ECLECTIC RANT: Timeshares: Know What You Are Buying

By Ralph E. Stone
Monday May 13, 2013 - 10:34:00 AM

Mr. Smith received a mailer -- "3 Free Nights in Waikiki-Spend 3 nights in 4 star hotel-no purchase necessary." The mailer directed him to call the listed telephone number "to schedule your short presentation from ABC Resort." When he called the telephone number on the mailer, he was given a nearby address and time for him to attend the presentation. Both Mr. Smith and his wife showed up and were given a hard-sell sales presentation that while not illegal, bordered on the unethical. Instead of carefully reading the contract or better yet, taking it home and having their lawyer read it, the Smiths impulsively signed the contract obligating them to pay $20,000 for their timeshare. 

The Smiths received their voucher for 3 nights in Waikiki, but, of course, had to pay the airfare and the times were subject to availability.  

What is a timeshare anyway? It is the subdivision of condominium property into legal estates where occupancy rights are restricted to a number of days, usually seven, at specified or reserved times of the year. Timeshares are either owned in fee simple or nonfee. Under fee ownership, the purchaser receives an undivided interest in real estate, coupled with an exclusive but restricted right of occupancy. 

Timeshare fee ownership periods are either fixed or floating. Fixed time ownership is where the calendar year is divided into fifty-two one-week periods and property occupancy rights are assigned by week number. The owner of week thirty in a fixed-time timeshare property, for example, has the right to use week thirty forever. In a floating time arrangement, the calendar year has been divided into seasons. The owner of a floating time timeshare week has the right to occupy the property during any week within that season provided the resort can confirm the availability of that week.  

In a nonfee arrangement, the interest is contractual. The person buys a lease, license, or club membership (sometimes called a points-based vacation plan) that allows the person to use the property for a specific amount of time each year for a stated number of years. 

Many timeshare owners become a member of an exchange program, where the timeshare owner can, for example, "exchange" his Colorado resort timeshare for the use of a similar time period in a Florida resort. Exchange companies label time periods according to whether they are in high, mid, or low season. They also grade and rate each property to provide for an equal or fair exchange.  

Timeshare resort developers may both develop and sell timeshares. In other case, the developer will arrange for a company specializing in marketing and selling his timeshares. If done this way, marketing and sales cost can be 50 percent or more of the developers sales price. Let's look at the math. Assuming the developer can can build and furnish a two‑bedroom condominium unit for about $150,000 per unit. By dividing the unit into 50 one-week units and selling each unit for an average price of even as low as $10,000, the developer will gross $500,000 per unit. If the developer spends half this amount marketing the units ($250,000 per unit), the construction, sales, and marketing costs together will total $400,000, leaving $100,000 net income per unit.  

There are about 8 million timeshare owners in the United States. Annual sales volume in United States resorts has grown from about $291 million in 1978 to approximately $6.5 billion in 2011. The number of resorts has increased from 240 to about 1,500. In 2011, the average sales price for a timeshare was $18,401 with annual maintenance fees averaging $786. The states with the largest sales volume of timeshares are Florida, Hawaii, California, and South Carolina.  

Many owners of these timeshares are interested in selling. Thus, a timeshare resale market or secondary market has emerged over the years. Unfortunately, timeshare owners are usually competing with the highly sophisticated sales promotions of timeshare resort developers or marketers. In addition, timeshare owners are typically absentee owners who live some distance from their timeshares. Therefore, it is inconvenient for them to show their timeshares to potential buyers. Thus, timeshare owners frequently seek assistance from timeshare resale companies in selling their timeshares. While attempting to sell the timeshare, the owner will probably be responsible for maintenance fees, taxes, and finance charges. 

The timeshare buyer is paying an inflated price for his or her unit as about 50 percent of the price represents the developer's marketing and sales program. As there are many more trying to sell their timeshares than those looking to buy them, the resale market is generally a buyers' market.  

Given the number of timeshares for sale in both the primary and secondary market coupled with the large amount of profit to made, the sales of timeshares has been ripe for scams. As an attorney for the Federal Trade Commission (FTC), I prosecuted a case against Timeshare Owners Foundation, Inc. (TOF), a Florida-based timeshare resale company, the first FTC challenge to a timeshare resale company. The FTC complaint alleged that TOF and its principals misrepresented the nature and present value of its $1,000 bond guarantee and by misrepresenting the likelihood of a sale within a year for a price equal to or in excess of the price paid for the timeshare. The suit was brought in the U.S. District Court for the Middle District of Florida.  

TOF targeted timeshare owners as its customers by mail solicitations, inviting the owner to call TOF, or by unsolicited telephone calls. The pivotal come on was a $1,000 bond guarantee that promised a sale of the timeshare within 12 months or the owner would receive a $1,000 government bond. The principal elements of the sales pitch was the promise of a sale at a desirable price within a year.  

In actuality, the $1,000 government bond turned out to be zero coupon bonds worth from $62.50 to $95.00, considerably less than the $295 to $495 price that customers paid for TOF's services.  

TOF's promise of a sale within a year or less was also alleged to be false. TOF's services simply did not provide customers with access to any resale market that were likely to sell timeshares within a year at any price. 

The TOF defendants entered into a stipulated permanent injunction -- without admitting fault -- ordering them to pay $1.25 million in pro rata redress to consumers. The defendant were also ordered to clearly disclose the nature and value of any bond. Further the defendants were enjoined from representing the likelihood of a sale within a given time period or price without the possession of reliable data substantiating the claims before making such claims. Finally, the defendant were ordered to provide a twenty day right-to-cancel the transaction and receive a full refund. 

Before buying a timeshare, calculate the total cost of the timeshare, including mortgage payments and expenses, like travel costs, annual maintenance fees and taxes, closing costs, broker commissions, and finance charges. Then compare these costs with the cost of renting similar accommodations with similar amenities in the same location for the same time period. And remember, a timeshare is not an investment for profit or an interest in real estate that will likely appreciate over time. And if you try to resell your timeshare, it is unlikely you will get any way near what you paid for it.