In most cases “fractional” ownership has involved taking the timeshare concept and making it 10 times more expensive! However the need for fractional ownership is created (at all levels of income) by folks not wanting to spend so much money on their leisure assets. Even for the wealthy, the cost of a luxury ski lodge in Aspen or the latest super-yacht is going to hurt. So if you are rich you can bring down the cost of owning your luxury yacht or prime Florida real estate. For the rest of us it can be used to bring down the cost of ownership of slightly more mundane items!

Forget about anything you think you know about fractional ownership and consider the following:

A. Think of something that you would like to own or use but can’t afford (it has to be something that you don’t need to use all of the time). Typical types of things would be leisure assets (second homes, yachts, boats, caravans/RVs, tents), business equipment (expensive and occasionally used machines), or functional items such as a garden tractor.

B. Assess how much this would cost you if you were going to buy it. If you would have bought something used then use this price, not the new price.

C. Consider how many people could realistically share the use of this asset. When working this out you need to think about if the asset has a popular season (e.g. summer for beachside property, New Year for second homes in ski resorts).

Now divide B by C. Doesn’t this make your proposed purchase seem more affordable? There is no reason why fractional ownership has to be about luxury (although that is very nice). It can save you lots of money as well. Think about the following examples:

1: A family on a limited budget would like to save money on their vacation (or even afford to be able to go on one) by camping. The problem is that a full camping setup for a family of 5 isn’t cheap if you haven’t got much money. The fractional solution would be to share the cost with 2 other families in their local area. They would still each be able to go on vacation in the school summer break and take turns at using the equipment through the rest of the summer.

Example 2: If you enjoy yachting why not look at a fractional scheme for a used yacht. This can really bring yachting/boating within the reach of a lot of people. This was exactly the sort of scheme that I got involved with at the age of 18!

Conclusion

I’m not suggesting that fractional luxury ownership schemes are a bad idea, in fact I think that they put some really luxurious destinations within the reach of many more people. I just want to put forward the view that fractional ownership can also be used lower down the value scale to actually save folks on modest incomes money and make their life a lot more enjoyable.

Buying Expensive Assets Outright Has its Own Risks

When we make any major purchase we expose ourselves to some form of financial risk – we may not be able to afford the upkeep of the asset or a mortgage on it (due to changes in employment etc.), the resale value may be poor, purchasing may have been less cost-effective than renting/leasing etc. But how is the risk equation altered when you decide to buy into a fractional ownership scheme rather than buying an asset outright?

Fractional Ownership Risks

Firstly, one of the major risks is reduced – you should be less financially stretched because you have bough a part of an asset appropriate to your requirements rather than paying the whole cost.

If you buy into a syndicate formed for the purpose of buying a particular asset there are some additional risks associated with your fellow fraction owners – will they be afford to be able to keep paying for their share of the maintenance costs? Can the remaining fraction owners afford to pay extra if anyone can?t afford to pay their share? This type of risk needs to be assessed even more carefully if there is any joint borrowing involved.

If you buy into a private residence club or destination club then the risks depend on the ownership structure format of the club in relation to the assets that it controls. Deeded shares limit the extent of risks arising from the operating company failing or performing badly. All schemes would suffer if the management company failed to provide agreed services, however you are insulated from their financial performance if you own a deeded share of a particular home. This is because whatever happens to the overall scheme, if you own a deeded share in a home you have an asset that can be sold to get (a proportion of) your money back.

However if you opt for a non-deeded holiday club (some destination clubs fall into this category) you need to be very concerned with their financial stability and management. A commitment to refund your membership fee may come a long way down the list of creditors if the club gets itself into financial difficulty. This is one reason why schemes that feature some form of direct (deeded) ownership (whether directly or through a company formed for the purpose) are preferable.

Owning a deeded share also gives the possibility of benefiting from increases in real estate value, whereas the best that a lot of destination clubs offer is the refund of a percentage of your membership fee. This is not usually a factor for assets other than real estate (e.g. yachts, cars, planes) as they do not usually increase in value. The points above about the security of your financial contribution still apply.

Conclusion

I firmly believe that overall, buying an asset using a properly structured fractional ownership scheme has lower risk and is a more efficient use of money than buying outright. As with any large purchase you are advised to investigate the details of what you are buying and get as much advice as you can.

