I was reviewing the late 1980s and 1990s craze of “investing” in timeshares, a type of investment that still exists to this day, in order to determine why these purported investments proved to be such disasters.
My assumption, as I approached the study, was that the ownership position would be structured so that people would have fee simple absolute (read: full owner) interest in a given property, except the slice of ownership position would cut across time rather than a percentage of ownership. Some states do make this harder to do than others, as the old English common law held that someone with any interest in land, even 1%, would have a right to full possession of the property at all times, and could limit have his usage limited by subsequent contract. Many states, between the 1960s or so, added statutes that specifically permitted title to vest via a timeshare arrangement.
Logically, there is no reason why this should lead to a disaster. You and someone else buy a $500,000 property in Southern California, and instead of the deed granting you each 50% ownership that would imply a full right to possession at any time, one person has the right to exclusive possession from January 1 through July 2 of a year and the other from July 3 through December 31. The proceeds from any sale, or the obligations for paying for taxes and improvements, could be negotiated and even incorporated into the deed itself. If owning the second half of the year were deemed more valuable, our two individuals could deem that the second individual pays 55% of the property taxes, home repairs, is responsible for 55% of any loans secured by the property, and then obtains 55% of the proceeds upon sale.
The point is, this could be all be the creature of contract that is incorporated into a deed, with two unique yet risks:
First, there is the issue of maintenance as it relates to wear and tear or even worse usage of the property. A never-ending shuffling of occupants makes it difficult to properly identify and hold accountable the correct party for any necessary upkeep and repairs at the property.
Second, there are issues relating to marketability of title. Most people who want to buy property want to own it outright, and do not want to take on shared owners, or only purchase a one-week or two-week interest in property.
Still, despite these concerns, the generally appreciating value of land, especially in beach or resort areas where most timeshares are offered, should theoretically be offset come sale time.
The question I wanted to uncover in my research was this: How come people who enter into a timeshare arrangement can’t sell the property a decade later at a profit, or at least at a price close to the paid value? Where are these massive losses and horror stories coming from?
The answer, I discovered, is that no title is actually passing. In nearly all instances that I have reviewed, the timeshare was not part of a vesting deed (that results in ownership) but rather was either (1) a restrictive term of years lease, or (2) a revocable license. In other words, the typical timeshare purchaser is really buying a “terminable possessory right”, meaning that you aren’t actually acquiring an ownership interest in the property but rather you are acquiring a right to possess the property for a set of period time.
In most instances, a timeshare investment is the functional equivalent of booking a hotel room on New Year’s Eve for the next twenty years at a particular location, with most of the money being paid up front. The reason why there is no payoff at the end of these transactions is because nearly all are structured as a lessee/licensee arrangement rather than as a grantee that acquires some form of title property. This brings about the ultimate consequence–no payoff during a sale at the end. This distinction results in the difference between an “investment” that fails to make money and a disastrous financial loss.