Fractional property-ownership can help your clients achieve affordable second-home-ownership

Bob Waun, CEO, Vacation Finance

As published in Scotsman Guide's Residential Edition, December 2006.

Imagine this scenario: A client is looking for a second home but can't decide between a beachside cottage and a slope-side lodge. With fractional ownership, however, your client wouldn't have to choose.

With fractional real estate, your clients can buy the piece of the real estate they can use. Fractional real estate ownership also lowers the expenses and the guilt that often comes with owning a second home. In fact, many fractional real estate owners own pieces of more than one property.

Fractional ownership is not a new form of real estate investment. It has been popular in ski resorts for more than 20 years. Families also have shared ownership of vacation homes for as long as there have been second homes. But today's fractional programs are more formal and create situations in which owners may never know their property's co-owners.

Similar to condominium ownership, fractional ownership occurs when many people share ownership of the same piece of dirt. Fractional ownership takes the concept just one step further, however, and divides time-usage rights, as well.

According to research from Ragatz Associates, the fractional market generated about $2 billion in sales in 2005, up from $1.5 billion in 2004. Although mortgage-financing sources have not kept pace -- only about five lenders focus on fractional real estate -- this sector can have potential for borrowers and brokers.

Taking smaller bites

The average working American receives 14 days of vacation per year. In addition, according to the Research Institute of America, two-thirds of second-home-owners spend four weeks or less per year in the home. As such, fractional ownership often is enough for most of us. The economic common sense of only paying for the fraction you can use is a dynamic many borrowers can understand.

Fractional properties often allow for economic justification of even higher-priced second (and third) homes in prime locations. As resort real estate prices have soared, so has fractional properties' popularity.

For instance, your client could potentially own parts of $1 million condominiums in multiple locations. One-eighth a share of a $1 million condo may sell for $175,000 each. So if your client wanted use of two $1 million condos in different locations, your client could own a share of both for $350,000.

Throughout the United States, fractional projects are being developed and offered for sale. Some popular locations include ski areas of California and Colorado; beach resorts in Florida, North Carolina and South Carolina; and New York. Condominiums and single-family homes may be sold in fractional shares, but marketing of resort projects are often the norm. They also are easier to sell toconsumers as they offer a lifestyle benefit that is more than just real estate ownership.

Resort rental programs rent your clients' real estate when they cannot use their allotted time. This further increases the investment benefit to owners of fractional real estate and minimizes the hassle associated with owning property that is too far away to manage.

Compared to timeshares

Timeshares are the original "fractional share." With timeshares, buyers purchase one week of ownership per year -- or 1/52 of a share.

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