The Popularity of Fractional Ownership

The recent increase in popularity of fractional ownership is well documented, with a lot of the growth coming from new development schemes fro large developers. With the larger numbers of fractions being bought, it is inevitable that some of them will be re-sold. But having decided to sell your fraction, how do you go about valuing it?

Valuation Methods for Fractional Ownership

The traditional method for valuing real estate would be to engage an expert realtor (estate agent in the UK) to the job for you. Ideally consult with several to get different opinions (this is usually easy given the number of real estate businesses there are). When valuing a real estate fraction this approach might is more difficult since the re-sale market is still small and the number of businesses working in this area is few (although growing quickly). So how can you value your fraction? The following are some ideas of ways to assess value:

1. Find out how much the developer is selling fractions for now. If the resort/home you bought a fraction in is still being actively sold it should be a simple matter to find out from the developer what their current price is. You would often need to discount this price to achieve a reasonable re-sale price.
2. Find out how much real estate prices have increased (or fallen) by since you bought your fraction. Apply this percentage change to the original price of your fraction.
3. Consult an expert. There are some emerging experts and websites in the fractional ownership market who should be able to give you an opinion on the value of your fraction. This advice should be free unless you decide to sell your fraction using their services.

My advice would be to use a combination of all of the above methods before deciding on a value for your fraction.

Advertising Your Real Estate Fraction for Sale

This presents another problem in that the fractional re-sale market is relatively immature. Probably the best places to advertise your fraction for sale are the types of sites/publications that you would advertise real estate in. In this way you can access a large potential market.

Rules on New Members of Fractional Ownership Schemes

Often there is a worry about the sale of fractions in existing schemes and whether this will cause problems. The main concerns are normally over the allocation of time, payment of maintenance dues, and changeover problems (not leaving at the agreed time or leaving things dirty/broken etc.). Sometimes there is an attempt to counter this in the fractional ownership agreement by having a clause that new members need to be approved by the existing members. In my view this is a mistake. The focus should be on ensuring that the time allocation and changeover rules are clearly defined in the original fractional ownership agreement. In addition there should be clear and extensive penalties for failure to comply with these. The worry over payment of maintenance dues is easily dealt with by having a clause in the agreement that the fraction owners cannot use the home unless their maintenance dues are paid.

It is also worth considering how disruptive a fractional scheme member might be if they had a sale lined up, only to be refused permission to sell. Would they then be a constructive and helpful member of the group or would they be bitter and resentful?

What is Fractional Ownership

For those not familiar with the concept, fractional ownership involves a group of people purchasing an asset that they do not want or need to use all of the time. They buy a ?fraction? of the asset that entitles them to the amount of time that they need to use it. This is typically used for leisure assets such as second homes, yachts, cars etc. although it finds another application for functional items such as expensive business equipment or tools.

What Are the Environmental Impacts of Owning Leisure Assets

This varies depending on the type of asset you are considering. Second homes occupy valuable land, sports cars consume scarce natural resources, and yachts put pressure on the limited and fragile coastal environment through the construction of marinas and associated service. All assets consume energy and resources as part of their manufacture.

Second homes can also cause resentment in local communities especially if they are left empty for much of the year. They are seen to be driving up the cost of local property whilst contributing little to the local economy.

How Can Fractional Ownership Help

It is estimated that the average second home is only occupied for 4-5 weeks in a year. Sometimes owners will fill up the remaining weeks by renting the property out but the difficulties of arranging changeovers and keeping the property in a state that is suitable to rent discourage many. The use statistics for yachts and boats are the same if not worse. The desire to own a sports vehicle may result in it being used on a regular basis. It might be preferable to own something more practical and economic for regular use, and keep the fractionally-owned sports vehicle for occasional trips.

There is obviously the potential for more than one person/family to own the typical leisure asset. Most people (excluding the retired) would be able to share the use of a leisure asset with 3 others without significantly impacting on the opportunities to use it. A degree of compromise is required on use at very popular times, but the upside is more flexibility to have other holiday experiences or even buy additional fractional leisure assets. One problem with outright ownership of leisure assets can be the pressure to use them whenever you can, when you might want to do something different.

Fractional ownership also helps with pressure on local communities from second home ownership. As more people can share a smaller number of homes the affect on the local property market should be less. A fractional ownership second home will typically be occupied more frequently and will therefore contribute more to the local shops, restaurants, leisure facilities etc.

