Fractional Ownership & Timeshare in Spain

Timeshare and fractional ownership are both concepts that strike fear in many people. In some cases, they should! In other cases, they can be a great way of sharing the use (and the cost) of a holiday home. What are they? How do they work? What are the dangers to look out for?

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This guide covers…

This guide deals with the ways in which you can share the ownership of property in Spain with other people – whether by way of fractional ownership or timeshare. It looks at the differences between the two and the advantages and disadvantages of each method.

This guide focuses on the timeshare and fractional ownership of real estate in Spain and doesn’t look at the their use for for cars, boats, aircraft etc. However, many of the same principles apply in these cases.

Introduction

For some people the thought of sharing the use of their property is something totally unacceptable. Read no further.

Others can see a compelling logic in sharing the use of expensive items: it reduces the cost of ownership, there is no need to worry about what is happening to the item when you’re not using it (because somebody else will be), it is often better for the item to be used regularly than left standing (houses, boats and cars all fall into this category), it is better for the environment for something that has consumed lots of materials and energy to produce to be used more intensively and – in the case of\ holiday homes in Spain and elsewhere – it is better for the local community. It is not a good thing for a community to have hundreds of homes that are left empty for a large part of the year.

All of these thoughts gave rise to the ideas of timeshare and fractional ownership.

Neither has taken off to the extent that it is completely dominant in any of the fields referred to earlier, yet both are used widely – both in Spain and worldwide. There are some 20million timeshare owners worldwide in some 5,500 resorts and the number of fractional ownership programmes increases daily.

What is the difference between fractional ownership and timeshare?

Though the differences could be somewhat confusing at first, there is a clear distinction between a fractional ownership and timeshare ownership.

In fractional ownership, the property is owned by several owners who agree between themselves how and when to use the property and share the costs of ownership. In terms of ownership, they are the rightful owners of the property.

In a most timeshare resorts, a hotel or timeshare operator is the only owner of the property, and as such, they control both the conditions and the annual cost of its use. A person buying a timeshare week would enjoy the use of it, as per the terms and conditions established by the residential complex, but he would never be the owner of the property. Nor can they decide how it should be managed or decorated or improved. Nor can they control the annual charges made for running the complex.

Fractional ownership can be seen, by the cynical, as a way of re-launching the heavily criticised concept of timeshare. This is not entirely fair.

Timeshare

When timeshare was first conceived in the early 1960s – strangely, in the UK – it expanded upon an earlier concept, popular after WW2, called vacation home sharing.

Vacation home sharing had a political and ideological basis as well as an economic one. The idea was that four European families – for example, somebody from Germany, somebody from France, somebody from the UK and somebody from Italy would, together, buy a holiday home. Let’s say in Spain. Each would have the right to use it for three months of the year, either in one block or in several parts.

Today, this would today be seen as a fractional ownership rather than timeshare. The owners actually owned the asset and simply shared the use of it.

The next stage in the development came when a UK company decided to offer properties divided not into quarters but into 1/50th shares. This allowed somebody to buy one, two or three shares and have one, two or three weeks’ use of the property each year. The remaining two weeks were allocated for redecoration and maintenance.

Today, this would be seen as a fractional ownership rather than timeshare. The owners actually owned the asset and simply shared the use of it.

With this arrangement came the need for a more rigid allocation of usage. Two patterns eventually emerged. Fixed weeks (where your share gave you the right to use the property for the fifth week of the year every year) and rotating usage (where, this year, you had the right to use the property for the fifth week but next year it would be the tenth week and the year after that the 15th week etc).

The general ownership model for early timeshare was one where the timeshare owner actually owned the asset. For practical reasons, you couldn’t have all 50 people’s names on the title deed and so, generally, the owner owned indirectly. Either the property would be owned by a company and the owner had a 1/50th share in the company or the property was owned by trustees who held it ‘in trust for’ the 50 owners. This means that they had to maintain it and manage it on behalf of the owners but in the best interests of the owners.

In either case, the owner could sell his or her week to another person and, in either case, if they all decided to sell the property then the net proceeds of sale would be distributed between them.

All of these early arrangements would today be seen as fractional ownership – because the ‘owner’ actually owned the asset.

