Fractional Ownership – How To Set The Price
This article will provide some tools to help developers, seller and sales agents develop a pricing strategy for fractional ownership, private residence club (PRC), quartershare, timeshare and similar offerings.
Using Fractional Pricing Multipliers
Fractional pricing multiplier describes the relationship between the price of a fractional ownership interest and the price of whole ownership of a similar property. To calculate fractional pricing multiplier, add the cost of all the fractional shares being offered in a particular home, and divide the total by the fair market value of the home.
To illustrate, imagine a private residence club selling eight shares per villa for $300,000 each, and assume that a nearby villa of similar quality and size generally sells for $1,800,000. The calculation would be:
Total cost of fractional shares:
8 x $300,000 = $2,400,000
Fair market value of home:
Divide share cost by home value:
$2,400,000/$1,800,000 = 1.33
Be sure to use a realistic value for the home, meaning the price at which it would sell for in the current market in 90-180 days. Resist the temptation to use what the property would have been worth last year, or what you think it should be worth.
Historical statistics show average fractional pricing multipliers of 1.6 – 2.4, but multipliers began dropping in 2008. Most industry experts believe multipliers of 1.2 – 1.6 are appropriate in today’s market.
The following factors generally determine where a particular fractional offering will fall within this somewhat large range:
- Number of Fractional Shares: In general, selling more shares will yield higher sale proceeds, and push the multiplier up. But offering too many fractional shares can backfire. For example, if the location has seasonal use patterns, a higher number of fractions may give each owner too little prime usage time. A higher number of fractional interests will also increase sales, marketing and operational expenses, lengthen the sellout process (adding to carrying costs), and potentially complicate regulatory approval.
- Branding and Developer Name Recognition: Fractional projects carrying names consumers recognize will generate significantly higher multipliers.
- Project Amenity Level: Amenities such as concierge services, exchange networks, spas, pools, on-site golf, etc., will boost multipliers. The level of finishes, furnishings and equipment within the house or apartment will have a similar but less dramatic effect.
- Prices of Whole Ownership Alternatives: When prices of comparable properties offered as whole ownership are higher (reflecting greater demand relative to supply), multipliers are also generally higher. Consumers perceive less value in shared ownership where whole ownership is more easily affordable.
- Number of Bedrooms: Multipliers diminish as the number of bedrooms increases.
Using Comparable Fractional Property Sales
Analyzing sales data from comparable fractional ownership, PRC, quartershare, or timeshare projects can provide more nuanced and specific pricing information than using a multiplier. As with all real estate, pricing data must be adjusted to reflect the characteristics of the property.
The most basic and common method for factoring in property characteristics is to use size, often expressed in terms of square feet or square meters, and to divide the cost by the size to determine cost-per-square-foot (or meter). This approach is essential in pricing fractional offerings, but it is not enough. Since fractional real estate involves sharing usage with others, pricing statistics must also be controlled for usage allotment. This requires an additional step, which is to divide cost-per-square-foot by the number of nights of usage allotted with the fractional interest.
The simplest approach to analyzing and comparing fractional real estate sales data is to use the price as the unit of measurement. To do this, take the asking or sale price, and divide it by the size and usage allotment to determine cost-per-square-foot-per-night.
The calculation is slightly more complex where each participant is allowed unlimited usage subject only to reservation rules and availability. But remember that the reality of these situations is that usage is limited by the number of people sharing the property. Consequently, one way to break down pricing data from this type of project is to divide 365 by the number of owners per unit in order to determine the number of nights allotted to each owner each year. While not perfect, this approach provides enough information to compare pricing among fractional projects.
The problem with the pricing comparison approach is that it ignores the ongoing annual costs of fractional owners. These ongoing costs are a significant component of the annual cost of fractional ownership, and ignoring them can distort the results of a pricing comparison. By using the annual cost of ownership rather than the sale price, cost-per-night-per-square-foot includes owner dues, assessments, maintenance fees, and usage fees.