A Word of Warning

This article takes the view that fractional ownership will result in fewer leisure assets overall. It is possible if the concept really takes off that the increased number of people able to afford fractional leisure assets will actually increase the number of second homes, yachts etc. that are purchased. In this case the environmental benefits won?t have been achieved but there will be a lot of happy people!

What is the Credit Crunch?

In case you’ve been living in the wilderness for the last year, a short history of the credit crunch! It all started with a relaxation of lending criteria, both with regard to the size of loans compared to income and the credit rating of the borrowers. People who 10 years ago wouldn’t have been able to get a mortgage at all were offered large loans with very little proof of income. These loans were then packaged up by “clever” bankers and sold on to financial institutions around the world. This fueled a boom in asset valuations and while this continued everything appeared OK – if people couldn’t afford to pay their mortgage interest they simply rolled up the interest into a new loan. The party ended when interest rates in the US were raised and some of the more ridiculous deals that had been sold (balloon/deferred interest schemes) started to go wrong. Bring on a period of falling real estate values (both in the US and in the UK) and panic in the banking world. Some of the losses for individual banks on mortgage-backed securities are truly amazing, running into tens of billions of dollars.

What Effect is it Having on Real Estate Values?

Whilst all the chaos has been going on in credit markets banks have been unwilling to grant new mortgages without the security of large deposits. This is continuing to this day, with rates on mortgages increasing (in the UK) whilst the official rate charged by the Bank of England falls. Sales of homes are forecast to be down 40-50% in 2008 compared with 2007, with the decline in prices being put at between 5 and 10%. All connected with home sales are feeling the effects, and there is no end in sight to the crisis.

Why is Fractional Ownership Different?

Fractional ownership so far seems to be less affected by the problems in the credit market, and is still growing in popularity. This seems surprising, given that the main selling point of fractional ownership is that you own a fraction of the real estate – an asset that is declining in value. There are however genuine reasons for the continuing success of fractional ownership:

1. Many purchasers of fractional ownership have been “cash buyers” and are therefore not dependent on getting a mortgage. If they do need to raise mortgage finance against their primary home, they probably fall into the category of consumers that banks are still willing to lend to (large amount of value in the home, and a perfect credit record).

2. The people buying fractional ownership are not (or should not) be motivated mainly by investment concerns. Whilst it is true that the value of fractions over time should increase, and should be much better than timeshares, it is still not primarily an investment. People should regard fractional ownership as a life investment.

3. Fractional ownership is growing from a relatively small base. Market penetration is still small when compared to timeshare. The negative effects of the current credit crisis are more than offset by the rapidly increasing reach and acceptance of the fractional concept.

A Real Example

Steve Navaro runs Paris Home Shares LLC, a company specializing in fractional developments in Paris. After a recent article in the New York Times featuring his developments, Steve was overwhelmed with enquiries and quickly sold out one development. Steve admits that the exposure from the article made a big difference, “I think that if the product is done well, and priced fairly, it will sell, but only if there is plenty of exposure. Up until the article, things had been pretty slow”. Interest has continued at a high level, and Steve’s next Paris development is 50% sold out even though the renovation is not complete.

This example supports the idea that the limiting factor for fractional ownership sales is market awareness. The fractional market looks set for more years of growth whatever the fate of the wider economy and real estate market.

When is Real Estate Not Valued as Real Estate?

Answer: When it is part of a fractional ownership scheme!

This isn?t necessarily a bad thing, because resale fractions could (and sometimes have) been valued at more than their fraction of the original real estate value. However a proper exit strategy is required to cope with the possibility that the fractional valuation may be less than the value suggested by the underlying real estate.

Why is Real Estate a Good Long-Term Investment?

Real estate has proved such a reliable investment over the long term (ignoring the last year or so) because:

1. It is ?produced? using a scarce/finite resource – land. This has a greater effect in crowded countries like the UK but is true to a greater or lesser extent with all locations.

2. It has an enduring utility value. Everyone needs a place to live. Even properties in typical vacation locations have this utility value, since they can be used by the support staff that are needed to run a resort.

3. Unlike most investments, you can borrow to buy it. This gives the potential benefits (and losses) of investment ?gearing?.

Why Are Fractional Valuations Different?

If you compare a fractional ownership unit with the above you can see that point 1 is still true, 2 isn?t (or is much reduced) and 3 is difficult to achieve (perhaps more so with the recent credit problems). The fractional ownership unit will be owned with other people and probably looked after by a management company. Part of the valuation of the fraction will be based on the perceived quality of these external factors. In some circumstances these external factors could push the valuation of the fraction below that suggested by the underlying real estate value. In this case an exit strategy/contract clause is required to safeguard the fraction owners investment.

The Exit Strategy

I would personally advocate a winding-up clause in fractional ownership schemes, to enable re-alignment with the underlying real estate value after a specified number of years(if advantageous). In this case the fractional ownership scheme could only continue if all fraction owners agreed to another period of ownership.

Alternatively it would be possible to specify a clause in the fractional contract that would permit termination of the scheme with the agreement of a specified number of fraction owners.

Either of the two approaches above make sure that the investment interests of fractional owners are protected by the underlying asset value.

What’s the Problem?

The suggested problem seems to be that fractional ownership is only suitable for resorts with year-round warm climates or places with a very long season for other reasons, e.g. Summer/Winter use of an apartment in the French alps or a city-break location. This long season would mean less pressure on the time allocation and allow smaller fractions to be practical. Of course it does help if the season is longer, but I think that what is really being said is that fractional ownership in the UK (outside of London) is not really suitable for developers looking to make huge profits.

Why Fractional Ownership Can Work in the UK

To see why the worries about fractional ownership in the UK are incorrect, you only have to review the leisure industry that already exists in the UK/England. If the fractional ownership model can’t work in the UK why are there so many people with second homes who rent them out for part of the season? The whole cottage rental business would not exist if this were true. Also fractional ownership’s much derided “cousin” – timeshare is established in the UK, concentrating on resorts with either a lot of indoor facilities or year-round appeal (e.g. the Lake District). For developers to ignore the Uk market is to ignore potentially lucrative opportunities to sell a different type of holiday experience. As the green market grows and ever-increasing oil prices drive up the price of air travel there will be a larger market in the UK for UK-based holidays.

Who Would Buy UK Fractional Property?

Part of the problem is that developers often only seem to be considering a limited range of holiday experiences (basically luxury beach and/or golf) when it comes to developing fractional schemes. In the UK there are a number of existing leisure concepts which fractional developers could tempt consumers away from, the most significant being timeshare. Also as mentioned above there are a large number of second homes in the UK. The owners of these could be tempted either to sell fractions in their existing assets or to buy new fractional developments as a way of releasing capital.

From the consumers point of view the development of fractional ownership in the UK would open up the possibility of second home ownership to new groups who had not previously believed they could afford it, and had been unwilling to buy timeshare because of the bad publicity/poor investment returns.

My final point is that this year I took a break at “Centre Parcs” in the UK in the Lake District. This is a leisure facility that manages to be busy throughout the year, despite the English weather.

The Need for Fractional Ownership Management

If you own a leisure asset (real estate, boat, car) outright you are solely responsible for the maintenance and upkeep of the property, you have only yourself to blame if it is not in a reasonable condition when you want to use it. Not so with fractional ownership! People will not (and should not) put up with fixing things caused by the fractional owner who used it last. There is a need for cleaning and maintenance to be arranged and for the rules in the fractional ownership contract to be enforced. The question is, who should do this and what are the consequences of it not being done well?

Owner-Managed Fractional Schemes

This is the most cost-effective method, where either the fractional ownership management is delegated to one of the fraction owners, or a committee formed from the fraction owners. Although cost-effective there are many potential problems. The person responsible for managing things such as changeover arrangements and time allocation may have to mediate between different fraction owners. Where there is a serious disagreement this could be a very unpleasant experience. There is also the possibility of having to enforce unpopular rules, such as stopping fraction owners from using the asset if they have consistently broken the rules or not paid maintenance fees. There is also the possibility of there being a conflict of interest if the dispute involves the person(s) who have been given the authority to manage the fractional ownership scheme. Overall, although cost-effective this is an option that has lots of potential difficulties that should be carefully considered. You would not want the burden of administration and mediation to prevent you enjoying using the asset!

Resort Fractional Ownership Management

In the instance of private residence clubs, destination clubs, or other forms of club ownership the management of the fractional asset will come as part of the overall package. In this case you will need to make sure that you have confidence in the ability of the organization and the management team to control both the regular maintenance required and any disputes that may arise. How old is the resort/club in question? Has it or its assets been well maintained to date? Try to speak to some of the existing members to get a feel for how happy the are with the way that the resort is managed.