In the early 1970s the idea reached the US where, as is so often the case, an interesting idea was converted into a raging commercial success.

However, in the US they changed the ownership model. In those early American timeshares the operator would, typically, own three or four resorts in different places. The buyer received a ‘vacation license’ which gave them the right to use any of the resorts (usually on a first come, first served basis) for a fixed period of 25 years.

Most recent timeshares have used this model or something similar to it.

Hence the real difference between timeshare and fractional ownership is the fact that in fractional ownership you actually own the asset whereas in timeshare you only have a contractual right to use the asset for a certain period of time and for a certain number of weeks each year.

Just to confuse the situation, there are still one or two products sold as timeshare which do give the owner of the week the ownership (together with the other owners) of the premises but this is now rare.

The worsening image of timeshare

Timeshare promised to be a great way of enjoying holidays in high quality resorts at a cost far lower than you would pay if staying in hotels.

It was hugely successful as a concept but then came to the attention of a number of very dubious characters who realised that there were enormous profits to be made. If you could buy an apartment for $100,000 and sell it to 50 people at $5,000 each you generate a gross profit of $150,000. You also have the ability to charge for (and make a profit from) the expenses associated with the use of the property each year.

The profit led to terrible and very high-pressure sales techniques, along with a lot of owner dissatisfaction. As a result, timeshare became regulated in most places around the world, including Spain. Unfortunately, the timeshare operators seem to be smarter than the regulators – and so as soon as one abuse was closed they would come up with another.

So timeshare developed a terrible image.

Relaunching it (albeit in its original form) as fractional ownership helped to clean up the image problem.

How does timeshare work?

For most people, there are three great attractions about timeshare. First, the entry price can be low – though this is not always the case; there are some very high-end timeshare products.

The second is that the quality of the accommodation has usually been very high.

The third is that most timeshare resorts are members of an exchange organisation. This allows the owner to swap the use of his weeks not just for weeks in other resorts owned by the same group but for weeks in thousands of resorts worldwide. There are two major timeshare exchange programmes: RCI and II. Between them they give access to about 300,000 properties in 100 countries around the world.

So when it comes to organisation, there are two main players of concern to the buyer: the company that owns or runs the development in which you are thinking of buying your timeshare and the exchange organisation to which it belongs.

These days, almost all timeshare offered to you will be on the basis that it gives you the right to use the complex for a certain number of weeks each year. It’s important to note that, in addition to the price you pay for that right, you will also have to pay an annual charge (called ‘the maintenance fee’) for the maintenance of the complex and the cleaning and other services that you will use while you are there. This charge can be substantial: sometimes as much as renting a local hotel room – though, in fairness, the accommodation is often more specious and of higher quality than you would find in a typical hotel.

Increasingly, timeshare is now the field of big hotels. The likes of Marriott operate a number of timeshare programmes. They realise that it is a way of ensuring customers come back to their group of hotels year after year. They treat it like a loyalty programme. Needless to say, with such contracts, the owners of the timeshare weeks have no say at all in the decor or services provided.

If you want to exchange your week in Spain for a week in a resort in, say, Mexico you will have to pay the exchange organisation a modest fee for providing that service. It’s worth looking at the rules of the exchange organisation associated with your development to see what they have on offer and what it will cost to use the service.

Both of the big exchange organisations provide a comprehensive and reliable service.

When thinking of buying a timeshare it is worth doing some due diligence about both the exchange company and the operator of your resort but, in particular, about the company that operates your resort. Some have a very good reputation. Others are appalling. Needless to say, you should not buy a timeshare in a resort run by a company with a bad reputation. A Google search for ‘problems TIMESHARE/FRACTIONAL COMPANY NAME Spain’ will often be very revealing.

It’s worth noting that timeshare weeks are often available secondhand at a far lower cost than the original cost of purchase. This is because people’s ideas change and the owner wants to get out of his timeshare contract and so avoid having to pay the ongoing annual maintenance charges for the weeks they are entitled to use.

Fractional Ownership

The history of fractional ownership

Whereas fractional ownership, like timeshare, started off as a small number of small programmes, more and more big companies are now coming into this field and offering fractional ownership opportunities.

