Can’t find a buyer for your luxurious beachfront villa? Maybe you could sell it by the slice.
That’s an evolving strategy among homeowners in resort areas who have given up on finding a buyer in the usual way and are turning to the concept of fractional ownership.
"Who wouldn’t want to live in a $3 million house for four weeks a year for $300,000 — and own it?" asks Evelyn Bernet, an agent with Wagner Realty in Sarasota, Fla., who recently began marketing a home on nearby Anna Maria Island through fractional ownership.
Bernet said the owner (fellow agent and co-lister Suzanne Van Gundy) had tried to sell the fully furnished two-bedroom, three-bath home for $3.25 million for more than a year. Recently, however, they decided to go the fractional route, and are asking $169,000 for a two-week slice of the beachfront house, $299,000 for four weeks, etc.
This type of arrangement isn’t a timeshare. In simplest terms, timeshares sell the right to a certain amount of usage — or time — in a property each year; in a fractional, the buyers own a portion of the property itself.
"It’s deeded and fee-simple," Bernet said. "The owners own their part, and they can sell it, rent it, pass it on to their kids."
It’s not a widely understood concept in the United States, though it’s gaining popularity in some resort areas, according to Andy Sirkin, an attorney who specializes in shared-ownership properties. He estimates his firm, Sirkin Fractional Lawyers, with offices in San Francisco, Evergreen, Colo., and Paris, has handled 5,000 fractional ownership agreements since 1985.
Sirkin said fractional ownership is most likely to be found not among single-family homes or condos but at larger resort complexes. However, in this slow real estate market he’s seeing an increasing number of situations like Van Gundy’s. In the fractional business, such individual homes are known as "one-offs," he said.
"(Fractionals in the United States) took off five or six years ago, and they’re gaining traction," Sirkin said. "The economic crisis slowed the momentum of the overall market, but the future is very bright for this type of ownership."
He said the real estate downturn here has potential buyers taking a serious look at the traditional concept of vacation-home ownership.
"Many people don’t want the responsibility, the headaches and cost of owning the whole property that they’re going to use maybe one month a year," he said.
Further, he said, fractionals are now appealing to well-heeled buyers who want diversified vacation locales — they might buy fractionals in several places so that they aren’t tied to a single location. …CONTINUED
Thirdly, he said, fractionals promise entrée into something grander for some buyers. "They might afford a small condo (purchased outright), but this way, they might get a share of a five-bedroom villa."
But fractionals are not a slam-dunk, he cautioned.
For sellers who want to fractionalize a home, the biggest problem Sirkin sees these days is realistic pricing per fraction. Sellers get stars in their eyes, he said.
"While such properties may be worth more as a fractional than as whole ownership, the amount by which it’s worth more is not as great as people think," he said. Typical one-offs these days should be priced at about 1.2 times what it would sell for in the traditional market, he said.
"Issue No. 2 is financing," he said. "Until the mortgage crisis hit, people had a choice of financing options. They could go with individual financing, where each of the buyers had their own loan.
"Or, they could go with one loan on the building, and everybody pays part of it," he said. Sirkin said that with the current troubles in the lending market, individual mortgages may be difficult to secure.
So he’s seeing instances of single mortgages secured by all the buyers, which can be complex to put together.
"Or, you might see everybody paying with cash," he said. "In a multimillion-dollar property, you might be surprised at how many people do."
For buyers, the considerations also are complex, Sirkin said.
Although fractional owners can and do re-sell their ownership slices in the traditional market, it’s not often easy because it’s still an unfamiliar thing in the marketplace, he said.
"It’s new, and it’s a complicated concept," he said. "People have a certain amount of distrust about sharing things, left over from having to share things with their little sister when they were growing up."
The key, he said, is the real estate agent community becoming familiar with it, which he said will take time. …CONTINUED
But before the resale issue comes the issue of "owner harmony," he said.
In order to succeed, ownership arrangements have to spell out expectations in extraordinary detail, he said. The contracts for fractional ownership tend to be thick.
"The most important element of the contract is usage," he said. He said there are a variety of approaches on deciding who gets to use the house when.
Secondly, fractionals, like condo ownership, typically have monthly maintenance fees, and budgeting and reserve funds need meticulous consideration, he said. Not only are there major bills to pay, such as mortgage, taxes and management, but the nitty-gritty needs to be considered.
"I make my clients inventory every single item in the house and devise a time frame and a cost for replacing them," Sirkin said. "The biggest problem encountered with budgeting and reserves comes with repair and replacement of all the things in the house — not just the roof and the couch, but the stereo and the dishes.
"Then, you’re giving people a realistic expectation of cost," he said. "And you have the money there when it’s time to repair. This turns out to be a huge element in how well the property owners get along with one another."
He said, in his experience, fractional owners are a happier group when daily maintenance issues are in the hands of a professional management company.
Frequently, though, differences of opinion emerge, and fractional owners shouldn’t kid themselves otherwise. A process for dispute resolution should be spelled out in the contract, he said.
Sirkin said his specialty practice sometimes seems to be less law than political science.
"A lot of what we do is design a governmental system in miniature," he said. "Instead of rules for a group of people living together in a city, we’re helping to design rules for a group of people living together in a house."
Mary Umberger is a freelance writer in Chicago.
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