Are Timeshares a Good Idea?

Beach Yes. If you can arrange bridge financing, they are a great way to pay off the construction of your new resort. You will have to hire a sales staff and wait a few years to sell the full inventory, but when it is done you will have made a tidy profit.

What’s that? You meant is it a good idea for a consumer to buy a timeshare? Oh.

No. It isn’t.

I am reminded of this by a recent item at SmartMoney telling us how the prices for some second-hand timeshares, that is, those owned by consumers who now want out, have dropped to $1. They are not so much for sale as up for adoption, free to a good home. Given the annual fees involved, that is not as illogical as it might sound, but it is a stark contrast to the five figure sums those consumers were dazzled into paying just a few years ago.

 

As a general rule, the harder somebody tries to sell you something, the worse the deal is. And I have trouble thinking of anything that the seller works harder to move than timeshares. Life insurance salesmen are comparatively low key.

Even car dealers, who are selling items at a similar price level, do not go to such great lengths to get you to buy. They will let you drive the car for a few minutes. You might get a free cup of coffee. And maybe balloons for the kids, if there is a special event going on.

Timeshare vendors will often give out discounted or even free stays at their resorts, if only you are willing to sit through their sales pitch. They have even been known to use fake sweepstakes to lure you in.

The difference is that while selling new cars is roughly a break-even venture for most dealerships, the profit margin on selling new timeshares can be staggering. And for that, we have only ourselves to blame.

Timeshares are usefully thought of as a bit of real estate that has been sub-divided using a calendar rather than walls. And for modestly mysterious psychological reasons, folks are willing to pay a lot more for the time-divided pieces than the whole. A $500K condo might go for $15K a week, which is a big difference to the developer. Add in a handful of annual fees, which can increase over time, and you have a serious money maker, hence the lavish marketing.

And in a way, this is a shame. Because the basic timeshare idea ought to work. Vacation homes, by definition, can only be used by their owners a small portion of the year. A scheme whereby several people own the same property by dividing up the calendar ought to be a practical and efficient solution. It is easy to imagine a group of friends buying a beach house that way. Building a resort to be owned by hundreds or thousands of people under the same terms ought to work too.

Alas, it does not. Ironically, the core reason is that timeshares seem like such a great deal. Consumers, some of them anyway, are willing to pay a lot more for a timeshare than it is objectively worth. That causes developers to build more timeshares than the world really needs and to aggressively sell them.

Inevitably, as the years pass some of those once enthusiastic purchasers sour on the deal. They realize that what they bought was not just the right to use a bit of real estate for a week each year, provided annual fees are paid. It is also the obligation to pay those fees, whether or not the real estate is used, essentially forever. And as if that was not bad enough, those fees are not fixed and will rise with inflation.

Indeed, rising with inflation may be something of a best case scenario. If a timeshare owner wants out of his timeshare but cannot get out, because nobody else is willing to take on the obligation of paying the fees in exchange for annual use of the property, his natural next step is to stop paying those fees.

The SmartMoney piece quotes an outfit called TimeshareResortCollections.com, which is apparently a specialized debt collection agency, saying that “Up to 48% of timeshare owners are behind on their annual maintenance payments by at least a year.” The words “up to” confuse me a bit, but it is clear that this is a big problem.

In theory, an operator of a timeshare resort could sue a non-paying owner for the fees or foreclose on the timeshare. In reality, neither option is particularly practical. The money owed is not enough to sue over. And taking the timeshare does not help much given that the whole point is that the owner cannot give the thing away.

What happens is that in order to raise the money needed to run the place, the resort operator raises fees for the owners who are paying. And that leads to a classic downward spiral, as higher fees lead to more trapped owners who stop paying.

So, no, timeshares are not a good idea.

16 Comments

  • By Dave, April 18, 2012 @ 12:19 pm

    Good to have you back!

    I have some in-laws that bought some timeshares, and are now having problems using them. They really seem to be wise with money most times, but there have been some expensive mistakes along the way (DirectBuy, the timeshare, etc.) It would be an interesting metric to see if a household has more than one of these big ticket buys at any one time, and how well they correlate.

  • By Mike, April 18, 2012 @ 12:20 pm

    Great to see you posting, again. Hopefully the return after the 14 month hiatus doesn’t indicate you’ve also returned to the ranks of the unemployed.

    I always snicker a bit when people tell me about their timeshares, or at the very least revise my opinion of their intelligence and/or gullibility appropriately.

  • By Jim, April 18, 2012 @ 12:33 pm

    Great to see you back, with same caveat as Mike.
    I was just about to delete this dormant blog from my RSS feed!

  • By Eric, April 18, 2012 @ 1:21 pm

    This is the best personal finance blog on the web! I sure am glad to see you return.

  • By Andrew, April 18, 2012 @ 3:40 pm

    Thanks for posting again! I can only hope that you’ll continue to add new items to your site. The internet hasn’t been the same without you.

  • By Dan, April 18, 2012 @ 5:34 pm

    Well, this is a nice surprise! Hope there is more to come.

  • By TFB, April 19, 2012 @ 2:10 am

    Glad to see your return. You were missed. Hope more will come.

  • By Financial Advice for Young Professionals, April 20, 2012 @ 4:35 pm

    Wow, I never thought about this but it’s so true that the more a salesmen tries to sell you on something, the crappier the product probably is.

    The best products usually sell themselves :)

  • By Rob Bennett, April 23, 2012 @ 9:10 am

    Good to hear your voice again, Frank.

    Rob

  • By Austin Davis, May 1, 2012 @ 3:59 pm

    Great post frank,

    I like what you said about “the harder someone tries to sell you something, the worse of a deal it is”. Awesome advice.

  • By Kevin, May 3, 2012 @ 11:55 am

    Oh shit this blog is back! Hells yeah!

  • By Garrett, May 8, 2012 @ 3:03 am

    I’ve never been so excited to see a new blog post pop up on my RSS feed. This is still the best personal finance blog out there. I hope your hiatus has ended permanently this time. Welcome back.

  • By Timeshare for Resale, August 16, 2013 @ 6:22 pm

    Buying a timeshare resale is a good idea. It will save you money and it will save you from having to sit through a sales pitch!

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