Third-Party Fractional Ownership Management Companies

If your fractional ownership scheme was put together by an agent/company for a single asset they may offer a management service of there own. The same points apply as to resort fractional management. Do your research and find out what their track-record is. Also, importantly find out what the arrangements are for terminating the management contract if you are unhappy with the service.

Conclusion

Do not forget to check out the quality of the fractional ownership management that is going to be in control of your asset. The best contract in the world is devalued if its terms are not implemented properly by a competent management team.

How Often Does Your Boat Really Get Used?

When I was young and had no commitments I owned a boat. I was really keen on my sailboat and tried to get out on it as often as I could. When I look back at this period I can see that I still only used it for a maximum of 7 times (weeks or weekends) in a season. Now this was a massive waste of money. Given that the sailing season was nearly 28 weeks I was using it for approximately 25% of the available time. I was still doing a lot better than some people though. There was one particular boar that was put in the water at the start of the season and I think it was probably only used once. By the end of the season it sometimes had grass growing on it!

Most People Who Own Boats Have Commitments!

The example I gave above was for me as a young man with no family commitments, an undemanding job, and few domestic responsibilities. This doesn?t fit the normal profile of someone owning a boat. They would typically be of an age where they had children, possibly their own business or demanding career etc. etc. In these circumstances it becomes even more difficult to allocate the time/resources to maintaining and using a boat. It can be quite common for the opportunities to use it to be only a few times in a season. In these circumstances does it really make sense to own your boat and leave it unused for 80% of the year or more?

What Are the Advantages of Fractional Ownership

For a boat the advantages of fractional ownership are even more compelling than they are for property/real estate. You can afford to have a bigger boat (or make the one you have cheaper to own). You can reduce the maintenance costs. It makes it easier to afford to have the boat professionally maintained leaving you free to enjoy using it rather than painting it! All the accessories and inventory that help to make using a boat more enjoyable or safer can be more easily afforded if sharing the cost with others.

Types of Fractional Ownership

You could find some like-minded individuals to buy a boat together (making sure that you have an ownership document detailing rights and responsibilities). There are also many companies that sell fractions of specific boats or opt for one of the many sailing club arrangements that are on the market. When entering into a ?club? type arrangement be sure to understand how your joining/subscription fees are being spent and whether you have any right to a refund. However you decide to do it I virtually guarantee that you will enjoy your boating more!

Timeshare ? a Word Forever Tarnished

At the mention of timeshare, do you think of carefree holidays in delightful locations achieved at a reasonable cost? Do you think of saving money and boasting to your friends and relatives about how wise your investment in timeshare was? I suspect not! If you?re anything like me the word timeshare immediately brings to mind the following:

High pressure sales
Being hassled when on holiday by touts
Losing money
High maintenance fees

A Unique Event!

Whilst enjoying a pre-Christmas dinner with friends one of them mentioned their recent break which, they unwisely told us, they had arranged using the timeshare that they had owned for 10 years. After having endured the usual amount of joking about their naivety they explained that, for them, this had been a good arrangement. They had enjoyed holidays at a number of quality UK locations over the years that they had owned the timeshare. They were happy with the annual maintenance fees. They had no reason to sell it and were perfectly happy with owning it. The normal rules of social behavior meant that I was unable to check the details (purchase price, annual fee etc.) but I think the fact that someone I know claimed to be happy with a timeshare was momentous enough to justify writing about it!

Can You Make Timeshare Work For You?

The most important point to note here is that my friends did not buy their timeshare new from a developer, but on the timeshare resale market. This is the only possible way that a timeshare can (sometimes) make financial sense. Timeshares are often sold for a tiny fraction of their new cost on the resale market. I once knew someone with connections with the timeshare industry who would quite happily market new timeshares to people. Of course the timeshare that he owned he had bought on the resale market.

Summary

The main things to consider when buying a timeshare are:

If you are thinking of buying new ? DON?T. You will always be able to get it cheaper resale.

Check that the timeshare you are buying entitles you to swap it for stays at resorts in other locations of a suitable standard.

Check how much the annual fee is. Frequently if timeshares are on the resale market for a very low price it means that the annual fee is very high. Also check what the arrangements are for increasing the annual fee.

Do a sensible calculation of how much you holiday costs for the remaining period of the timeshare would be. Compare this against the capital cost of the timeshare (and don?t forget to include the investment returns that you could get from this money) and the annual fee.