What is Fractional Ownership? Pros And Cons Of Fractional Home Ownership

Article Summary:

Fractional ownership lets people buy a stake in a vacation property in a beautiful resort community. This is ideal for those who only use the property for a few weeks per year. But unlike timeshares, fractional ownership grants people ownership of the property itself–not just time.

Fractional ownership is the latest trend among those looking for an affordable getaway house. Fractional properties allow prospective buyers to purchase a stake in a vacation home rather than buying a whole property.

This approach makes sense for several reasons, including lower purchase costs and less maintenance. Plus, a fractional property is less likely to stay vacant most of the year.

Fractional ownership is not without its downsides, though. In this guide, we’ll cover everything you need to know about this shared ownership model and whether it may be right for you.

What is Fractional Home Ownership in Real Estate?

Fractional ownership is a deeded real estate arrangement wherein each fractional owner buys a stake in the property. Instead of owning an entire property, fractional interests buy a stake in the property that grants them a right to use the property. That stake is typically between one-tenth and one-half. That use is divided up either by weeks of the year or by space.

This shared equity model of buying a stake in a vacation property can make a lot of sense. It lowers the cost of purchasing a property; plus, most owners only use their vacation homes a few weeks out of the year. Plus, timeshares have fallen out of favor, and fractional ownership is seen as an improvement over this old way of doing things.

This real estate investment strategy also makes sense for the party that initially buys the property and then sells the shares. Instead of earning rental income, they simply sell the property, but it can be easier to sell a high-value asset to multiple owners.

However, this ownership model can lead to conflict. When vacation properties have several owners, they all must reach an agreement on upgrades to the property, who can use it and when, and even interior design.

Fractional Ownership vs. Timeshare

Fractional ownership does bear some similarities to timeshares and destination clubs. The most obvious similarity is that with fractional ownership, each of the co-owners may be permitted to use the property for a set amount of time, such as six weeks per year.

But the difference between the two is in the name: fractional ownership. Indeed, in this arrangement, each of the fractional ownership interests owns a stake in the property. Each co-owner shares accountability in maintaining the property.

That is opposed to timeshares, where vacationers simply buy a certain amount of time at the property each year. But they don’t own a share of the property itself, nor do they receive an ownership deed.

There are other differences, too. For instance, fractional ownership properties tend to have far fewer owners than timeshares. Plus, fractional ownership allows people to buy a share of a luxury vacation home, while timeshares may be less luxurious properties.

Fractional ownership vs. shared equity agreement

Fractional ownership describes any agreement where two or more people share ownership of something, including timeshares, private residence clubs, or vacation clubs, whether or not they share usage. Shared equity agreements are completely different. Home equity investments — another term used to describe shared equity agreements, describe a contract between an investor and a homeowner to share the future equity of a home.

Unlike fractional owners, the homeowners in a shared equity agreement keep complete control of the usage of the property. Some homeowners do use shared equity agreements to invest in a vacation or investment home. Here is how they work.

Shared equity agreements, sometimes known as home equity investments, allow homeowners to cash out on their equity without getting into debt. Investors give homeowners a lump sum in exchange for a share in the future value of their homes. When the homes are sold (or when the contract term ends), the investors receive their share from the sale. If the value of the house increases, so does the amount the investor receives. If the house drops in value, the investor also shares in the loss. Here is SuperMoney’s list of the best shared equity investors.

Responsibilities of a Fractional Owners

Typically, you and a group of unrelated owners share the property and a property management company is responsible for maintenance. That company would also take care of any renovations or improvements to the property.

However, this isn’t the only fractional ownership model. For example, with a tenancy-in-common, one owner may be responsible for managing the property. This may save you some fees, but having a single owner managing the property may also carry added risk.

In addition, each individual owner is responsible for their share of real estate property taxes.

What About Financing?

While it is possible in theory to finance a fractional ownership property, it is not very common these days. Many banks either don’t offer this type of financing for this type of real estate or are leery of extending a line of credit.

In other cases, a lender may be unwilling to cover more than 50 percent of the cost. Thus, fractional buyers must either make a large down payment or avoid borrowing money altogether.

And fractional ownership properties are not cheap. While you share equity, most fractional shares have a price tag over $100,000. Thus, with financing limited or impossible, fractional ownership is often limited to wealthy buyers.

Can You Sell Fractional Ownership Shares?

It is possible to re-sell your fractional share which means you can take advantage of any appreciation to the property. Still, it can be complicated with traditional fractional ownership, and you’ll have to know how the ownership is structured and be aware of any potential restrictions on selling. The good news is that fractional ownership shares are usually easier to sell than a stake in a timeshare.

What Are Private Residence Clubs?

If you happen to hear this term, it’s just another term for a fractional vacation property. These properties, in which you buy a share, can be sold, gifted, inherited, or placed in a trust. This allows you to pass them to family members if you so choose.

Pros and Cons of Fractional Ownership

If you have considered this form of co-ownership, you might wonder what the pros and cons are. Let’s take a quick look.

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and the drawbacks to consider.

Pros
  • Lower cost to purchase a vacation home
  • Several parties occupy one property so it doesn’t sit vacant most of the year
  • Ability to sell your shares and take advantage of appreciation
Cons
  • Shares can be difficult to sell
  • Financing options are limited
  • Having many owners could make it difficult to make decisions about decorations, renovations, etc.

Is Fractional Ownership Right For You?

Buying whole ownership of a property isn’t always logical for those who only spend a few weeks of the year at their second home. This way of sharing equity allows you to tailor your vacation home ownership to how much you actually use the property. By having usage rights for only as much time as you need, your ownership interest corresponds to your personal use of the property.

Of course, you will also have to work with other owners. Each of you hold title to the property and may have concerns or ideas about how the property should be used. While there is often a property manager that takes care of upkeep, each of you shares in management responsibilities.

Financing for this type of real estate can be difficult; so, too, can selling your shares, if necessary. However, some lenders are willing to finance fractional ownership. Plus, if the property value increases, you can take advantage of that appreciation.

Be sure to ask key questions about the real estate property before committing, such as how easily owners can sell their shares. While you might be eager to take your next vacation, be sure fractional ownership is right for you before spending money on one of these real estate properties.

Key takeaways

  • Fractional ownership is a deeded real estate arrangement allowing co-owners to purchase shares in a property
  • Unlike a timeshare, fractional ownership allows buyers to own a piece of the property, which can be resold
  • Use is divided up either by space or by time throughout the year
  • Financing can be difficult and many buyers pay in cash
Article Sources
  1. Shared Equity Agreements: Reviews & Comparisons – SuperMoney
  2. The Best Shared Equity Alternatives to a Home Equity Loan | September 2021 – SuperMoney
  3. Featured Fractionals – Luxury Fractional Guide
  4. The Best Shared Equity Alternatives to a Reverse Mortgage | September 2021 – SuperMoney