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.
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: