Thinking About Buying a Vacation Condo? The Nuts and Bolts of Time-Shares V. Condo-Hotels

Thinking About Buying a Vacation Condo?

With warmer days arriving at last, thoughts turn to lazy summer days in a beachside house. But what's the best way to secure your spot on the beach if you don't want the hassles of full-time ownership? Condo-hotels and time-shares are two popular vacation home options, each with their own benefits and drawbacks.

Before signing on the dotted line for either, it's essential to understand exactly what you're purchasing.

The Two Options

Both condo-hotels and time-shares share a number of features, in that both are sold fully furnished and come with access to amenities, like a pool, exercise facility, and parking. Condo-hotel purchasers who invest in a five-star hotel typically have access to more upscale amenities, such as onsite dining, room service, and a full-service spa.

The differences between condo- hotels and time-shares are more numerous, including their investment potential, flexibility of use, and the type of ownership involved.

Condo-Hotels

Condo-hotels, which are also known as condotels, are hotel rooms inside a fully functioning hotel. Condotel owners who want to spend time in their units must call and make a reservation, just like prospective hotel guests. When not staying in their condotel unit, most owners put their unit in the on-site rental program.

If they choose to rent their units, condotel owners rely on the on-site rental/management office to handle booking the room, checking in the guest, and cleaning up before and after. In exchange, the condotel management office collects anywhere from 30 to 70 percent of the overnight fee.

Time-Shares

Time-share owners purchase a real condominium, but only for their allotted week during the year. The advantage to a time-share arrangement is that the owner has the opportunity to exchange not only their week but also the location in which they will stay, particularly if their unit is part of a large time-share network like RCI (Resort Condominiums International), a worldwide corporation with North American offices in Road Carmel, Indiana.

The ability to trade both weeks and locations is dependent upon the desirability of the purchased time-share, which is often expressed in "points." A week in Orlando, Florida, during mid-winter would be worth more points, and have a higher trading value, than a week in the same location in July, when vacationers seek out northern climates. Similarly, a time-share's value in Vermont or New Hampshire peaks during ski season and goes downhill as the snow melts.

How to Decide Between the Two

A large part of the decision to buy a time-share or a condotel depends on the prospective purchaser's means and goals, both financial and otherwise. Condotels cost much more than time-shares, and the latter offer a better value for vacationers of lesser means who aren't concerned with investment potential.

"The value proposition of a time-share comes from its use," says Howard Nusbaum, president of the American Resort Development Association (ARDA), a Washington D.C.-based non-profit that educates and advocates for time-shares. "A time-share is a use product; it's really prepaid vacations. You're buying tomorrow's vacations at today's prices."

The value of a time-share is apparent when comparing it to staying in a hotel in the same resort area over 10 years, says Nusbaum. For example, he says, the average one-time price of a two-bedroom time-share week near Disney World, a ski slope, or a golf course is now slightly less than $15,000, and its average annual maintenance fee is $500. Over the course of 10 years, the time-share owner would spend $20,000 for "one week in a two-bedroom time-share that includes a very upscale, screened-in porch, equipped kitchen with stainless steel appliances and granite countertops, flat-screen TVs, and a Jacuzzi in the master suite," says Nusbaum.

By comparison, he says, a stay in a comparable hotel would cost $600 a night, multiplied by seven nights. At that rate, the hotel version of the vacation would cost the same vacationer $42,000 over the same 10 years.

In addition, the time-share owner enjoys a more comfortable stay and ends up saving money on the costs of meals, says Nusbaum. "The time-share owner has a dining table and an equipped kitchen. They probably have breakfast in the unit, and they might cook in a couple of nights. They aren't eating pizza on a bed. They're sitting at a table enjoying their family time," he says. "The person renting the hotel room would have food costs that were substantially higher because they are going to eat 21 meals [in a restaurant] during a seven-day period."

A final calculation involves proceeds from the sale of the time-share, should the owner have a change in life circumstances and decide that the time-share no longer works for them. Nusbaum acknowledges that most time-shares lose substantial value over time. But even with the $20,000 time-share depreciating substantially over a decade, Nusbaum says it could still be sold for $5,000, reducing the cost of 10 years of vacation to $15,000—compared to $42,000 for 10 years of staying in equivalent hotels.

In contrast to time-shares, condotels have a decent chance of appreciating and even making enough money to cover their operating expenses. But the typical cost of purchasing a condotel is much higher. Maintenance fees are also higher because there are not 51 other co-unit owners with whom to share expenses.

Joel Greene, president of the Condo Hotel Center in North Miami, Florida, says typical condo-hotel rooms in four- or five-star properties go for "a minimum" of $250,000 to $300,000 and can "easily get up to $1.5 million or more."

"There's a difference in the economic background of the buyers who are looking to buy a time-share vacation versus [the buyer who is interested in] a condo-hotel room that could serve as an investment," he says.

While condotels can often be good investments, Greene says the U. S. Securities and Exchange Commission (SEC) forbids developers from talking up their potential. "[Developers] may not sell the investment aspect of a condo-hotel. All they can sell is the real estate and the lifestyle. You can talk about the services, the location, and the pride of ownership and the potential for real estate appreciation. They cannot get into a discussion of tax implications, profits, and loss and income expenses, occupancy expectations—anything that sounds like they're trying to tell the buyer they'll get a nice little revenue if they make this purchase."

Although condotels in desirable locations often generate income for their owners, Greene advises prospective owners to consider condotels as revenue-neutral.

"Condo-hotels in general are designed to break even, to cover the costs of most if not all your expenses, but not typically to provide a cash flow. They may provide a cash flow if you get the right property, the right market, and a good economy."

But the potential for income from condo-hotels also comes with a risk factor, warns Greene. "You are buying a one-room hotel which you own, and you are subject to anything and everything that can go wrong with hotel ownership—the warm winter up north, the gas prices, the threat of hurricanes, the threat of terrorism, competition."

The increased risk factor inherent in a condo-hotel is balanced by the fact that they almost always appreciate on par with conventional condominiums, says Greene.

"In general, [condo-hotels] will [re]sell every bit as effectively or as well as condominium units on the market," says Greene.

The downside of a condotel is that although the units have a greater potential to earn income and appreciate, they do not share the flexibility of a time-share, which can be traded for other locations, says Greene.

Condo-hotel owners have the flexibility of easily changing their use dates, but they are typically required to put their unit in the rental pool for at least 11 months of the year. They are also usually required to give the hotel some advance notice if they decide to change the dates that they intend to use the unit, he says.

Whether it's a condotel or a time-share, Nusbaum only sees a growing market for vacation homes and the accompanying experience, especially among Baby Boomers.

"Baby Boomers are moving from full time work into leisure time. They have more affluence than their parents, they don't have a Depression-era mentality," says Nusbaum. "They're not sitting on a porch watching the fish go by, they want to experience life."

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