The Timeshare Foreclosure Fiasco
Navigating the complex world of timeshare ownership, particularly the financial and legal intricacies, can be a daunting task for many consumers.
This becomes especially pertinent when considering the debtor-creditor relationship inherent in timeshare purchases, often financed by the selling resort. Like any substantial financed purchase—be it a car, boat, or home—timeshare buyers are required to sign a series of critical financial documents.
These typically include a promissory note, a detailed purchase contract, and a security instrument, commonly in the form of a mortgage or a security agreement. These documents bind the consumer to the developer, setting the stage for a potential financial and legal quagmire.
However, the timeshare market is distinctively unique. Unlike conventional assets, timeshares present a unique challenge when owners decide to divest their interests. At this juncture, the previously signed legal documents take on a new and often more complex dimension, diverging significantly from experiences with traditional asset sales like cars or homes. The primary distinction lies not in the creditor’s rights, which remain constant, but in the nature of the timeshare as a consumer product. Contrary to typical assets, timeshares rarely, if ever, maintain substantial resale value post-purchase. This fundamental difference in asset valuation and market dynamics often leads timeshare owners into a labyrinth of financial and legal complications, culminating in the timeshare foreclosure fiasco.
Very few timeshares retain any significant resale value after purchase
One of the major differences is the fact that very few, if indeed any, timeshare interests retain any significant resale value after purchase. The average initial retail timeshare purchase interest is well in excess of $20,000 and accordingly most timeshare purchasers assume, being traditionally a real estate-based product, that their timeshare purchase will retain the majority of its “market” value to the day they resell it. Thus, it’s often quite a shock when the day arrives to sell, only to learn there is no one who is willing to purchase the interest for any significant amount of money.
Compare and contrast this with the day you decide to re-market your home, or even your car. Clearly you expect your auto to depreciate, but slowly over time, so that the value depreciates at about the same rate as your diminishing car loan balance, so at least you won’t be way upside down when it is time to trade in your older vehicle for a new one.
With your timeshare purchase you’ve actually contractually incurred two separate liabilities:
- your mortgage debt, typically paid off over a ten year period; and a second maintenance liability which renews itself annually and typically increases in amount over time
- your annual maintenance fees which tend to grow rather quickly year over year.
The better news about your home is that there’s a good chance that it will have actually appreciated in value and be worth more now than when you purchased it. Under these circumstances you’re not left with the potentially significant debt you may be facing with your unwanted timeshare. Additionally, with your timeshare purchase you’ve actually contractually incurred two separate liabilities: your mortgage debt, typically paid off over a ten year period; and a second liability which renews itself annually and typically increases in amount over time, your annual maintenance fees which tend to grow rather quickly year over year. These pesky annual fees never go away; you pay as long as you “own” your interest.
So, what exactly does a timeshare owner face when foreclosure comes?
Most consumers rarely have to deal with security-based debtor/creditor issues or becoming a target of secured creditor remedies, since most families include their housing and transportation expenses as a priority in their budget. However, timeshare owners not aware of the differing economics involved with timeshare ownership, have little initial understanding about what exiting their timeshare interest can entail, particularly when they come to grips with an unsympathetic timeshare developer who charges near usurious interest rates on their mortgages and who refuse to take back their interest, once the owner realizes a sale of their timeshare interest to a third party is highly unlikely.
- As with any debtor-creditor relationship, initially missing payments on your timeshare obligations will undoubtedly trigger repetitious billing statements, extra fees and interest with internal collection phone calls. Failure to catch up will then be met with more urgent and no doubt threatening calls and correspondence. Ignoring those means your debt will be escalated to third party collection agencies and negative credit reporting (which may already have been triggered earlier in the non-payment process).
- The next step in the process will depend on which creditor is the most impacted by the continuing non-payment, the Developer with the unpaid purchase price, or the Property Owners Association with the 2 unpaid maintenance fees. Although similarly situated, each creditor has slightly different legal remedies and how they determine to proceed can have differing impact.
The Property Owners Association (POA) is, by law, a non-profit legal entity separate and legally distinct from the Developers organization, although as a practical matter the Developer will have a significant amount of control over the POA, either via control over the property management company or by infiltrating the POA’s Board of Directors by controlling the Board’s electoral process and insuring it’s people get elected to the POA Board, or both.
- Non-payment of the annual maintenance fee directly impacts the Property Owners Association as the annual maintenance fee is the major financial resource through which the resort pays its operational expenses. Its remedy for non-payment of these fees, which are part and parcel of the timeshare owner’s obligation via the purchase contract, is after collection attempts have failed, to threaten, and thereafter initiate ‘lien’ foreclosure proceedings solely against the non-performing owner’s timeshare interest. Often the mere threat of foreclosure is sufficient to motivate the owner to pay up as the mere reference to the act of “foreclosure” is scary enough to frighten legally unsophisticated owners into submission. The enduring problem is that these expenses never, ever, are completely totally satisfied as they are renewed every year.
