. Mexico and Florida might not be that attractive during the summer. How many bedrooms does your unit have? These details factor into the exchange value of your unit.
The Bottom Line
It would be very hard to even remotely consider timeshare units an investment. However, if you enjoy going to one specific destination yet cannot own property because of foreign rules, or you only plan to use it a week or two a year, buying a timeshare unit might make sense.
FYI: A banker passed on some advice awhile back. The best way to buy timeshare units at attractive prices is to become friends with several estate attorneys. From time to time, they have timeshare units that must be disposed of to settle an estate.
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Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.