Fractional Ownership Real Estate-What is it and how it works.
In resort communities all around the country and world, fractional ownership is becoming a popular option as a way to own a luxury property. Fractional ownership is a “deeded” ownership interest in a parcel of real estate. Fractions can be divided into quarters, tenths or any type of split that is desirable for the seller or buyers.
Each fraction entitles the owner to a percentage of ownership according to the agreement that is designated at time of closing. Let’s take an example. You want to own a million dollar home but can’t afford it. This home is being sold in quarter shares. You can buy a 25% interest for $250,000. You get deeded ownership and to use the property 25% of the time with 3 other owners and rent out the time you don’t use for income. Typically a calendar is put together for the owners of the fractional shares and the calendar rotates annually so everyone gets holiday weeks every four years. You also have the option of switching weeks with the other owners if the other owner agrees.
The benefits are substantial. You own a share in a million dollar home, and only have to pay 25% of the expenses. This is becoming very popular in ski resorts and beachfront property.
In most cases you can initiate the purchase process with a reservation and a deposit. This deposit is held until a percentage of the shares have reservations. In a quarter share property, if there are deposits for 3 shares the property can go to closing. The reason this is done is because if the seller of the property has an existing mortgage, this mortgage must be paid in full to fully release it. Once the property is sold in quarter shares future releases of mortgages will be partial releases and the property is easier to sell in the future.
There are a couple of pit falls for buyers of fractional properties. Financing is the primary one. Most lenders will not do fractional financing. There are a few local lenders in the fractional financing market right now and one national lender that finances these loans around the country. Another item you should check on is if the property is a condo or townhouse, be sure to read the association documents and make sure there are no provisions that prohibit fractional financing. In most cases there are not. Sometimes you will find language that prohibits the unit from becoming a time share. Time shares usually aren’t deeded real estate and this will not apply to fractionals.
The ownership agreement should contain provisions for first right of refusals, holding over, default for non-payment, remedies and prohibitions on further “division” of an interest. Also these items need to be worked out: The budget, calendar, pets, furnishings, smoking, rental pools, cleaning, property management and storage for the owners. These items are property specific – each group of owners wants to make their own agreements.
If you have any questions regarding fractional ownership, please feel free to call or email me. Chuck Daily