- In actuality, the term “lien foreclosure” means no more than to foreclose upon the lien interest that the POA has undoubtedly filed against the owners interest in the timeshare property after a period of nonpayment. At this point the owner has already undoubtedly made the decision to abandon his or her interest in the timeshare resort in any event, so foreclosing upon the interest (or in other non-legal words, taking back the interest via a statutory procedure) accomplishes nothing more (at this stage) than triggering an interest takeback that the owner was most probably willing to voluntarily do in any event. However, because few of us have even been debtors pursued by a creditor, the very term “foreclosure” frightens consumers into compliance, perhaps incorrectly thinking of a lien foreclosure as a scary legal procedure that could result in the loss of other property beyond the timeshare interest, such as their family residence. Although it’s accurate to say that there may ultimately be personal liability for the maintenance fee obligation that survives the lien foreclosure, it’s quite rare for a property owners association to attempt to pursue its owners to that point and beyond.
- On the other hand, the psychological tool utilized by the timeshare Developers by introducing the specter of “mortgage foreclosure” in its collection process is even more intimidating in its use for collection purposes than when utilized by the Property Owner’s Association. To further distinguish the two separate legal entities and their creditor remedies, the POA is by definition, a non-profit association, is more owner oriented, and consequently perhaps a little more consumer friendly. Contrast this with the timeshare developer, definitely a sophisticated profit making entity that historically is not shy about strict enforcement of its creditor remedies, in part for reasons that will become clearer as this article progresses.
- For the resort developer seeking to “foreclose” against an owner who still owes the developer a portion of an unpaid purchase contract, Florida State law allows it two separate foreclosure options; judicial and non-judicial, meaning that either filing a court action or opting for a non-judicial process that still allows the resort developer to take back its ownership interest in order to place it back into its sales inventory.
- Although the ultimate judicial interpretation of the Timeshare Lien Foreclosure Act (as to whether or not the Developer can seek a deficiency judgement against the defaulting owner after foreclosure) is not, at this writing, settled law — as Finn Law Group is, at this writing vigorously arguing in several pending litigation matters that the law precludes the Developer from pursuing a deficiency — the very possibility of a deficiency judgment could potentially legally be assessed against the timeshare interest owner with a judicial foreclosure proceeding is perhaps both the most controversial and most contentious issue in the evolving owner/developer, creditor/debtor relationship discussion to be had.
Distinguish timeshare valuation from other kinds of actual real estate valuation:
To better understand the underpinnings of the controversy, we need to distinguish timeshare valuation from other kinds of actual real estate valuation. Typical real estate valuation is based upon market forces that, working together comprise and define the market value of the subject property.
- Consequently when that property is sold at foreclosure auction, if market forces are properly in play, then the property will be auctioned off or sold for an amount close to the property’s actual market value. Therefore if a debtor was unable to continue making payments on his or her property’s underlying mortgage, at least when the property is sold at foreclosure sale, the net amount obtained at auction sale would first be credited against the mortgage debt. Therefore there is not only a fair chance of the mortgage debtor’s debt being extinguished but perhaps if the market value has appreciated, those surplus funds still remaining after the mortgage debt is fully satisfied would then be paid back to the debtor, hopefully to be used for a fresh start.
- Contrast this possible outcome with a timeshare foreclosure where the only bidder for the foreclosed property is the Developer who, as a practical matter, never lost possession or control of the interest in any event, since it was always contained within the four corners of the Developer’s project. Also, note that that foreclosed timeshare interest was maintained at the exact same level of maintenance as its neighboring adjacent interests and therefore its condition was precisely the same as its neighbors. The foreclosing Developer has just gained a double windfall by retaining the monies it received prior to foreclosure from our debtor and again when the interest was then resold to the next purchaser, presumably for at minimum, the same price that the defaulting debtor had paid. Due to what I would characterize as a Developer inspired legislative oversight in the law, typically none of the proceeds from the next subsequent sale are credited against the so-called debt (the balance of the previous unpaid purchase price).
This completely inequitable result appears, to me at minimum, to be patently unfair. Even worse, to then allow the timeshare developer to pursue the former owner for the unpaid balance of the purchase price after retaining the funds that were paid prior to default, in addition to the Developer retaining the complete sales price from the next buyer, to me, creates an absolute unconscionable and unfair result!
Indeed therefore, regularly reselling the same interest over and over again would arguably be more profitable for the Developer than working with the then current owners to alleviate any need for foreclosure!
Disclosure: This article is for information purposes only and is not intended as legal advice.
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Led by Timeshare attorney Michael D. Finn with over 50 years of legal experience. The Finn Law Group is a consumer protection firm that specializes in Timeshare Law. If you feel you need assistance with a timeshare related matter, please contact our office for a free consultation. In addition, learn more on timeshares on our Twitter page.
