Time shares
rise in price, prestige, but
unwary buyers can get their clocks cleaned
By Michael D. Larson • Bankrate.com
The time share industry seems to be coming of
age.
Operators have moved to shed
their shady past. Big-time hotel companies have partnered with
small-time rivals to stamp well-known brand names on developments
around the world. Vacationers, meanwhile, have found they can
pick from more offerings than ever before.
All of this is great news for the companies
that sell ownership or usage rights by the week at various resorts.
But asking prices have swelled along with demand, and interest rates
for time share loans tend to be up in the credit-card range -- in
the teens. That makes it all the more important for consumers to
carefully consider how they're going to pay for that April week
in Aruba before they buy.
"You're not talking about a home mortgage amount,
typically," says Scott Berman, a director in the hospitality and
leisure consulting group at PricewaterhouseCoopers.
"But we're getting into some fairly higher-priced timeshares that
are much more than $20,000.
"When you see Ritz-Carlton, Four Seasons and
Hyatt get into this, those are some high-end resorts."
Anyone who has landed on the right mailing list
or endured an arm-twisting session with a time share salesman has
an idea of the basics of timesharing. But buyers new to the experience
may not understand exactly how this segment of the vacation real
estate market works.
How
timeshares work
Timeshares offer people the right to spend a week or two at a popular
vacation destination while avoiding overbooked hotels and other
worries. Shoppers can find them all over the place -- from Grand
Bahamas Island to Aspen, Colo. -- and all over the price map, depending
on what time of year they want to visit and how much room they'll
need once they get there.
"You pay based on the type of accommodation,
whether it's a studio, one-bedroom, two-bedroom or three-bedroom,
and you pay based on the season that you want to purchase," says
Don Harrill. As chief executive of Hilton
Hotels Corp.'s Orlando, Fla.-based time share unit, Hilton
Grand Vacations Co., he oversees several resorts around the
state and in Las Vegas.
"Having said that, you can actually enter the
program at an interval weekly price of as low as approximately $8,500
or go as high as $25,000 to $27,000, depending on the size of the
unit and the high season," he says.
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- A total of 2 million households own a time share in the
U.S. -- up 300,000 in the past year.
- U.S. time share sales were $3 billion in 1998. Sales
have enjoyed an average annual increase of 15 percent
since 1994.
- The average one-week time share in the U.S. costs $10,500.
The most common type of ownership (about 68 percent) is
fee simple.
- The typical U.S. time share buyer is wealthier and better
educated than average: The median income is $77,000 and
64 percent have at least a bachelor's degree.
- The states with the most time share properties, in order,
are Florida (25 percent of the market, 284 resorts), California,
South Carolina, North Carolina, Colorado and Hawaii.
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Source: American Resort Development Association
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People who look into purchasing timeshares will
typically be offered financing through a company subsidiary or a
third-party lender sometime during the sales process. Experienced
home buyers will spot some familiar terms and conditions in the
documents they review. But time share loans also differ in many ways
from traditional mortgages, and the end product looks somewhat more
like a home equity loan.
Expect
to put 10 percent down
For example, time share buyers generally have to come up with a percentage
of the purchase price upfront and be capable of making fixed monthly
loan payments, just as they would with a conventional, 30-year fixed
mortgage.
About four-fifths of resort developers require
a minimum 10 percent down, according to a 1997 survey performed
by the American
Resort Development Association, a Washington, D.C.-based time share
trade group. More than three-quarters of them also said 80 percent
to 100 percent of their outstanding loans were made on a fixed-rate
basis.
Like home mortgages, time share loans also generally
feature tax-deductible interest. Restrictions apply the same way
they do with mortgages, however, so a borrower can't deduct against
more than say, one primary residence and one timeshare. The rules
get even trickier if you rent out your time share for part or all
of your allotted time.
Ownership
types differ
Still, a time share buyer doesn't always get the unit's deed the
way home buyers get title to a property. In an increasing number
of transactions, people obtain what is essentially a long-term
lease rather than a deeded ownership right.
"Many people purchase with a 25- or 40-year
lease," says Ellen Barr of the National
Association of time share Owners, an Orlando, Fla.-based nonprofit
organization founded two years ago to assist owners.
"We're working with a group in New Hampshire
and many people are at 18 to 20 years who had purchased 25-year
leases," she adds. "They don't have much time left ... and they're
going to have nothing. I would look very carefully at the deed and
how long your ownership is for."
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Want to learn more?
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Here are some places to find out more about
owning time share property:
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People should also realize their time share likely
won't appreciate in value the way first homes often do. Vacationers
want the latest, greatest things and developers are only too happy
to supply them, meaning many locations have a stream of new construction
competing with condominiums that might have been built 10 years
ago.
A
depreciating asset
Some of that property depreciation comes right after a buyer seals
the purchase as well. That's because developers tend to jack up
the asking price of each unit to compensate for all the free golf
vacations and other marketing enticements they offer buyers to lure
them into sales presentations.
"What they have to look out for,
if dealing with a developer in a new product, is price," says Tom
Lugen, a broker with in Daytona Beach, Fla. His firm has listings from owners
looking to resell their weeks to vacation shoppers.
"We can't give them two free Disney
tickets," he says. "We cannot give them a two-day, three-night stay
and we cannot induce them to our brokerage by giving them $50 gift
certificates to a local restaurant."
Buyers may also be in for a shock when it comes
to the financing fine print. time share loans generally have much
higher interest rates than conventional mortgages, as well as shorter
terms. The ARDA study showed a little more than half of the respondents
charged interest at 13.1 percent to 15 percent, for example, and
most did so over the course of 4.1 years to 8 years rather than
15 years or more. Almost one in 10 developers offered financing
at rates greater than 17 percent. The loans carry a higher interest
rate because the delinquency rate is higher, plus the property securing
the loan is an asset that depreciates in value over time.
Still, Harrill says time share loans tend not
to have prepayment penalties. That means people can refinance their
balances into already existing home equity lines of credit or other
types of secured loans to lower their rates and payments.
The bottom line, experts say, is that timesharing
can prove to be an affordable way to enjoy vacation the way it was
meant to be. As long as people don't overextend themselves and can
really afford to own a piece of paradise for years, there shouldn't
be a problem.
"Hilton has been involved since 1992 in the
industry and time share at the moment is, I believe, the fastest-growing
hospitality product there is," Harrill says. "The customer acceptance
and the sales volumes in this industry are phenomenal right now."
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