Think Before You Buy: Timeshares

The infamous high-pressure sales tactics are enough for some people to avoid timeshare presentations like the plague—but it is even worse when you view timeshares from an investment perspective.

Instant decrease in value

Nobody would buy a stock or bond that behaved like a brand-new car, losing a significant chunk of its value the second you drive it off the dealer’s lot. Unfortunately, those who buy timeshares—as the investment opportunities the sales representatives claim they are—end up doing just that.

The resale value of timeshares often drops to half or even lower in the second-hand market, making it a guaranteed money loser.

Lack of liquidity

The aforementioned price drop is due to the perpetual glut of people trying to get rid of their timeshares while buyers are few and far between. The only way to catch the eye of a buyer is to offer a bargain, so your choice ends up being taking a hefty loss or resigning yourself to a long wait. During the wait, you still have to pay all the annual fees and mortgage costs as usual.

Broker scams

Since there is a large group of people trying to get rid of their timeshares, a specialized breed of scam artist has surfaced to prey on frustrated sellers. The scam artist approaches the seller posing as a broker, guaranteeing sale in a certain number of days. All he needs is a reasonable up-front fee that will of course be refunded, should the promised sale not occur. The sale—and the refund—both fail to materialize.

Poor rental prospects

Since you own the property (a part of it, at least), you may be able to rent out the timeshare to others. While this may sound good in theory, there are some obstacles. For starters, finding willing renters may be easier said than done. Just as the normal state is to have a buyer’s market, there’s a perpetual renter’s market for timeshares. The rates you can demand are unlikely to recoup your annual costs.

There may also be restrictions on your ability to rent out the place buried in the fine print. Finally, any damages or unusual wear and tear caused by the renters may be coming out of your pocket, rendering the whole ordeal a net loss.

High and uncontrollable expenses

The annual maintenance fee alone typically runs over $500 and there’s rarely any cap to future increases. That means your $500 annual fee for a one-week stay can become $1,000 before long.

Opportunity cost

For example, if you put $10,000 into a timeshare, it is easy to use that static price tag as the reference point for your investment going forward. If you manage to sell the timeshare 10 years later, the natural thing is to compare the proceeds of the sale with that initial $10,000 to determine how much you lost.

However, if you hadn’t bought that timeshare and the $10,000 remained in a bank account or you invested it in a mutual fund, you would have received interest, dividends or value increase during those 10 years.

If you sold your timeshare for $8,000, you not only took a loss of $2,000, you also missed out on 10 years’ worth of investment return elsewhere.

The cost of flexibility

Having a place in Florida or Hawaii may seem great, but many discover that going to the same spot year after year gets rather boring. To fix this, there are companies offering point swap clubs, where timeshare owners get points according to destination popularity, which they can trade for other timeshares.

The catch is that members pay another fee for joining the club and a timeshare owner in a less popular area may find that the exchange rate is so poor that he or she can barely scrape together a vacation week in the off season anywhere.

Marc Demetriou, CLU, ChFC is a branch manager and mortgage consultant at Residential Home Funding Corp. He received an NJBIZ Forty Under 40 Award in 2005 and is ranked as one of the 25 Most Connected Mortgage Professionals in the USA. He is also the co-host of The Real Estate and Money Show.

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Meadowlands Magazine

Meadowlands Magazine

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