What Is Fractional Ownership?
Fractional ownership is a form of property ownership where several parties can divide the use and cost of a piece of real estate among them, usually for vacation purposes. Instead of buying a second home outright, you can own one quarter, one eighth, or even one tenth of a property.
Not too long ago, timeshares were the most common way to purchase time in a vacation home, but fractional real estate is gaining popularity around the world as an alternative option that provides stability and extra value.
Fractional vs. Timesharing
While the two are very similar, there are a few key differences to be aware of when considering whether to buy a timeshare or fractional ownership in a vacation property. Keep in mind that these differences vary from property to property, and you should always investigate the full terms of the deal before committing to a purchase.
- When buying a timeshare, at least half the time you will only be buying time at the property. While a number of timeshares result in a deed and conveyance of title, this is not always the case and is at the discretion of the property owner. With fractional ownership you will always be buying a percentage of the property itself, and there will always be a conveyance of title as with any other real estate purchase.
- Fractional ownership typically results in more time to spend on the property per year when compared to a timeshare.
- Timeshares in a hotel or complex can result in different suites from vacation to vacation depending on the property, while fractional ownership will always involve the same unit.
- A timeshare may include the use of or interest in the property's contents, but not full ownership of them. With fractional ownership, you will typically own a share of the contents of the property, including appliances and furniture, and extra amenities if the property is located within a resort.
- Timeshare costs are often predetermined according to the amount of time spent on the property per year, which may or may not reflect a percentage of the property's value. With fractional ownership, costs can be broken down into any split of the property's total value, from ¼ to as small as 1/12.
- When timeshares only represent the right to occupy the property, selling them can be difficult — you may have problems finding a real estate agent willing to work with them. Pricing can fluctuate independent of the real estate market, and they often have a great number of hidden products that can influence both value and liability. Fractional ownership always functions like regular real estate, and your share can be freely sold independent of the other owners, or passed on in a will.
- A timeshare is not considered an investment, as the property typically has too many occupants (50 or more) to divide the title in any meaningful way. Fractional ownership shares the ongoing costs of an asset among a much smaller group, and owners may see an increase in property value which in turn can improve their equity. Fractional interest can also be sold or transferred.
- Unused timeshare time is limited in how it can be recouped. Unused fractional ownership time can be used to rent the property out instead, generating income.
- As such, timeshares are best suited for predictable, shorter vacationing at the same time each year, with minimal administrative concerns. When maintenance fees are reasonable, fractional ownership offers better value for those who take longer vacations in the same location, and who want a real estate investment without owning an entire property.
What You Get
Fractional ownership time is dependent upon the number of owners, and is often prescheduled in advance by a written agreement between the owners. The average use time for fractional ownership real estate in BC is 12 weeks a year for each owner with a 1/4 share in the property, with two weeks of the year used for spring and fall cleaning. When fractions are smaller, general practice is for each owner to have at least one week during the summer season, with their remaining weeks scattered throughout the year.
Use of this time is flexible. If 12 weeks isn't enough, an owner can buy multiple shares in the property. If 12 weeks is too much, many fractional ownership properties allow owners to rent out the property for their unused weeks, or to swap the time out for a timeshare at another property.
As many regular owners of a vacation home only spend an average of 23 days a year at their property while paying full ownership fees year round, fractional ownership often has a much more effective cost-time ratio.
For many fractional ownership properties, a share can cost less than $35,000, while luxury properties may have shares ranging in the hundred thousands. As deeded real estate, share purchases can be financed via a loan or mortgage.
Furnishings and monthly maintenance fees are often shared out and charged alongside taxes and insurance, though owners may choose to rotate direct management of the property among themselves rather than pay for it to be done by a third party. Unused ownership time can also be rented directly, or handled by a property management company that takes a share of the rent income, minimizing the work to be done by the owner.
As the cost of real estate rises in desireable vacation destinations such as Vancouver Island and the Okanagan, more and more developments are likely to offer fractional ownership at a much more affordable cost than full ownership.
Being a property landlord can be complicated, subject to local bylaws and tenant obligations and legislation. With fractional ownership, the process can be divided among the owners or (more frequently) handled by a management company in order to minimize inconvenience. Maintenance is also typically handled by a third party, freeing up more ownership time for vacation rather than upkeep and repairs.
Properties that exist as part of a larger development or resort may also have extra amenities or conveniences available to partial owners. For instance, a high-end fractional ownership property on a ski hill might feature ski-in/ski-out access, a fireplace, a private hot tub, sundecks, leather furniture, and local artwork.
Understand The Risks
Fractional ownership is different from timesharing in many ways, and potential buyers need to understand the process and costs involved. Things to remain aware of include:
- What your vacation needs are, and how much you plan to use your vacation property in a year.
- How attractive the location will be during shoulder and off-seasons.
- If the property is part of a development, how big the development will be, and whether you are part of its target market.
- Whether there are other comparable projects in the area.
- What kind of fractional ownership program is in place, and whether there are any regulatory issues. Remember that capital gain is more likely with larger ownership fractions such as ¼ compared to 1/10 or 1/12.
- Whether financing will be provided.
- What the monthly bill will be after maintenance and services.
- How the property or project will be managed after it's sold, and in the case of a resort, whether it will continue to be viable as an operating business.
As with any real estate, fractional ownership is best handled with an experienced real estate agent and real estate lawyer present to guide you through the process.