Fractional Ownership 101
Why Consider Shared Vacation Home Ownership?
Fractional ownership is an arrangement where a group of individuals or families co-own and share use of a vacation home or condo. Sometimes these arrangements are organized by the users themselves, but more frequently they are set up by a property owner or developer who outfits the property, creates the legal structure and documents, then offers the fractional interests for sale. Contrary to what you might think, groups of complete strangers who come together through these packaged offerings are generally much more successful at co-owning and managing the shared property than groups of friends or family members.
Why Consider Fractional Ownership?
Statistics show that most people only use their vacation home 17-30 days each year. Shared ownership is appealing because it allows people to own only the share of a vacation home that they will use, rather than the entire property.
What Are The Benefits of Fractional Ownership?
The main benefits of fractional ownership are:
- Lower Acquisition Costs: Buying a fraction of a property means the buyer pays only a fraction of the cost of the entire property. In addition, the costs of renovating, furnishing and outfitting the property are shared by the owner group. Although the per-share cost of fractionals packaged by a property owner or developer include a “markup” (on average the total share price will be 150-250% of the cost of the home and contents), they are still a good deal for most buyers because they avoid the time, effort and difficulty of outfitting the property, creating the legal structure and assembling the owner group.
- Lower Operating Costs: Owning real estate involves ongoing operating costs such as property tax, insurance, utilities, and maintenance, including the cost of repairing and replacing the furniture and other household goods inside. Maintaining a vacation home can be particularly complex because of intermittent usage and the distance between the owner and the property, often requiring the assistance of a local manager or management company. Sharing the cost and efforts of operating dramatically lightens all these burdens.
- Eliminate or Diminish Need for Rental Tenants: Most vacation home owners face the unpleasant decision between leaving the property vacant when it is not being used by the owner, or renting it out. As anyone who has been involved in vacation rental knows, the rental option has significant downsides. Do it yourself, and you spend innumerable hours promoting the rentals, responding to inquiries, handling bookings, checking tenants in and out, and readying the property between tenants. Hire a manager or rental agency and you will generally give up 30-50% of the rent. Either way, the tenants extract a significant toll on the property, and the rental periods most demand are the same ones when you would prefer to use the home yourself. While some fractionals allow owners to rent out their home when they are unable to use it, the lower cost of buying and owning a fractional means that most owners do not need to use this option.
- Diversification of Investment and Destination: Fractional ownership allows the money that would have been needed to own and operate a single vacation home to be spread over two or three vacation homes. Spreading your dollars over several homes lowers investment risk and increases the likelihood of profit by exposing you to two or three different real estate markets. Moreover, owning vacation homes in several locations gives you more vacation options each year, while still allowing you to spend your time in your own homes where you are comfortable with the surroundings and know how everything works.
The benefits of shared ownership are so compelling that many people who could easily afford their own place are opting for fraction ownership instead. Perhaps even more surprising, many people who already own a vacation home are choosing to sell some fractional interests in it in order to lighten their cost and management load and still use the property just as often as they ever did.
The most important element of a vacation home sharing arrangement is the usage structure. Usage assignment among co-owners can be fixed (meaning the Smiths get February every year), variable (meaning the Smiths get four different weeks each year), or a combination of fixed and variable. To the extent some or all of the usage periods are permanently fixed, price allocation may also be influenced by the quality of each owner’s assigned usage dates and, in some cases, it may possible to show the specific days, weeks or months assigned to a particular owner on that owner’s deed.
Variable usage periods can be determined by establishing preset groups of days, weeks or months which rotate among the Co-Owners annually so that, for example, Co-Owner #1 gets “Usage Package #1” the first year, “Usage Package #2” the second year, and so on until he/she has had all the usage packages, at which time he/she begins again with “Usage Package #1”. This type of variable usage assignment allows for unlimited predictability and advance planning and, of course, a co-owner can simply trade with another co-owner if his/her usage for a particular year does not work for his/her schedule. Alternatively, variable usage periods can be pre-selected annually by the co-owners based on a rotating system of selection priority, or use a more flexible reservation system (although operating a reservation systems tends to be too complex and expensive for most independent fractional owner groups).
To avoid disputes and cash shortfalls which could result in credit blemishes and even loss of the property, it is absolutely essential to collect periodic payments based on a budget system rather than “as needed”. This means that at the end of each year, the manager estimates all of the expenses for the following year, and determines the amount that will be needed from each co-owner to pay the bills. The anticipated expenses should include some reserves for long-term recurring expenses such as painting, roofing, system upkeep, and furniture and houseware replacement. The amount required from each co-owner are divided into equal monthly or quarterly payments, and each owner is required to contribute his/her payment on schedule. In this way, each co-owner knows with a fairly high degree of precision what will be expected of him/her in the coming year, and it is easy to track whether a co-owner is meeting his/her obligations before a significant problem develops. It is very risky, and an awful lot of work, to wait until funds are needed and then attempt to reach each owner to try to collect.
Learn More About Fractional Ownership
For more information about the various types of fractional vacation property, and how to compare a timeshare to a private residence club, destination club, vacation club and other types of fractional, shared and co-ownership of vacation residences, see “Analyzing, Comparing and Choosing Among Fractional Vacation Ownership Options“. For answers to the most frequently asked questions about fractional vacation home sharing and co-ownership, including partnerships with friends and family, see “Fractional Vacation Property FAQs“.
About SirkinLaw APC
SirkinLaw APC has focused on real estate co-ownership since 1985, and has been involved in the creation of more than 5,000 co-ownership arrangements throughout the United States and the world. This breadth of experience allows us 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. We pride ourselves on our ability to write legal documents in plain English, develop simple and elegant usage and organizational structures, and offer efficient, reliable and cost-effective services for fractional projects ranging in size from a single house or condominium up to hundreds of factional interests. Our firm has offices in San Francisco California and Paris France.
About The Author
D. Andrew Sirkin is a recognized expert in fractional real estate ownership, residence and destination clubs, and other shared vacation home arrangements. Although his practice includes some large fractional real estate projects, he frequently advises and prepares contracts for small groups of families and friends who buy and share vacation homes as partners, and for fractional sales of individual vacation homes and condominiums. He has worked on homes all over the world, including most U.S. States, as well as Italy, France, Spain, Portugal, Ireland, Argentina, Nicaragua, Costa Rica, Panama, Dominican Republic, Nicaragua, Belize and Mexico. He is an accredited instructor with the California Department of Real Estate, and the co-author of The Condominium Bluebook, published annually by Piedmont Press, and The Equity Sharing Manual, first published by John Wiley and Sons in November 1994 (order the book). Andy is based in Paris, and can be contacted via the contact form.