In my last two blogs, I touched on ways to research a good timeshare vacation purchase and some key factors to consider when making a purchase. Now, I’d like to examine the facets that drive a timeshare’s value, the basics of exchanging timeshares and how to analyze the cost of a timeshare to determine if it’s a good buy, or not.
What drives up the value of a timeshare?
Like any commodity, timeshares have a value. Not just in the resale market, but also as a method of exchange, where owners can exchange their timeshare week for another week at a different resort.
To get the most out of your exchange you’ll need to understand what factors drive up a timeshare’s value.
Location. Like in all real estate, location really is the most important feature in a timeshare. Buy in the right location and you will never have trouble renting or exchanging the unit. To find the right location you’ll need to examine the supply of timeshares in each of the destinations that are on your family’s “wish list.” Locations with high demand and limited supply will have a higher value.
At the moment the areas that meet these criteria include: Hawaii, San Francisco, parts of coastal California and a few of the big U.S. ski resorts in the. Internationally, popular areas include Paris and London.
Areas that are overbuilt (which lowers the value of the timeshare) include: Orlando, Las Vegas and Whistler.
While general locale will impact a timeshare’s value, so will the specific location of a timeshare resort. For instance, a beachfront unit will almost always be in higher demand than a unit five or six blocks inland.
Unit size. Unit size refers to square footage, but the key to good value is the number of bedrooms a unit offers. As a general rule of thumb, a two-bedroom unit will always have a higher value than a one-bedroom or studio unit. But the unit size will always be trumped by resort location. This means a one-bedroom beachfront unit will command more in rent or have a higher exchange value than a two-bedroom unit a few blocks away from the beach.
Season. In the timeshare world, seasons are often colour coded, with different colours corresponding to different seasons. The rationale is that certain seasons have a much higher value than other seasons. Even different weeks within the same season will have a higher value than other weeks.
Be forewarned: You cannot compare different colour designations for different resorts when looking at exchange value. When in doubt, find out how the resort codes their seasons, and trade (or buy) based on value, not colour.
Advance deposit. If you’re interested in exchanging your timeshare, you’ll want to pay attention to the rules and regulations around depositing weeks. Many vacationers will actually make their timeshare plans 12 to 24 months in advance and, according to one timeshare vacation club, a timeshare actually starts to devalue when there is less than a year left before the date of use. That means, the less time your timeshare is on the exchange market the less value it holds. To get maximum value you’ll want the earliest possible exchange options.
Resort rating. While many owners are happy to hear that their timeshare is a five star or a Gold Crown resort, these ratings do little to increase the value of your timeshare. That’s because these ratings are based on the amenities provided at the resort, not the demand for the resort. For example, a beach front resort with a low or no amenity rating will often have a higher exchange value than a top-rated resort located a short distance inland. Only if two resorts are located in similar settings will resort ratings and amenities impact the exchange value of the timeshare.
How do exchanges work?
There are three ways to exchange your timeshare: through owner-to-owner exchanges (known as direct exchanges); exchanges within a resort group that provides this as part of their timeshare membership; and exchanges through third-party companies that specialize in renting and exchanging timeshare weeks.
Direct exchange. A direct exchange can be the simplest and most straight forward way of exchanging your timeshare. If, for instance, you owned a timeshare in Hawaii but wanted to go skiing in Whistler, all you need to do is find a Whistler timeshare owner that wanted to make a straight exchange. You’d end up in Whistler and the other owner would end up in Hawaii.
The one drawback with direct exchanges is finding and contacting other owners to make an exchange. There are websites that cater to this type of exchange, such as Tug2.net’s exchange marketplace. Another option is to contact the management at the resort you want to visit and ask if there are ways to contact their timeshare owners directly.
Once you’ve made an agreement to exchange, each owner must contact their respective resorts to notify them you’re reassigning your right of use to another owner.
To be successful with direct exchanges, you’ll need to be comfortable with long-range vacation planning, usually starting the process 24 months or longer from week of use.
Exchanges within a resort group. Many timeshare programs include multiple resorts in different locations. This lets owners take advantage of different vacation spots. You select the week you’d like at a sister-resort in accordance with your club’s rules. In some cases these exchanges are free, while other clubs will charge an exchange fee.
Exchanges through an exchange company. The advantage of using an exchange company is there is a larger pool of fellow timeshare owners also looking to exchange weeks. To use an exchange company you will be required to “deposit” your week into their “spacebank.” As soon as you deposit a week you have the right to obtain a different week from the company’s spacebank inventory.
The two largest exchange companies are Resort Condominiums International (RCI) and Interval International (II), but there are other smaller, independent vacation clubs in the timeshare marketplace. However, most timeshare resorts have a formal affiliation arrangement with either RCI, or II, or both.
Most exchange companies will charge a fee for each exchange. RCI and II also charge an additional annual membership fee, in addition to the per exchange fee.
There are also different procedures governing timeshare deposits, depending on the type of timeshare you bought. For instance, you can simply deposit a fixed week timeshare with any exchange company. If, however, you bought a floating week you will need to contact your own resort to have a week assigned to you before you can make a deposit into a spacebank.
One industry practice that can complicate your own exchange is a resort’s decision to “bulk spacebank.” This is when a resort deposits a large number of unassigned units with an exchange company even before owners have the option to spacebank their units. If this happens, contact your resort to explain that you intend to deposit a week for exchange. They should then contact the exchange company and ask for one of the deposited bulk weeks to be transferred to your account.
If you deposit a week and then change your mind you can usually get the week back but only if the week is still available and only if you have not selected another exchange week in lieu of your deposit.
For an in-depth discussion on exchange procedures please see Tug2.net’s Timesharing 101.
Estimated cost of a timeshare
By now, I’m sure you realize that a timeshare purchase is about spending disposable income; it’s not an investment. If you do make money on the resale of your timeshare consider it a bonus, just don’t expect it.
At this point you know enough about timeshares to begin an analysis on whether a specific timeshare makes sense for you. To do this, we need to factor in all the costs of owning a timeshare. Before we proceed, though, we need to keep in mind that when you buy a timeshare you are actually tying up your money—this is known as an opportunity cost. If you were to spend $10,000 on a purchase of a timeshare, you lose the opportunity to invest this money. If you believe you could obtain a 5% annual return if you invested the money, then the opportunity cost for the timeshare would be $500 per year. Many timeshare owners leave this cost out of their analysis, but as savvy savers and investors, we’re going to include this in our analysis of timeshare ownership.
To determine a timeshare’s valuation, consider the following purchase example:
• One-time purchase price: $2,000
• One-time transfer fees and closing costs: $575
• Annual maintenance fees: $600
• Annual exchange company membership: $100
• Biannual unit exchange every other year with exchange company: $120
• Annual opportunity cost: $100
Based on these numbers you’re costs of ownership are as follows:
1. One-time costs: $2,575 (if you use the timeshare over five years, this is an amortized cost of $515)
2. Annual costs: $860
3. Total annual costs including amortized one-time costs: $1,375
To decide whether the timeshare is a wise purchase simply compare the cost of a rental for a similar type of unit in the same location or resort. If the rental costs are higher, then it makes more sense for you to purchase the timeshare (as long as your lifestyle suited this vacation option). If rental costs are cheaper than consider buying a timeshare in another location.
If you use these calculations every time you consider a timeshare purchase, you’ll not only be able to find your top price—the highest price you should pay before renting becomes a more sensible option—but you’ll make an informed decision based on value.