How does fractional ownership work?

Fractional ownership is, in some ways, more simple than timeshare. However, there are more ways in which it can be structured.

In the simplest of cases, a property will be divided up into four or six periods of usage each year and the owners of those periods of usage will be listed on the title deed to the property as the joint owners of the property itself. If you shared the use of a vacation home with your brother, this is probably how you would do it.

In some ways, this is the simplest and best form of fractional ownership, although it can be more expensive when you want to sell your right to somebody else as you then have to do a proper new title deed for your share.

Other fractional ownership programmes put the property into the name of some form of company and then make the owners of the fractional shares the owners of the company. This can work equally well and it is usually simpler and cheaper to transfer the ownership of a share in a company than it is to transfer the legal title to a property.

A few fractional ownership programmes put the ownership of the property itself into trust and the trustee then owns it on behalf of the individual owners. This also makes the transfer of ownership simple and straightforward.

While these are the main methods of ownership chosen there are others.

Most fractional ownership programmes relate to only one property. Until recently, it was not possible to take advantage of the worldwide exchange facilities offered by RCI and II, but that has recently changed. RCI has opened a new website called the Registry Collection to deal specifically with exchanges of fractional ownership.

Precautions when buying into a fractional ownership property

As with timeshare, you are well advised to do your due diligence about any fractional ownership that you’re thinking of buying to make sure that you really understand what it is you’re buying, the reliability of the operator and the overall costs involved.

The use of your timeshare or fractional ownership property

When it comes to the use of your time in your fractional ownership property the way things are organised is similar to the way in which they’re organised for timeshare. In other words, you may have an entitlement to use your property (for example) for the month of April each year or you may have rotating rights to use the property (for example) in April this year, in July the following year and in October the year after that.

However, in the case of small fractional ownership programmes there is an additional way of organising the use of the property which is quite common. One of the owners becomes the secretary of the group and owners book through the secretary the time they want to use on a first come, first served basis. Indeed, even where the constitution of the fractional ownership programme lays down fixed or rotating usage, owners sometimes set up this kind of arrangement because they find it more convenient. Generally, if the property is divided up into four or six fractions, you will all get to know each other and become friends. It is often the case that with this free and easy approach people are happy for their period of use to overlap that of another owner. For example, you might want to fly in on a Tuesday and the other owner is going to fly out of the Friday.

As with timeshare, there will be an annual charge to pay for the expenses of maintaining, administering and cleaning the property. However, in fractional ownership schemes that charge should be fixed and monitored by the owners.

Regulation of timeshare and fractional ownership

Timeshare in Spain

The regulation of timeshare in Spain started with Law 42/1998, enacted on 15 December 1998. Law 42/1998 detailed the rights of real estate timeshare owners, and involved the implementation of the Directive 94/47 EC of the European Parliament and the Council.

This first attempt to regulate quickly proved to be insufficient and ineffective against abusive practices by some industry players, usually to the detriment of the rights of consumers.

Another law, Royal Decree Law 8/2012, came into force on March 18 2012, but was quickly succeeded (on July 6 of the same year) by Law 4/2012. This law deals with contracts for timeshare, acquisition of long-term holiday products, resale and exchange. This standard incorporated basically all of Law 42/1998, leading to the repeal of the older law.

Some key points about the laws surrounding timeshare in Spain:

  • The ‘withdrawal’, ‘right to cancel’ or ‘cooling off’ period after signing a timeshare contract is 14 days (up from ten pre-2012).
  • It is completely illegal for the seller to take any money from the buyer before the end of this cooling off period.
  • Timeshare contracts must be in the buyer’s language and in Spanish.

Fractional ownership in Spain

There is no specific law in Spain governing the fractional ownership of property.

Conclusion

If you’re happy about sharing the use of your vacation home with other people, both (good) timeshare and fractional ownership can be interesting options. It will never be the same as owning your own property, though in the case of fractional ownership it can come pretty close – especially if the alternative to fractional would be owning your own property and renting it out for part of the year to help cover the costs.

However, for both offerings you do need to check what you’re buying, the reputation of the seller and the ongoing costs of ownership.

Further Information

Please contact the author if you would like any further information. See the sidebar for their contact details.

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