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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2008

Look to Shared Ownership for Answers

Fractional real estate benefits vacation-homeowners, brokers -- and the environment

One day, I saw a father walking on a sandy beach with his son. The boy was taking extra-long strides to walk in his father’s footprints. I was struck by some interesting implications of that moment: It made me think about how we must carefully consider the path we take and consequently, the legacy we leave behind.

I also thought about how two individuals were sharing the same space at different times. The efficiency of that concept was striking.

Thoughts on efficiency and space-sharing often lead to discussions about conservation, land use and global warming. When people think of going green, most consider things such as recycling, carpooling, using energy-efficient, compact fluorescent lights or driving a hybrid car.

There is another trend, however, that offers a different way to think green -- fractional real estate.

As a mortgage broker, you can help your clients who are seeking second or vacation homes understand the environmental and financial benefits of fractional homeownership.

Buyers of traditional second homes or vacation properties usually find that their “home away from home” is empty most of the year. Many people now consider this to be somewhat careless and certainly “ungreen.”

Lately, more people have become interested in fractional ownership. Along with the benefit of owning a property for less, this likely is also because of a rise in environmental awareness. Many people are warming up to the idea that the use of natural resources, fuel and other materials in constructing second homes is wasteful and inefficient if those homes are not owned fractionally.

People are usually open to conservation if it’s not overly burdensome and if it saves money. Fractional homeownership does both. It allows individuals to experience a luxurious property for a percentage of the full price. Such homebuyers can also feel good about their decision to make less of an environmental impact.

The most-common fractional-ownership arrangement is the “independent” model, under which a single home, condo or cabin is sold to various owners. Individual owners get their own title for their fractional interest and can use the property for a set amount of time each year.

For example, if three people own a property fractionally, each owns one-third interest in the home. It’s important to emphasize that this is a real estate transaction; it’s not a buy-in to a club. Each owner actually owns real estate, which may be leveraged as equity against a mortgage, paid for in cash or sold upon appreciation, as with any other property.

Many consumers are turning to fractional ownership because of the logic involved. For instance, if people own a second home or vacation property but can’t use it more than a few weeks each year, they are still responsible for the property’s full-time upkeep and management. It makes financial sense to fractionalize the property to share the burden of ownership, maintenance and management.

A formal fractional-operating agreement answers the questions of how to use the property in a way that is fair and friendly. It also spells out how operating expenses will be paid and what the enforcements are among owners.

For mortgage brokers, fractional ownership opens new opportunities for marketing and networking relationships with Realtors and other industry professionals. It also offers opportunities to stimulate stagnant markets. For example, where markets are depressed, instead of offering a vacation home for $750,000, sellers can offer quarter-shares for $250,000 each.

It is common, however, for everyone to make more money because fractional ownership actually creates more value for a property. Because a fractional deal can be made for more than a property’s appraised value, broker and Realtor commissions will be better.

Fractional ownership represents the next-logical step in the progression of “highest and best use” of real estate. Just like the boy walking in his father’s footsteps, fractional ownership represents an efficient path toward sharing the same resources and feeling good about it.


 


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