Fractional Ownership 101
What is Fractional 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 Sharing a Vacation Home?
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 sometimes include a “markup” (on average the total share price will be 110-250% 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.
How does Fractional Ownership Work?
Fractional owners agree to a system to allocate the benefits and obligations associated with their shared vacation home. The most important benefits to be allocated are usage and, if the home will be offered for rent, income. The most important obligations to be allocated are costs and management duties. The owner agreement also describes how decisions will be made, if and how owners will be allowed to sell or gift their ownership interests, and the circumstances under which the owner group would sell the entire property.
The agreement can be set up so that only the owners and their families can use the house, or can allow unaccompanied guests or rentals either some or all of the time. Owner use can be structured as: (i) exclusive, meaning that the entire house is assigned to a particular family during that family’s usage periods; (ii) non-exclusive, meaning more than one family can use the house at the same time (perhaps with assigned bedrooms or areas of the house); or (ii) some combination of exclusive and non-exclusive.
Having a system to determine when each family gets exclusive use time is also important. Usage assignment can be fixed (meaning the Smiths get February every year), variable (meaning the Smiths different days or weeks each year), or a combination of fixed and variable. Variable use can be based upon a rotation schedule, annually-made selections using a rotating priority system, an open reservation system where families reserve the home on a space-available basis subject to a system a rules created to ensure fairness, or any combination of these approaches.
To avoid disputes and cash shortfalls that could result in credit blemishes and even loss of the property, fractional ownership groups collect periodic payments based on a budget system rather than “as needed”. This means that each year the owners or a manager estimate(s) the expenses for the following year and determines the amount that will be needed from each co-owner to pay the bills. The budget should include some reserves for long-term recurring expenses such as painting, roofing, system upkeep, and furniture and houseware replacement. Each owner them makes a payment (either annually or on some other pre-determined schedule) based on the budget. The owner agreement also assigns responsibility for ongoing management duties such bill paying, maintenance, etc.
For more detailed information on these and other issues relating to the organization and function of fractional ownership for shared vacation homes, please visit the article Fractional Ownership – Answers To Frequently Asked Questions.
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 7,000 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
Andy Sirkin has been a recognized expert in fractional ownership for more than 35 years. Since 1985, he has focussed on advising and preparing contracts for small groups of families and friends who want to buy and share vacation homes as partners, and on advising and preparing contracts for sellers and real estate agents who want to market and sell fractional interests in a particular vacation home. While work with individual owner groups, buyers, sellers, and real estate agents remains a major part of Andy’s fractional ownership practice, his work now encompasses advising and preparing contracts for web-based platforms (such as Pacaso) that organize, facilitate and manage fractional ownership arrangements for specific homes, and advising and preparing contracts for fractional ownership developers (who buy properties to renovated and furnish for sale as fractional ownership interests), fractional ownership marketing and sales firms, and fractional ownership management companies.
Andy has worked on fractional ownership of properties located throughout the U.S. and the world, and has also advised fractional ownership startups, platforms, developers and related businesses based in, or focussing on, locations throughout the U.S. and many other countries. However, most of his work has involved fractional ownership in the U.S., the U.K., Western Europe, Mexico, and the Caribbean. He has been a featured speaker at many fractional ownership and timeshare conversions and symposia, an accredited instructor with the California Department of Real Estate, and a frequent interviewee on fractional ownership for podcasts and news coverage throughout the world. Andy is based in Paris, and can be contacted via the contact form.