How Timeshare Works
While the timeshare concept might be straightforward, the process by which it is turned into reality is somewhat more complex. The box below illustrates the principle stages in the chain that turns the concept into a product. Individual companies might undertake more than one of these activities – for example developers may market and operate their properties.
Timeshare resort developers
Timeshare developers have the principal responsibility for shaping the development of the timeshare scheme as they take the decisions which establish the characteristics of their resorts and, in most cases, the way in which they will be run. As well as arranging their own project financing, developers may also typically put in place consumer finance facilities.
Once the resort is ready for sale, the developer puts in place a mechanism to protect timeshare owners’ rights according to the legal framework of the country where the development is located.
In the United Kingdom, for example, there are typically two principal parts to the package of rights which the developer puts in place.
The first part is the management agreement for the resort. This agreement provides for the smooth running of the resort on behalf of the members. It sets out the means by which the budget is fixed and approved and the relationship between an owners’ committee (if created) and the management company.
The second part relates to the relationship between the timeshare owners and the developer. Timeshare owners own rights to use their apartment, as opposed to owning the apartment itself. Legal ownership is typically vested in a trust company. The developer hands over all rights to the property to the trustee in exchange for membership certificates in each unit. The trustee then holds the property and protects it on behalf of the owners. The third party owners receive a membership certificate in exchange for their contracted payment and this certificate gives them occupancy rights in the property and membership of the club.
In most other European countries, however, the principal mechanism for transferring rights is for the developer to contract with the timeshare consumer via a notary. The notary checks the legal validity of the agreement which transfers the ownership rights to the timeshare from the developer to the consumer. In Spain, for example, a refined legal system has been put in place. The rotational rights scheme is based on the sale of real rights, rather than property based rights.
Whatever legal rules apply, RDO members ensure that the consumers’ rights are well protected so that they can enjoy their timeshare, in confidence, over time.
Marketing and Sales
Timeshare is a relatively complex and high-value product when compared to a traditional package holiday. As consumers want to buy a holiday experience, and not a complicated product, the marketing challenge for the timeshare industry is to persuade consumers to take the time to understand timeshare and the high-quality holiday experience that it offers. For the developer, this challenge is compounded by the volume of sales needed at each development: every apartment needs to be sold roughly fifty times – once for every week that it can be used.
The need to convey information means that the marketing process has tended to be focused principally around direct marketing and one-to-one sales. Particular campaigns are often based around incentives to encourage prospective purchasers to visit developments or attend sales presentations.
This is an effective technique when done well; but the industry has, in the past, been criticised for adopting high-pressure sales techniques which have undermined the image of the industry. In Europe, a combination of legislation by the EU and individual member states has put consumer safeguards in place. Equally importantly, RDO has a tough ethical code which protects timeshare consumers’ rights.
Management and maintenance
Once a resort has been completed, its management can either be carried out by an owners’ committee, a specialist management company or the developer itself. Whatever the arrangements, the management organisation will levy annual fees on timeshare owners which typically cover cleaning and maintenance; utility charges; insurance; taxes; the operation of common facilities (such as tennis courts or swimming pools); and, usually, a sinking fund to provide for major redecoration or refurbishment. The resort’s constitution also gives details of the owners rights and responsibilities in relation to their occupancy rights.
Management organisations need to work closely with exchange companies, so that the resort’s capacity is effectively utilised and its members have the maximum flexibility when choosing their holidays both at their resort and elsewhere.
The role of Exchange
Exchange has become an essential part of the timeshare product. The Exchange companies are like brokers between consumers. They give timeshare owners the ability to swap their timeshare for another – at a different time, location or both – with the confidence that they will receive another high-quality holiday.
The two principal exchange companies are Resort Condominiums International (RCI) and Interval International (II). Almost all timeshare resorts choose to affiliate with one of these companies. Typically a timeshare purchaser in an affiliated resort joins the exchange company automatically at the time of purchase. Their exchange company then acts like a timeshare bank. If the consumer chooses not to use the week they have bought, they deposit it with the exchange company and can subsequently withdraw equivalent weeks – at other times and/or at other resorts – which have been deposited by other members.
The exchange companies use sophisticated computer systems to match demand with supply, establishing the "value" of different weeks in different resorts. Weeks are rated according to a variety of factors, such as size of unit, duration of stay, seasonality, resort location and quality and so forth. The value of the weeks, established according to the factors mentioned, can be measured in “points”. Those represent a symbolic measurement related to a timeshare ownership. Points are used by some developers for internal exchange. Exchange companies use points to simplify external exchange.
The exchange companies also offer their members flights, car rentals and travel insurance alongside attractively discounted travel packages through their travel clubs. Fuelled by the year-round flow of members who need airline tickets and rental cars for travel, these travel agencies have been able to secure extremely competitive rates from suppliers of travel services.
As well as facilitating specific transactions, the exchange companies are a powerful force for ensuring quality levels throughout the industry, as they can act to penalise resorts which are unsatisfactory. As substantial companies with a clear interest in the reputation of the sector, they have also been at the forefront of forming national and international trade associations – such as RDO.
Timeshare owners typically have the right to sell or rent their timeshare, and to include it in their estate. Any exceptions to this presumption should be clearly stated in the scheme documentation. However purchasers should be clear that timeshare is not a real estate investment. It may have a resale value, but it is more akin to a club membership purchased to use and enjoy, and should be justified on that basis.
Some resorts operate their own resale programme. Another alternative is listing with a resale agency specialising in timeshare sales. Resales are now covered under the same Directive as timeshare and companies must provide a 14 day cooling off period. Deposit taking is now prohibited.
Today there are 6,7 million satisfied timeshare families world-wide. But like any new, fast-growing sector its reputation has suffered at the hands of irresponsible operators who have used high-pressure sales techniques or simply failed to explain accurately the nature of the timeshare product.
As the industry has matured, it has taken collective action to raise standards. National trade organisations in Europe have been brought together by the Resort Development Organisation (RDO). The exchange companies set minimum quality thresholds whilst consumer legislation, by both the EU and individual member states, has introduced consumer rights including a cooling-off period, whereby consumers can change their mind within a specified period of time. RDO advises consumers of their rights and stresses the importance of choosing a reputable company – all RDO members have to follow a code of ethics which offers greater safeguards than the law demands.
Timeshare is becoming an integral part of the Travel and Tourism industry with major hospitality and travel companies active on the European market such as Starwood, Marriott, De Vere, Pierre & Vacances, Thomas Cook and Hilton.
Branding is becoming more important, as leading operators develop, or use existing, brands to signal the credibility of their products.
Segmentation is also increasing as the industry becomes more transparent in terms of resort quality levels – reflecting the different quality levels found in the hotel sector.
Vacation Clubs & Points Systems
The need for more flexible holidays, such as short breaks, has recently seen the emergence of vacation clubs (also known as Points systems). Consumers buy points instead of a conventional timeshare week, which can be exchanged for holidays at a different time, length of stay and resort every year.
From the consumer’s perspective, this gives great freedom of choice. It also extends to the developer, who is able to retain the existing owners’ base and bring into the system several resorts in a variety of locations. Making vacation clubs work smoothly and efficiently requires a sophisticated management and reservation system. It is also important that there are clear and transparent rules governing the club’s operation covering, for example:
- how properties can be added or deleted from the club;
- the maintenance of a one-to-one ratio of accommodation to membership (to prevent "inflation" eroding the value of consumers’ balances); and
- a reservations system, so that consumers understand the trade-off between advance bookings and last minute flexibility.