You may see a real estate listing that reads “Million Dollar Property at a Fraction of the Cost” or more commonly Fractional Ownership , Playa Del Sol, Jan 2 To Feb 27.Welcome to the world of fractional ownership. But what does it mean, exactly?
Fractional Ownership 101
By definition a fractional ownership is exactly as it sounds: a means by which individuals share in ownership and management of high-value property. And the centerpiece of this arrangement is the legal document which aligns all owners, both legally and in spirit, and spells the sharing arrangements including usage/rental (if applicable), alterations, maintenance, financing, resale and in case of death.
More Common than you Think and Beneficial Too
Fractional ownership agreements have been widely used in business for group purchases of many things including yachts, airplanes, business jets, commercial property and race horses. Vacations homes are growing in popularity and the benefits are clear:
Shared equity and capital gains at resale
Predetermined, part-time access without relying on hotels and timeshare schedules
Low cost to entry
Direct control over assets, alterations, usage than timeshares vacation clubs
More affordable overall than timeshares and hotel lodging
When considering a fractional ownership be mindful of ALL details prior to entering into a purchase. Here are a few special considerations (your real estate agent will have more information on the matter).
1 – Title and Ownership
This can comprise many variables. The ownership agreement helps parties mitigate any unforeseeable circumstances which may bring harm to each shareholder.
Example; let’s say one fractional partner of four wants to sell his/her share. Who and how does the group decide who can buy in? Do remaining partners get rights of first refusal? If so, who? If the fractional is owned by family members, can an outsider buy in? And so it goes. And this is just the tip of the iceberg.
Other considerations and protections include:
equity or non-equity arrangements – In one arrangement you own equity plus access, the other, only access
Liability – Are you protected against injury claims against the property?
Protection – Is your share protected by actions other owners’ creditors
Insurance – Group or individual?
Partner buyouts – Is it permitted and what are the procedures?
Asset/fees shared – Does a 25-percent equity share equal 25-percent cost sharing? What about excessive wear and tear by one partner (with many guests for instance)
“Sweat equity” – Is one owner contributing personal labour or skill on improvements and how shall that be compensated?”
Death – Are assets willed or is it sold to control future partners?
The list is long and detailed. The main point is to have a clear understanding of all technicalities in the ownership arrangement. (for a complete list, contact an experienced real estate agent and lawyer who are well versed in fractionals).
2 – Compared to Condo Ownership and Timeshares, Fractionals are Fairly Simple Concepts
For anyone who has purchased a condo, they’re familiar with shared assets or common elements in a building – not to mention the collection of condo fees for shared maintenance. In essence, a fractional is similar in that a group is charged with working collectively, and usually in far fewer numbers. It’s a rather simple undertaking. And as in a condo, there are rules, guidelines and a management structure.
3 – Usage and Access
Many properties listed for sale define in clear terms the usage arrangement, i.e. month and day.
While many buyers may assemble, and attempt to conduct fractional ownership in a casual manner, it’s recommended that there are firm agreements in place which cover all details of schedule and access – especially when family members are involved.
4 – Rental Procedures (if Applicable)
Partners may consider using their share to rent out to third parties. This will complicate matters, wear and tear, insurance liabilities etc. Get it in writing.
5 – Contribution of Funds, Budgeting, Bill Payment: Not unlike condominiums, owners must ensure a means by which funds will be allocated for maintenance and repairs, rather than on an as needed basis.
Formalize this in advance of a maintenance event.
6 – Management and General Accounting: Again, similar to condominium models, ensure that all financials, accounting, tax, utilities and subject to adhere to a formal and strict calendar or procedure.
7 – Decision-Making and Disputes: If an ownership group organizes and sets rules, they should be able to work through any decision making, be it maintenance, schedule changes, unforeseen costs etc. It should be business, first and foremost.
8 – Enforcement: Fractional ownership require all owners to act in according to guidelines. If one does not, you may need a mechanism to address it.
9 – Equity Gains & Exit Strategy: This is one primary benefit of fractional ownership over timeshares, which are, at best, a depreciating asset over time. You will own equity – bricks and mortar – and thereby will also share in the appreciating property values.
Think about conditions for exiting; who controls a new buyer, rights of first refusal to remaining owners etc, a juried buyer. And as mentioned, there should be clear provisions and guidelines in case of death.
10 – Get a Real Estate Agent
With the right agent and lawyer, you may realize the dream of enjoying your very own Mexican getaway, and enjoy peace of mind knowing you’ll always be visiting the same home away from home, year after year.
To view fractional properties in the area, visit Ron Morgan Properties.