Due Diligence. Should you sign up for time shares?

Software engineer Ashish and his wife Sonal are almost sold on the idea of buying a time share, which will allow them annual vacations at subsidised rates, for a one-time down payment. While the thought is exciting, given the large sums involved, you need to weigh the pros and cons before signing up for time shares.

Time share is a form of vacation ownership, where one purchases the right to use a resort for a specified number of days each year, for a certain number of years.

If you buy a time share at Club Mahindra, for instance, you are entitled to a week’s vacation (seven nights) every year for the next 25 years. For each vacation, you can choose from over 40 resorts in India and abroad. In the case of Sterling Holidays, you have a choice of 24 resorts. But the main attraction that draws many people to time shares is the prospect of taking regular vacations for the next 25 years at today’s costs. Hence, while resort and hotel room rates increase every year, your vacations are hedged against inflation, or so many players assure you.

First, to become a member, you have to pay a one-time membership charge. This upfront payment can vary depending on the type of accommodation and time of the year when you plan to take your holidays.

For instance, Sterling Holidays offers a 25-year membership for a price range of ₹1.98 lakh-13.5 lakh. Club Mahindra’s membership fees range from ₹2.25 lakh to 17.5 lakh.

Aside of a large upfront payment, you also have to foot the bill for the upkeep of the property, staff salaries and utility charges by paying an annual maintenance fee. This isn’t inflation-protected. Club Mahindra charges ₹11,000-25,000 per year. But your annual fees are likely to be revised every year. Club Mahindra’s annual fee is benchmarked against WPI/CPI and revised every year.

Let us assume that you take the basic ₹1.98 lakh membership which entitles you to a basic room which, for non-members, costs ₹5,000 a day. Assuming an annual increase of 5 per cent in both room tariff and annual fees of ₹11,000 today, you are likely to recover your initial upfront payment in about 12 years, provided you opted for a seven-day vacation every year.

Or, to put it differently, a non-member will spend about ₹17 lakh if he takes a seven-day vacation for 25 years, while a member will spend only half that amount. But hold on. You need to consider other aspects too.

For one, to make it a worthwhile investment, you have to necessarily take vacations almost every year for 25 years. Skipping a number of years from your vacation package can push back the payback time on your initial investment.

Two, even if you know for sure that you will take a vacation every year for 25 years, and plan for it, your resort may not have rooms available for the period you choose at the specific destination.

Three, additional out-of-pocket expenses can throw your workings off track too. Then, instead of a modest 5 per cent increase in annual fees, your yearly payout may go up substantially.

Also remember that you have to pay extra for food and beverages every day during your stay.

That said, there are some pluses that are worth noting. Membership in a time share can give you access to new locations as your resort enters into new tie-ups.

For instance, Club Mahindra and Sterling Holidays both offer you international holidays through the optional Resort Condominium International (RCI) membership. RCI is a holiday exchange network which covers nearly 4,500 affiliated resorts. You simply deposit the week you own from your home resort with RCI, and then swap it for a week at another resort from RCI. But mind you, there is an exchange fee. RCI charges ₹8,000-18,000 depending on the location.

You can also split your weekly vacation or accumulate it and carry it forward to the next year. You can also gift or transfer your time-share units for a nominal fee. Sterling Holidays charges ₹1,000 for gifting and ₹3,000 (plus taxes) for transferring.

Vacation ownership assures you good quality rooms and is a cheaper way to holiday. But if you love to hop across locations and tend to plan holidays on a whim, then tying yourself down to a time share isn’t a good idea.

As time shares require you to pay large sums in advance for very long-term payoffs, go for brands that have a sound reputation and have been around for a long time, even if the membership comes at a premium.

COMMENT NOW