Step 1: Determining Annual Cost of Ownership
To begin, translate the price into an annual cost by applying an interest rate to simulate the amount of investment return the buyer would have earned if he had invested the money. In practice, the true cost will be influenced by the appreciation or depreciation of the property over time, but since we are only using this information for comparison purposes, this factor can be ignored so long as it is ignored consistently. For example, if we use an interest factor of 6% on a $200,000 fractional share, price translates into an annual cost of $12,000. Next, add the annual costs including owner dues, assessments, maintenance fees, or usage fees. The total of the two figures will be the annual cost of ownership. For example, if the $200,000 share had annual maintenance fees of $6,000, the total annual cost would be $18,000 (12,000 + 6,000).
Step 2: Determining Cost- Per-Square-Foot
Divide annual cost by the square footage of interior living area of the property (if usage is always in the same unit), or by the average square footage of interior space of the group of properties (if usage can be in any of a group of units). If the property has a significant amount of private outdoor living areas (such as patios or porches), you may want to include these in your calculations. Generally, outdoor areas are not given the same value as indoor areas, so you will probably want to apply a discount factor. I recommend discounting the value of private outdoor living areas by 75% compared with indoor living areas. So, for example, if a home has 3500 square feet of interior living plus 2000 square feet of private porch, you would discount the outdoor area by 75% to 500 square feet, and consider the total square footage to be 4000. If the cost-per-year is $18,000, the cost-per-year-per-square-foot would then be $4.50 (18,000/4,000).
Step 3: Determining Cost-Per-Night-Per-Square-Foot
Divide cost-per-year-per-square-foot by the number of nights of usage. For example, if each owner is entitled to 42 days of usage, and the cost-per-year-per-square-foot is $4.50, the cost-per-night-per-square-foot is $0.107 (4.50/42).
The cost-per-night-per-square-foot of properties that have sold, or that are on the market, can be valuable indicators of how your property can be priced successfully. But as with pricing multipliers, it is essential to filter this date for other factors, including number of fractional shares, branding and developer name recognition, project amenity level, prices of whole ownership alternatives, and number of bedrooms. The likely affect of these factors on pricing comparison is discussed above.
The early years of the emergence of fractional ownership and private residence clubs as a major component of resort and second home industry, particular 2006 and 2007, were marked by impressive sales growth and astonishing profits. Viewed from today’s perspective, this phenomenon can be explained by two factors: (i) availability of a core group of very affluent buyers who were strongly predisposed toward the product and had not had access to it before; and (ii) a culture of free spending that was prevalent during this period. Recent survey and spending data suggests that even the super affluent have cut back on discretionary purchases and, perhaps more important, that the new spending behavior of this group may last far longer than the economic crisis. This probably means that this group will be less anxious to purchase fractional interests in the medium term, and that those that do purchase may be more focused on pricing and value.
Moreover, there is an increasing sense within the fractional industry that the market for fractional vacation ownership extends beyond the super-affluent, and that too many fractional developers and marketers offer only products and marketing programs catering to the perceived needs and desires of this narrow market segment. There is also a realization that many timeshare owners came to regret their purchases because the effective per-night cost of using the resort exceeded the cost of staying at a comparable hotel. While effective sales and marketing strategies may sell a poor-value product, they will not keep the customer happy and ensure continued success. If the fractional industry is to grow and avoid the timeshare stigma, the product needs to do more than just sell; it needs to perform for the customer.
All of these factors are moving fractional pricing down in relation to whole ownership, a trend that is likely to continue and even accelerate in the next 1-3 years. This tendency is reflected in lower pricing of new offerings, and product modifications (such as smaller share sizes) in existing projects that are not yet sold out.
About The Author
Andy Sirkin has focused on fractional real estate projects since 1985, and has been involved in the creation of projects throughout the United States, as well as Europe, and Central and South America, ranging in size from a single house or condominium up to hundreds of factional interests. This breadth of experience allows the firm to draw on a huge library of fractional project documentation as well as extensive knowledge of marketing and registration requirements for virtually any location where a project might be located or potentially marketed. Andy is the author of two books as well as numerous published articles, and has compiled a searchable disk containing the complete text and a summary of fractional ownership law for all 50 U.S. states. He has also created an extensive library of instructional material for fractional developers, brokers, and buyers, available at sirkinfractionallawyers.com. He is an accredited instructor with the California Department of Real Estate, and frequently conducts workshops and appears at conferences throughout the world. He currently splits his time between offices in Paris and San Francisco, and can be contacted via our contact form.