Consumers have been subjected to a lot of misinformation about the timeshare industry, and have been sold the concept that the timeshare or resort membership company is the one that is providing an exceptional service to consumers. A significantly discounted opportunity to enjoy more vacations, for less money. The reality is that timeshares are expensive and they only increase in cost over time.
In truth, we know that for most Americans, a timeshare does not open a door to affordable travel. Instead, it commits them to an unyielding legal long-term contract, that becomes costlier as each year passes. A non-flexible contract that remains a constant liability, no matter how the owner’s financial needs or circumstances change.
There is a reason why timeshares don’t simply build units and sell them outright, as deeded properties to consumers, the way that condominium residences are sold. The entire life cycle of a timeshare involves making profit from multiple owners, over a long period. Why get a one-time sale, when you can constantly exploit timeshare owners to pay more than operational costs, and profit from increasing administrative fees? It sounds like a fantastic deal (but only for the resort).
How Much Does the Timeshare Industry Make Annually?
The timeshare industry, even during years of economic hardship for American consumers, consistently makes billions of dollars of profit annually. There is an interesting parallel within the industry; the more the American economy struggles with job loss, unemployment, and consumer debt, the easier it is to sell a timeshare as an ‘affordable vacation option’.
The American Resort Development Association (ARDA) reported that 2013 was a record breaking year for the U.S. based timeshare industry. The United States gross domestic product only grew by 3.2% for that year, but the timeshare industry posted a sales volume increase of just over 11% and gross sales of $7.6 billion dollars, almost four times the growth rate of the entire American economy.
Are you surprised by this figure? If America slow to recover post-recession, and consumers are facing the financial insecurities of a weak global and domestic economy, why would they want to sign up for a long-term lease with virtually no options? Why would the average consumer want to add yet another monthly financial obligation?
The truth is that when the economy is not performing, and Americans feel skeptical about their ability to afford vacations, the “low cost” proposition of owning a timeshare becomes even more appealing. Many timeshare owners we have met were virtually 100% certain that they were going to use all their allocated time for vacations. After the fourth year of ownership, occupancy rates fall significantly, as people become either bored with the resort, or because they have found the monthly or quarterly payments to be a burden; one that makes affording air travel even more difficult.
In January of 2016, there were approximately 9 million timeshare owners residing in the United States, an increase of roughly 25% since 2010. The harder it is for Americans to save money for a prepaid vacation, the easier it becomes to sell timeshares.
How Consumers Fall Into The Inventory Recapture Model
What if someone told you that many timeshare resorts are hoping you will default on your regular membership and maintenance fees, because they will make more money? It doesn’t sound morally right, but it is completely legal.
When a timeshare is initially sold, there is an upfront balloon payment that can average $10,000 to more than $50,000 depending on the property. That is a high-profit payment that helps timeshares continue to build, operate and maintain the resort (in addition to revenues from fees). However, if a timeshare owner defaults on those fees, or enters litigation with the resort to “buy back” a timeshare that is in financial arrears, the resort has a new opportunity to make more money on the same timeshare.
Here is how it works:
The timeshare owner falls behind on payments (maintenance and membership fees).
The timeshare owner indicates that they “want out” of their contract.
The resort (if they have a recapture program in place) will offer a substantially lower than market value payment to buy back the contract. For instance, if an owner paid $30,000 up front, and fees for ten years, the resort may offer 50% of the net initial investment ($15,000) to the owner.
The owner accepts the low rate of buyout and transfers the timeshare title back to the resort.
The resort resells the timeshare for $30,000 and makes a $15,000 profit (while recruiting another individual or family into the fee revenue pool).
In the timeshare industry, unscrupulous and fraudulent practices can take place, that funnel customers into an inventory recapture to improve profitability. All a resort must do is start raising fees disproportionately to earn more income, and create affordability issues for current customers. The fine print in every timeshare contract indicates that maintenance fees can be increased at the discretion of the resort (or basically, anytime they feel like it, as long as they can provide a reason in writing to resort members).
When the timeshare becomes impossible to afford, consumers willingly want to turn over their timeshare, and recoup even the most nominal amount of their investment. The timeshare wins, with a new collection of inventory they can resell, at a premium price, and the consumer loses years of expenses paying into a vacation property they will never actually own.
Now that we have explained how timeshares run the profit center that makes the business so lucrative for resorts, you can understand why most financial advisors and experts caution against buying one. It is really like playing a game of cards, where the deck is stacked against you. Thankfully the Federal Trade Commission has been active with investigating complaints, and tracking down fraudulent offenders in the timeshare industry, while helping to educate consumers about the pitfalls of owning at timeshare.
Learn more about your options as a timeshare owner. If you are ready to get a fresh financial start and cancel your timeshare, call us at 1-800-587-EXIT for your free consultation. Our client care staff are ready to help.