Timeshares: Dream vacation or money pit?

Would you like to have a wonderful vacation in a beautiful location at a reasonable price? Would you like to repeat that vacation every year? That's the pitch timeshare salespeople use to convince consumers to purchase billions of dollars worth of timeshares each year. Here's what a timeshare is and what owners can expect for their money.

Timeshares are based on the concept of fractional ownership in a property. For example, if you purchase one week at a timeshare condominium each year, you own 1/52nd portion of the unit. If you purchase one month, you own 1/12th of the unit. Other buyers purchase the remaining fractions.

There are two general schemes:

• Deeded: You purchase an ownership interest in the property.
• Non-Deeded: You lease the right to use the property for a specific amount of time each year for a preset number of years.

From there, the various ownership structures become more complex. You can purchase a fixed week, which means that you own the right to use the unit during the same week each year, or you can purchase a floating week, which generally gives you the right to use the property during a predetermined period of time. Some properties operate on a point system. These are often referred to as "vacation clubs." With these, you purchase a specific number of points that can be redeemed at a variety of destinations. Some plans let you "bank" unused points.

Cost varies by:

• Unit size
• Location
• Deed
• Brand
• Time period purchased (e.g., December versus August at a ski resort)

Timeshare properties can often feature larger and more luxurious accommodations than standard hotels and are generally located in desirable places.

When you are standing in a beautiful condominium overlooking the perfect beach and sparkling blue water, it is easy to succumb to the sales pitch. Remember, timeshare salespeople are in the business of selling. But just because they tell you that you are getting a great deal, it doesn't mean that you really are. Before you buy, take some time to research the property and talk to other timeshare owners. Don't make your decision in haste and never let the salespeople rush you.

Points-based systems come with no guarantees. Just because the salesperson tells you it's easy to trade your week for another week or your property for another property, doesn't mean it really will be easy. If you own a week in Hawaii, would you be willing to trade it for a trip to the blistering hot Las Vegas desert in August? If you wouldn't, chances are no one else will either. It's also important to remember that everybody wants to travel to the same places and on the same weeks that you do. The desirability factor aside, trading often results in an additional fee.

In addition to the monthly loan payment, which comes with a high interest rate when financed through the timeshare company, the annual maintenance fee will also set you back a few hundred dollars a year. Also, if the property needs a new roof or a new sewage line, a "one-time" assessment will be levied. Some properties also charge miscellaneous fees, such as a publication fee if you want to view other properties that may be available for trade, and additional fees if they help you sell your property.

While a lifetime of vacations sounds great, will the management company that sold you the timeshare be around three decades from now? If you are considering a timeshare in a foreign country, you must also understand the laws and know what the result will be if the timeshare management company closes.

Another major consideration is your health. That condo on the ski slopes may look great today, but five years from now when you are a caring for a baby or are suffering from a herniated disk, your days on the slopes may be over, but the bills for the timeshare will continue. Consider that your desire to hop on a plane may wane as fuel costs rise, airport security becomes more onerous and the aging process makes you less tolerant of travel.

A timeshare is not an investment. Investments are designed to appreciate in value, generate income or do both. A timeshare is unlikely to do either, despite what the salesperson says. The huge volume of used timeshares on the market, the appeal of buying new versus used, and the marketing muscle of the firms selling new timeshares all work against the idea that you will make a profit reselling your used timeshare. Thus, selling for a profit is an uphill battle considering you need to convince someone to pay more for a used unit and factor in all the fees you paid over the years.

The very nature of the sales process should be a hint about the reality of the issue. Have you ever heard of a mutual fund, municipal bond or any other investment that offered you a free weekend in Miami just for giving the product a try? A timeshare is not an investment, it's a vacation. It's also an illiquid asset that is likely to lose value over time. Ultimately, timeshares are like swimming pools, if you buy one, do so because you love the idea of owning it, not because you expect to make a profit.

If you do take the plunge, remember that you are buying a repeatable vacation. Just as spending $3,000 on a trip to an exotic beach is not an investment, neither is spending $10,000 plus maintenance fees on a timeshare.

If you have found a vacation destination that you absolutely love and want to return to every year and have decided that a timeshare is the perfect way to achieve your goal, go ahead and buy one. But buy it used. Current owners that are tired of the maintenance costs, tired of the destination, or have grown frustrated with their efforts to trade their slot so that they can visit a different destination may be willing to give their timeshares away at a fraction of the original cost. Just search "timeshare resale" and you'll see dozens of offers that will let you choose less expensive timeshares in locations from Florida to Saint Martin.

Buying used gives you all the benefits of ownership at the fraction of the cost. Even if you choose a more expensive unit, you can save money by financing your purchase with a personal loan, which should offer you an interest rate that is considerably lower than the rate the timeshare company charged the original owner.

Like any major purchase, the decision to buy into a timeshare requires careful consideration. It involves a large amount of money up front and considerable recurring costs. You should ask plenty of questions and take your time making a decision. And as the Federal Trade Commission (FTC) says in its Facts for Consumers: "You should know that the value of these options is in their use as vacation destinations, not as investments."