A Quick Look at Fractional Home Ownership

Amber Randhawa Homeowner and Homebuyer Tips, Real Estate Trends

Photo Credit: Tessa Wilson @tessawilson

Are you interested in owning a vacation home, but you aren’t quite sure you are able to afford this leap into multiple home ownership? While owning a second home is a luxury that not everyone can afford, owning a fraction of a vacation home might be more accessible to you than you realize. Through a home ownership model called “fractional ownership,” you can share a vacation home with a group of other owners, while having the house to yourself when it is your turn to go on vacation. With fractional ownership, you’ll normally have 8-12 people pooling resources to purchase the home, while each owner uses the home for a portion of the year, based on an agreed upon schedule.

You may be thinking that this sounds like a timeshare situation, but fractional ownership operates in a different manner. Timeshares are typically owned and run by for-profit companies, and are not owned by those who purchase the rights to use them. Instead of having your name on a deed, you sign a contract that gives you the right to use the vacation property for a certain amount of time. When you enter into fractional ownership of a vacation property instead, your name will actually appear on the deed. Also, owners exercise much more control over the property than is possible with timeshares.

How to Enter Into a Fractional Ownership

So how does one get started with fractional home ownership? There are a few different ways you can handle this business transaction:

  • If you already have a network of family, friends or acquaintances who are interested in shared ownership of a property, you could actually manage the entire process yourself. You could even find interested parties online, if you are comfortable entering into this type of relationship with strangers who are also interested in fractional ownership.
  • You could buy a property yourself (or use a property you already own), and begin selling fractional shares of the home to others. When you approach fractional ownership in this manner, it often helps to have a vacation fractional broker or consultant handle the marketing and sale of the share, as they are already experts in the legal side of the transaction.
  • You could buy into a fractional ownership in much the same way that timeshares are sold, by finding a situation that has already been organized by a private developer or broker. These services are typically based in a particular region of the world, so to find a vacation home in this manner, you can simply search the internet. Use key terms such as “Fractional” plus the geographic location you are interested in, such as “Aruba” or “Bermuda.” By doing this you will likely find a local company that sells fractional ownership of local vacation homes.

Shared Vacation Home Ownership Structure

Photo Credit: Sebastian Staines @sebastian_staines

The name for homeowners that have entered into a fractional ownership is called being “tenants in common.” Every owner who is purchasing a fraction of the ownership will have their name appear on the deed to the home, along with their respective ownership percentage. The ownership may be split evenly amongst the owners, or some owners may own a larger fraction of the home than others. This will likely come along with additional rights and a larger share of time that the home can be used.

Some fractional owners form an intermediate entity, such as an LLC, nonprofit, or for-profit corporation. Rather than having their own names appear on the deed and therefore owning the property directly, the owners hold shares in the company or a membership in the nonprofit, and that entity is the one that owns the vacation home. This ownership format is advantageous because it limits each member of the group’s liability and makes it easier to bring in new owners. The downside to this scenario is that it also creates administrative burdens and prevents owners from claiming property tax and mortgage interest deductions.

Purchasing and then Sharing Expenses on a Fractional Ownership

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When it comes time to purchase the home, typically the co-owners take out a group mortgage and divide the down payment and monthly payments. The division is either done evenly, or it is divvied out to match the ownership percentages outlined on the deed. In some cases, for smaller groups of owners, fractional financing might be available. In this case each owner would come to the closing table with their own financing in place.

For ongoing upkeep of the home, it’s a good idea to ask every owner to chip in a set amount each month to cover expenses. This is much easier than, and preferable to, trying to calculate costs as needed or reconcile bills every month. Handling financial matters this way can also lead to an overestimation of costs, which allows the group to build up a reserve fund which is fantastic for covering major repairs, unexpected expenses, or remodeling. Vacation fractional owners often hire outside management companies to handle scheduling, pay expenses, and do regular cleaning, maintenance, and repairs.

Scheduling and House Responsibilities with Fractionally Owned Vacation Homes

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Because with fractional ownership only one owner uses the home at a time, scheduling is one of the most important issues, especially for homes located in areas that are known to be more popular during a particular time of year. If you are considering fractional ownership of a ski retreat or a beach house, proper scheduling is key, and should be worked out prior to purchase so that everyone is given a fair and equitable time period in which to use the home.

Your owners’ group can use any system that works well for you, but the most commonly used scheduling method is to assign certain weeks or months to each owner every year. You can use the same schedule every year, and some groups of owners even include these dates in the deed or other recorded real estate document. Alternatively, the schedule can be written out to rotate or otherwise change each year so that no owner is entitled to use of the property at the same time of year every year.

Some owners prefer less formality and more spontaneity when it comes to scheduling, and leave the home open by default, with scheduling done on a first come first served basis. You can simply sign up when you want to use the house, and as long as you are the first owner to claim a particular date, it’s yours. This method risks disputes when owners want to use the home at the same time but it allows for more flexibility. You could require owners to sign up well in advance, or perhaps rotate the most popular months or weeks, to solve disputes.

Fractional home owners groups also need to formulate their own guidelines when it comes to alterations that can be made on the property, and how the home should be decorated. Specific rules will need to lay out whether or not there is a fixed decorative scheme that must be adhered to, whether pets will be allowed along with any restrictions, and whether there’s a limit on the number of guests that may vacation at the property at once, and so on.

How to Sell Your Part of a Fractional Ownership Home

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Before you enter into a fractional ownership agreement, make sure that you can resell your share of the home if needed, and without too many hassles. In some situations the other co-owners might want a right of first refusal in place so that they can purchase your share if you decide to leave the arrangement. Other groups of owners want the right to reject a proposed buyer if they can articulate a good reason why they don’t feel a particular person would be a good fit.

If you have a shared mortgage on a fractional ownership property, the group might have to refinance if one person sells a share. In some states, selling a share could also mean the property is reassessed for property tax purposes—something most groups would prefer to avoid. It is important that you understand all of the ramifications of selling your share in the future before you start the process.

It can be hard to sell a fractional home ownership share, which means some owners might eventually feel stuck if they find that they are not using the home as much as they expected. To avoid this problem, some ownerships groups agree to set a particular future date in their sharing agreement, when owners who want out can either force a sale of the whole property, or require other owners to buy them out at the then-current market price.

Regulations Surrounding Fractional Ownership of Vacation Homes

Photo Credit: Mari Helin @mari

In many states, timeshares and fractional ownership relationships are treated similarly, and are subject to approval by a state real estate agency. For example, in California, a vacation home with more than ten owners must be approved by the state Department of Real Estate, to ensure that the property, financing, and agreements between owners are properly arranged. Be sure to fully research the laws in the state or country where you are considering making your purchase. Before buying, your group should talk to an attorney or consultant who can advise you about any regulatory issues that apply in the local jurisdiction.