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Are Fractional Shares For You?
By Leon Altman
Fractional shares (“fractionals”) are sometimes confused with other vacation property options, such as time shares and condo hotels. While there are similarities, there are a number of things that make fractional shares unique, and thus suited for a certain type of vacation property buyer.
Fractionals, also referred to as private residence clubs, are similar to condo hotels in that they can be put into a rental pool when the owners are not using the property. Also, fractionals are considered a second home purchase with interest and equity benefits that go along with ownership. But unlike a condo hotel, fractionals are typically luxurious private homes located in the most exclusive areas.
Although they are available in studio and one-bedroom units, most are larger with several bedrooms, family rooms, pools, decks and outdoor recreation areas, and a host of other features that make them exclusive properties. A fractional property would be out of the price range of most individuals, but because ownership of the home is divided between a small group of people, this upscale lifestyle becomes affordable.
Typically fractionals are split in 4 to 8 shares, which means that arranging time at the property is less competitive than other types of shared ownership properties. There is no requirement that you have contact with the other owners, but many do develop friendships or at least get to know each other at annual ownership meetings. How involved you want to be with the other owners is up to you.
Even those that could afford to purchase a million dollar vacation home may only be able to use the property for a total of a month or two during the year and might feel that it is not a wise investment. Fractionals allow owners to decide how often they want to use the property, with packages ranging from two weeks to three months (not consecutively). Prices vary accordingly.
This is an ideal situation for those who enjoy staying at quality lodging when on vacation and prefer to put money toward their own investment, rather than putting that money into the pockets of a hotel chain or resort management firm. When you own a fractional, you can rent it out yourself or offer it to friends and other family members. And if you decide that you want to sell your share of ownership, you are free to do so at any time. Or you can will it to your children or other designee.
Fractionals first became popular in the posh ski resorts of Colorado and Utah and beach communities of California and the Caribbean but have spread to other areas of the country, including Florida. In fact, fractionals are the fastest growing sector of the timeshare industry, growing over three times faster than the industry as a whole
One of the reasons they are so popular is because since you purchase deeded ownership to your share of the property, banks offer more favorable financing for fractionals than for other shared ownership options, often treating them as second home purchases. Because there are far fewer fractionals available than timeshares, their value tends to increase, making them a better bet for banks to finance.
Another benefit of fractionals that makes them popular to buyers is that many of them come with an option to upgrade to a larger residence if one is available. And some fractional properties are owned by organizations with units in other parts of the country or world, and they will allow you to transfer your scheduled time to one of these other properties. So you may own an oceanside unit in Florida, but can spend a weekend skiing in Aspen, while staying in the same luxurious comfort, often for no additional cost.
And with a fractional, you don’t have to worry about maintenance, repairs, or other ownership responsibilities that can get overwhelming with a second home. All of these services are included in your annual maintenance fee, which is similar to membership fees paid by those who belong to a homeowners association or gated community.
Many fractional properties are managed by lodging and hospitality experts like Ritz-Carlton and Four Seasons. This ensures that your property will be well maintained and offer the best in guest services and amenities. And if you have the option of placing your unit in a rental pool on a rotating basis, the reputation and sales clout of the management company increases the likelihood that the unit will be rented.
Perhaps the biggest appeal of fractionals is the personal service you receive from the staff. Prior to arriving, they will ready the residence for you, decorating the home with photos, artwork, books, DVDs, bedding and other personal items you keep in storage. They will purchase food according to your instructions and add a hide-a-bed or crib if needed. Everything is ready for you when you get there.
If your home is located in a resort community or luxury hotel property, you also receive the services and amenities that go along with the location. This often means access to golf courses, marinas, spas, and other desirable extras. All of this comes at an average price of $100,000 to $500,000 depending on the total sale price of the home, the number of weeks in your package and the number of other owners.
There are many benefits and perks that come with fractional shares, but they can come at a hefty price. Before you search for fractional shares, make sure it fits your budget. If not, there are other vacation property options that may suit your needs.
About the Author
Leon Altman is the founder of the InvestingIN Real Estate Letter - http://www.InvestingIN.com/realestate/LtrSignup3.htm
For more on finding and buying fractional shares, check out http://www.InvestingIN.com/realestate/resorts/fractionals.htm
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