Timeshare Financial Considerations
Purchasing a timeshare is an investment from the standpoint that its upfront costs can run several thousands of dollars. Unless a buyer has considerable available cash, it is likely that she will not pay the entire amount out-of-pocket. Therefore, financing the purchase becomes a consideration for most owners.

There are a few choices available for prospective buyers. Remember, the savvy buyer will always check out his options before committing to any agreements. The three main funding alternatives are:

1. Traditional Lenders – Banks, credit unions and other financial institutions will lend money for timeshare purposes; however, because the loan is rarely secured with property, rates are generally higher than mortgage notes. Some banks simply won't finance timeshares. But many will provide a personal loan for a borrower, again with little or no collateral required but with higher rates attached.

2. Developers, Management Companies, Third-Party Lenders – Many times resort companies will offer financing or recommend a specific lender they work with. If the company will self-fund the loan, it can be convenient for the buyer to deal directly with them. Third-party referrals will likely be attractive as well, because they usually have a history with the developer or the property. The trade-off for this convenience, however, is paying a higher rate than traditional lenders. It is important to research these lenders just as you did with the developer or operator of the timeshare. Ensure that the institution can withstand financial downturns, so you don't get caught having to pay the loan off early. Also, interest rates can be significantly higher than traditional lender rates, sometimes higher than credit card rates.

3. Timeshare Lending Specialists – There are lenders who only finance timeshares, offering loans anywhere from $4,000 to $100,000 or more. Some offer repayment terms up to 120 months. These lenders must abide by federal and state regulations, but – again – make sure you investigate their history and lending requirements before agreeing on a loan.

Owners must traditionally contribute at least 10% toward the purchase price in order to obtain financing. According to a 1997 survey conducted by ARDA, roughly four out of five resort developers required a minimum of 10% down. If an owner pays more up front, experts say, they put themselves in a better position if it comes time to sell (discussed in Module 11), as they traditionally receive less than what they paid for the timeshare. The less you owe on it, the lower you can set your resale price and still cover your outstanding obligations.

Timeshare financing is usually done with fixed-rate loans, and rates are higher than average home mortgage rates. The ARDA survey also revealed that half of the respondents claimed charging rates of 13-15%, with some higher than 17%. Repayment periods are generally shorter, more in the four- to eight-year range, rather than the traditional 15-plus year loan periods.

The good news is: there are rarely prepayment penalties for early payoff. Many times you can repay the loan with an equity loan or second mortgage on your home. The earlier an owner repays the loan, the quicker the savings over traditional vacations are realized.

As with any purchase, buyers should review all documents and clearly understand all fees, rates and repayment terms contained within. If possible, have a qualified professional review any documentation.

The tax implications of a timeshare purchase should be considered as well. The type you own, how it's paid for, whether you rent it out – all these factors can affect your tax returns. Additionally, each state or local municipality has its own rules regarding timeshare taxations. Before signing an agreement, consult with a qualified tax professional to understand your exact position and the effect of a potential purchase.

There are some general guidelines to keep in mind:

Ø Property Taxes

If you hold a deeded timeshare, you will generally pay property taxes on your home unit. Many times this will be included in a maintenance fee. This occurs when the facility is billed from its municipality, but each timeshare owner is assessed individually. Sometimes a timeshare owner will be billed directly. Other times, when the property is assessed as one tax parcel, the facility owner will bear the tax burden, and owners will have no property tax to pay. In these cases, owners are not eligible for tax deductions on property taxes paid. Municipalities vary in assessment procedures, so check with your local tax finance authorities and the operator to determine your obligations.

Interested in learning more? Why not take an online Timeshare Basics course?

The maintenance fee owners pay is generally not deductible. However, the portion of your maintenance fee allocated to property taxes is deductible on your tax return, if the timeshare qualifies as a vacation home according to the IRS and the taxes are itemized on your monthly invoices. Utilities, special assessments and service charges are not deductible, however. Also, RTUs or vacation plans (points program) are different, because they are considered personal property and require no property taxes, so owners aren't responsible for property taxes. In any case, if property tax expenses are not clearly defined (as in a tax bill or timeshare statement), owners are not eligible to deduct the expense.

Ø Mortgage Interest Charges

Many owners finance the purchase of a timeshare. With prices averaging $18,000, it is no surprise that buyers obtain loans or mortgages to defray the upfront cost. When the timeshare is deeded, the IRS allows for interest paid on the loan to be deducted against income taxes. There are restrictions, however. For instance, filers are only allowed to deduct interest expense on two homes: your primary residence and one additional vacation "home" per year. Even if you have no interest expense on your primary house, you can only choose one other loan from which to deduct the expense. Additionally, if you have loans on more than one timeshare, you are eligible to deduct interest on only one.

In order to deduct interest expenses, the loan must be secured by the financed property. If you pay any portion of the purchase price with secondary credit, like a credit card, that portion is not eligible for a deduction. Points programs also do not qualify for the deduction, as there is no real property to assess. Owners who finance through developers often find they are ineligible for this deduction because the loan is not secured by the property.

Ø Renting Your Unit

If an owner chooses to rent his interval, there could be some tax implications. Filers must claim all rental income for the year. This allows owners to deduct certain expenses like advertising, rental commissions, repairs, depreciation and even the maintenance fee, in some cases. "Vacation home" tax rules have restrictions, however; in particular, only rental income for a maximum of 15 days per year is allowed to be excluded. Accordingly, owners must occupy the unit for a minimum of 15 days per year as well in order to have the property qualify. This makes renting a unit for a tax advantage a rare benefit. Few owners hold at least four weeks at the same resort.

