For the purposes of the discussion of purchasing a timeshare, it’s assumed that you are familiar with the resort and its amenities and desire to vacation there annually or at least vacation annually in other timeshare resorts in the chain. This section is simply outlines what you need to do once you’ve made the decision to purchase a specific timeshare.
Due Diligence
The first consideration is that you want to get a timeshare that has no liabilities. If the timeshares was used as collateral for a loan, the loan is a liability. If the taxes on the timeshare have not been paid, the taxes are liability. If the annual maintenance on the timeshares is delinquent, that’s a liability. If this year’s maintenance is not yet due and is not yet been paid, that’s not a liability yet but will be soon. The seller could have liens for unpaid income tax or judgments on record, which are liabilities. If a vendor or other creditor of the resort has recorded a finance obligation against the timeshare resort or HOA, that may be a liability. If the owner has judgments recorded against him or her, those may be liabilities.
Real Estate
In other words, there are many opportunities for liabilities. For real estate, the liability question is answered by a title report. The title company guarantees that there are no liabilities against the property except those which it lists. If none are listed, the property is free and clear.
If there are liabilities against the property, you can usually find the recorded legal documents to determine exactly what those liabilities are, and the title insurance company will typically provide you with copies. Title insurance for individual transactions for timeshares typically cost between $300 and $600 (or higher for expensive timeshares). That’s a substantial transaction burden, and many people find a way to work around it.
How can you work around it? First, you should have a purchase contract that states that the property is free and clear and lists any exceptions (liabilities). At least, that makes it clear that the seller is legally responsible for such liabilities. Second, you should check the seller’s reputation where possible to determine whether the seller is trustworthy or not. Even though the seller may be trustworthy, however, there may be liabilities against property that the seller does not know about. Third, you can contact the resort to see whether there are any liabilities against the property. The resort can tell you of any unpaid assessments or maintenance fees. The resort developer can also tell you of any loans made by the resort that that are secured by the property and remain unpaid (e.g., purchase money mortgage).
Resort developers sometimes sell their loans to third parties. Thus, a loan originally made to the seller to buy the timeshare maybe no longer be collected by the resort, and the resort will not know whether it’s been paid or not. In addition, any lender can loan money to a person and take the timeshare as collateral. For real estate this will show up in the records.
There are two ways to avoid most of these liabilities. First, buy from a resort. Most of the resorts are large corporate entities and are reputable and safe sellers. Second, purchase title insurance. The title insurance company is liable for liabilities that the title insurance company did not list on the title report. The title company will have to pay them off. Third, buy from a reputable broker or reseller who is honest and knowledgeable in timeshare transactions.
Personal Property
If a timeshare is not an interest in real estate, it’s personal property. Liabilities against personal property are not accounted for in the local real estate recording system. They are governed by the Uniform Commercial Code (UCC). This is a complex area of the law which only attorneys can navigate well. However the resort (the entity that sells the private property interests) can provide you with information that covers most of the liability issues.
Yet, it’s still possible for an individual to use his membership or other interests in the timeshare resort as collateral for a loan. In such a case, you may be put on notice of such a loan by a UCC financing statement filed with the state. There is no title insurance company to back you up here, and dealing with the UCC is an attorney’s job. Thus, your only choices are to take the risk that there is not a loan against the personal property, or hire an attorney to figure it out for you.
How high is the risk? No self-respecting banker would make a loan based on using a membership in a timeshare resort as collateral. Yet, I’m sure it’s been done. All in all, I think there are plenty of risks dealing with a timeshare resort based upon memberships rather than on real estate, and this is just one of them.
Acceptance of Risk
If you do not get assurance (or insurance) that the timeshare you wish to purchase is free and clear, you need to assess the risk to determine whether to buy regardless. Read Chapter 15 for more details.
List
Here’s a short list of due diligence concerns:
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Legal Documents
The closing firm should take care of most of the documents required for a transfer of ownership. The one legal document you will need is a contract to purchase. Find one on the internet, fill in the blanks, and get the seller to sign it. Chapter 14 covers negotiation.
Closing
Unless you buy from a resort developer or a professional reseller with a good reputation, be sure to close your purchase transaction via a professional timeshare closing firm or reputable firm that does timeshare closings routinely.
Easy Purchase
Normally to buy a prime timeshare you will have to pay between $500 and $5000. (You don’t have to pay that much during economic downturns. You can buy a good timeshare for peanuts at a variety of websites such as eBay. The nominal cost will be between $25 and $200.) In addition, you will have closing costs which could be anywhere from $300 to $900. Considering that such timeshares originally sold between $15,000 and $35,000, such timeshares are a real bargain and offer you the chance to pick up real estate with great benefits to you at a low cost.
Where can you get timeshares at such a low cost? Do a Google search and find out. There are a number of websites where you can purchase timeshares very inexpensively. You might also advertise to buy a timeshare at the various places on the web where you can place a free or inexpensive ad. Be prepared to have a lot of people who want to unload their timeshare contact you.
Timeshares are all the same whether you purchase from the resort developer or you purchase from an individual who originally purchased from the resort developer. There may be more benefits, however, if you buy from the resort developer. Are the benefits are worth the extra money? You will want to get the information necessary to answering such a question.
Never ever buy a timeshare on installment contract. Whatever the promissory note is worth, the timeshare is worth much less, and you can imagine how hard it will be to sell a timeshare encumbered by a note someday when you need to sell. It’s difficult enough to sell one that’s free and clear.
Another way to buy timeshare is to buy one in the locale of the resort. You will often find a real estate broker in the resort locale who makes a market in timeshares. Typically a broker charges $1,500 (minimum) in commissions, so the minimum price you pay for such a timeshare is $1,500 cash.
There are some timeshares resorts that are so popular the timeshares maintain a reasonable value. If you buy a timeshare at such a place, you may not be able to find a bargain purchase, and the best price you will be able get is probably buying through a local broker. There’s always the chance, of course, that you can find such a timeshare on the internet for a bargain price if you wait long enough. But such timeshares are often few and far between and tend to be in the most desirable locations or in the high-end timeshare resorts.
Closing
When you buy a timeshare make sure the transaction closes properly. You should use to a timeshare closing service which offers an escrow closing. This will cost several hundred dollars, but it’s your assurance the closing will be done properly.
A deed has to be signed and recorded. If the timeshare is not an interest in real estate and instead is an interest in a vacation club (or comparable organization), you will still need some kind of a transfer document that needs to be filed with the resort. Timeshare closers take care of all this for you. But the only way you can make sure that a timeshare is free and clear of liabilities is to get a title commitment (report).
A title policy on a timeshare going to cost several hundred dollars. You have to decide whether the risk is worth it or not to forgo getting title insurance. You can find out from the timeshare resort whether a particular timeshare has encumbrances against it that benefit the resort. However, the resort cannot tell you whether the timeshare is encumbered by a note to third-party, such as the seller’s bank. For that, you’ll need a title commitment.
Generally speaking, if you do your checking properly as outlined in this chapter, your risk will be lower that there are encumbrances against it than if you don’t bother to do any checking it all. But in the end, your best assurance is title insurance (for real estate).
