How Does A Timeshare Work?

The thrill of traveling to other places includes the discovery of something new, but sometimes a great vacation can also mean revisiting destinations you fell in love with over and over again. If you found the latter and you stay there regularly, you might have heard of a timeshare.

A timeshare is basically an agreement you go into to co-own or share in the right to exclusively use a piece of vacation property, such as condos, apartments, or resorts, with other vacationers like yourself. This shared ownership model allows you to use the property for a specific amount of time and frequency. You'll need to pay an initial fee plus maintenance and other charges, according to the Federal Trade Commission (FTC). This initial fee is a share in the price which equates to an average share of 1/52 or a week every year, HowStuffWorks expounds.

There are basically three types of timeshare and each works slightly differently from the other. Determining which type of timeshare you're getting is important as it will dictate property ownership and how you'll be able to use it and if it truly will make sense for you in the long-run.

First, there's the deeded (or fee simple) timeshare, where you're buying ownership for a percentage of the vacation property. How much you're buying depends on how many weeks you want to use the property but timeshares are typically sold in one-week increments, which means it can have a total of 52 deeds and you can get 1/52 share or more in it, per Investopedia.

In terms of using your timeshare, you can either have a fixed week or floating week setup. According to a Loyola Consumer Law Review journal article, a fixed week setup means you'll only be able to use your timeshare during the same period of seven days, e.g., April 1 to 7, every year until your contract ends. Meanwhile, a floating week setup allows you to book your stay within a particular period or season. However, dates are subject to availability and booked on a first come, first served basis.

The second type is the non-deeded (or right to use) timeshare, where you don't have ownership but only the right to use the property for a certain number of weeks per year for a set number of years, according to Bankrate. The developer still owns the property and will only grant you a lease, license, or similar contract to use the property. This agreement could last within 20 years or more, per Quicken Loans. Once the contract expires, the right to use the timeshare returns to the owner.

When your non-deeded timeshare comes in the form of a lease, the owner grants you a possessory interest, per the Loyola Consumer Law Review, whereas a licensing agreement only offers a privilege to use the property. Although you'll receive the right to use the timeshare with both, a lease comes with property rights and legal remedies, but with a licensing agreement, you risk the owner revoking your right to use the timeshare.

This Loyola Consumer Law Review journal article mentions a third type of timeshare and that is the points system or vacation clubs. Examples include the Marriott Vacation Club, Hilton Grand Vacations, and the Holiday Inn Club.

It works similarly to frequent flyer miles or hotel points, per Forbes, where you accumulate points and then redeem them. You'll need to purchase the points necessary for the vacation property you're eyeing and then redeem your points at the resort and dates of your choice. Your points represent your ownership or interest in the timeshare, and Investopedia notes that developers often allow timeshare exchanges within or outside their resort network. So, you're essentially paying for each stay but the points system does offer flexibility not only in terms of booking dates but also with choice of destination and property size.

However, the points system works on a first-come, first-served basis and everything is based on availability. With high season or popular properties, early booking is recommended. In addition to availability, the number of points you need to book a stay in a vacation property also depends on its location and size, per Investopedia.

Another important thing to know about timeshares is that you'll need to pay an annual due, which could be in the form of a maintenance fee or homeowners association fee, according to Forbes. In 2018, the average maintenance fee was $1,000, according to the American Resort Development Association (ARDA), ranging from $640 for a studio all the way up to $1,290 for a three-bedroom unit. Developers use these annual fees to manage the property, including room improvements and landscaping, and to pay taxes and insurance. Forbes adds that it could also pay for large and other unpredictable expenses that aren't covered by the annual fee reserve, such as natural disasters and the pandemic.

Failing to pay on these annual fees would put you in a similar situation as non-payment of your credit card fees or defaulting on a loan payment. That is, timeshare companies have the option to report you to a credit bureau, which could damage your credit rating, according to Forbes.