Tax laws generally prohibit rental losses. If your expenses outweigh your income, you cannot claim losses if rental periods are seven days or less. Since your interval is typically seven days or less per year, you're unable to claim a loss.

If you offer the use of your timeshare for business-related "entertaining", you cannot deduct that interval as a business expense.
A developer takes a piece of property and converts it into timeshare units. Development can take place on undeveloped land or in an existing building. The developer typically designs the property, files required plans with local jurisdictions, and manages construction, landscaping and other property enhancements. Larger development companies include Trendwest, Fairfield Resorts, Marriott Vacation Club International, Disney Vacation Club and Hilton Grand Vacations. Most developers control multiple properties, an element which provides buyers with an array of choices under one operator.

Resort Management CompaniesOnce properties are operational, developers may engage a timeshare management company to run the day-to-day functions at the resort. Many development companies have their own management arm, so if a buyer purchases an undeveloped unit, there is a seamless transition once the building is opened. If issues arise regarding a unit, the management company handles the situation.
Timeshare Sales Agents
Since the dawn of timeshares, there has been a group focused on selling this type of property. In the early days most resorts engaged in selling their own properties. Then – as interval owners began unloading their unwanted plans – a new collection of resellers were born: brokers who had no direct affiliation with a resort. Now, this group facilitates a considerable number of transactions each year.

There are several agencies with an online presence, so buyers and sellers can broker a deal without sitting down with a sales agent. Some have long histories in the business; if an agency does not have a lot of experience, make sure to investigate the agency as much as you can. Though the industry has improved its image, and most agents and developers are reputable, there still exists a small percentage who use unethical – and potentially illegal - tactics to get you to buy. Most traditional real estate brokers will not list timeshares; however, some may list deeded properties.

Founded in 1969, the American Resort Development Association is a collection of over 1000 corporate entities with interests in the timeshare industry. Its website, www.ARDA.org, states the primary focuses of the organization as:

· advocacy regarding legislative and other issues

· networking among members

· business partnership/bridge-building with related or complementary industries in the US or overseas

· providing outreach and knowledge sharing with audiences of all types

· providing education about timeshare legal, governmental, ethical and other issues

There are some resources which can be helpful in the research you conduct. The group holds regional meetings and an annual convention. Though most members appear to support resort owners and management companies, as a timeshare owner you may be eligible for some protections and rights that the organization has backed.Exchange Companies
The concept of timeshare exchange grew out of the late 1960s, with two major players evolving from the start. Resort Condominiums International (RCI) and Interval International (II) are the dominant exchange companies, followed by an increasing number of independent agencies. Both RCI and II are affiliated with some of the most recognized resorts in the world.

RCI handles exchanges among Wyndham, Fairfield and Trendwest properties. It is the oldest and largest exchange company in the world. Agents deal with over 3,000 resorts in 85 countries, according to industry sources.

II manages trades between Marriott, Carlson and Hyatt resorts. Founded in 1976, it is the second oldest agency and now serves two million members. The company website states that II works with over 2,200 resorts worldwide.

As a growing number of owners sought alternatives to dealing with only two companies, several independent operations opened during the late 1970s. The flexibility of trading among unaffiliated resorts - along with dissatisfaction with the policies and fees of the "big two" – made independent exchanges attractive to owners, so more small exchanges have been opening over the past fifteen years.

Exchange companies do not own the properties they deal with. They manage a bank of "deposited" intervals at various properties, among which owners may choose to stay at instead of at their own resort. The company is basically a computerized reservation system. This service requires a membership fee and is considered a separate purchase when you buy your timeshare. We'll discuss exchanging in detail in Module IX.
Timeshare Media
The industry has spawned more than a few media outlets. Internet sites, magazines and discussion forums are a few examples of timeshare-related vehicles where information is shared. Periodicals like The Timeshare Beat cover the industry as newspaper-style journalists, whereby Vacation World focuses on issues surrounding ownership. Both RCI and II produce magazines covering exchanges and ownership topics, but are generally geared towards their members (though information contained can be useful to any prospective buyer). The ARDA also publishes its own industry periodicals. Some of the timeshare publications are structured as guidebooks; others are filled with real ownership stories and personal experiences.

The Internet provides an uncensored media environment, where owners, experts and timeshare professionals can voice their concerns, complaints and observations. Several sites host forums to stimulate discussion, while several weblogs ("blogs") exist primarily to discuss timeshare ownership. Many times you will learn firsthand what other owners are experiencing, and a buyer can ask questions online.

Regulatory and Governmental Bodies
In the US, the federal governmental agency which protects consumers from unethical, illegal or deceptive practices is the Federal Trade Commission (FTC). Improper sales of timeshares within US borders should be reported to the Bureau of Consumer Protection, which is a division of the FTC. Although it is working with consumer protection groups across the globe, the FTC cannot enforce domestic regulations internationally. However, sales through the Internet have become more targeted under international agreements.
As mentioned previously, each state has its own laws regarding timeshare operations. The State Attorney General's Office in the state you live in will typically enforce its own regulations affecting business practices within the state on behalf of consumers. This can involve promotional activities, development plans and financial accounting practices. Many states have a Real Estate Commission that oversees timeshare activities. States now list regulations online, so buyers and owners can usually review for themselves what the law states regarding their situations.Finally, there are the Homeowner's Associations (HOA) which govern property activities. Buyers must typically review at least part of HOA regulations prior to purchase. Many times these acts will be a part of a state's condominium laws governing different types of cooperative living operations.