"Time-share" ownership of vacation properties, one of the fastest-growing segments of the American real estate market, has plenty of potential pitfalls for consumers, the industry's first national survey reveals.
Time-sharers buy long-term, fractional interests in resort condominiums, or purchase "right-to-use" interests in condominiums, hotel rooms, motels and even yachts.
The new survey of this investment method, conducted by a Washington-based industry group, the American Land Development Association, generally gives time-sharing high marks as a solution to the high cost of leisure property. But it also documents problems with the concept, seen through the eyes of developers and state and federal regulators.
Public officials surveyed for the study expressed concern that many sales agents selling time-share real estate interests are not licensed and have passed no minimal competency tests. Officials also questioned whether management plans at time-share developments have been designed for the long run.
Time-sharing works in several ways. For example, a buyer might purchase a one-week, time-share interest in a Sanibel Island, Fla., beach resort for $5,000 in cash, or a two-week right-to-use interest in a Colorado ski resort for $7,000.
A time-share or fractional condominium interest may define a specific period - such as the last week in January for the next 30 years, or the second week in August for the next 20 years - for the buyer's exclusive use. Or, the purchaser may get a "floating" interest, usable at different times during the year for a specific number of years, with times negotiated among the sharers of the unit.
The shares are all rentable or exchangeable; many unit owners swap occupancy rights with the help of nationally organized bartering groups. The Sanibel Island unit owner, for instance, might exchange his January 1980 week for a mid-December 1979 week in Utah, for a nominal brokerage cost.
However, about two dozen officials contacted by the land association for the survey questioned whether heavily used condominium units owned by disparate collections of people can be maintained properly and retain their capital value five or 10 years after the initial purchase - long after the departure of the developer.
The same officials said problems already are arising in resort developments where some of the condominium units are wholly owned and others are owned on a time-share basis. Typically, they said, owners of whole condominium units see time-share owners as transients with little interest in management or upkeep - leading to tensions between the two groups.
Developers contacted for the survey confirmed that time-share ownership entails unique problems and agreed that greater regulation at the state level would be appropriate.
More than three-fourths of the 50 resort condominium developers who responded suggested stricter regulation of sales and promotional practices; more than 70 percent agreed with the need for strict licensing rules, and nearly two-thirds agreed that buy-back or rescission rights would be appropriate during a cooling-off period following the sale.
Time-sharing of property orginated in Europe, but has grown rapidly here in the past three years. The American Land Development Association predicts that unit share sales this year will total $700 million, up from $300 million last year and about $100 million in 1977. More than 300 American resorts offer time-share interests in one form or another, ranging in price from $800 to $18,000 a week.
The problems inherent in time-sharing arise in part from the novelty of the concept in the U.S., and in part from the complexities of condominium ownership. Having fractional ownership of a condominium along with 50 other strangers who are spread around the country can lead to staggering management and legal problems.
The new industry study points out that no federal agency has taken a hard look at the time-sharing boom, and only Florida, South Carolina, New Hampshire, Utah and Colorado have regulatory procedures on the books to safeguard the rights of buyers and developers.
The land association said that a "substantial percentage" of the developers surveyed supported the idea of regulation - after the sale - of time-share management standards and exchange program operations.
Other findings of the survey:
Nearly 20 percent of all resorts using the time-share condominium approach find themselves under pressure from local property tax assessors because of the huge increase in values resulting from their ownership format.
A condominium that would sell "whole" for $80,000, for instance, might be chopped into 50 weekly time-share units selling for an average of $4,300 per unit. The aggregate retail sales price of the 50 shares could amount to $215,000 - a fact that is not lost on assessors. Ultimately this tax jump will increase costs to each fractional owner.
More than half of all time-sharers pay cash, but more than three-quarters of the buyers of less expensive "right-to-use" units finance them - often through the developer. Typical terms for borrowers in ownership units were 20 percent down with six-year loans at 10 percent interest. Right-to-use purchasers typically paid 20 percent down, with loans for 4.4 years at 11 percent.
The average weekly maintenance fee - aside from financing, tax and other costs - for time-share units runs about $100, and about $87 in right-to-use resort units.
Kenneth R. Harney is executive editor of the Housing and Development Reporter, published by BNA, Inc., and author of Beating Inflation With Real Estate, published by Random House.