Why Buy a Whole Pie, If You Only Want a Piece?

If deciding between a beachside cottage or slope side lodge for a second home is a dilemma, fractional ownership may be the right choice. Owning fractional real estate allows you to buy the piece of the real estate you can use, lowers the expenses and guilt that comes with a second home that is under utilized.

Fractional ownership is not new. Families have shared ownership of vacation homes for as long as there were second homes. But today’s fractional programs are more formal and create a situation where you may never know your property’s co-owners. Fractional is similar to condominium ownership, but fractional shares time and real estate space. Condominium ownership in America started slowly and took decades to mainstream, fractional will get a boost from the baby boom generation’s propensity to innovate. Fractional ownership is growing, over $300 million in fractional real estate was sold in 2005, nearly a 40% increase over 2000.

Fractional is Not Timeshare – Timeshare is Not Fractional

Timeshare was the original “fractional share” where you can buy 1 week of ownership or a 52nd share. Timeshare has ballooned to a $3 trillion industry in the US in the last 20 years and is growing at a double digit pace.

Comparatively Fractional has many lower risk characteristics. It is less risky because Fractions are typically sold in ¼ share or 12 weeks a year; 1/8 share or 6 weeks; 1/10 or 1/12 or 5-4 weeks ownership, so the underlying real estate values are less diluted by sales and marketing expenses. It costs a lot to sell a single condo to 52 different buyers, and timeshare developers often expense 50% of the cost of a share to marketing. A single unit of timeshare or a 1/52 share might sell for $10,000 a week, or $520,000 for the whole property, might have a real estate value of $250,000. A ¼ share of the same condo might sell for $75,000, or $300,000 for 4 quarter shares, representing a 20% increase over the whole ownership real estate value.

Better Living through Thinking In Smaller Bites

The average American gets a whopping 2.4 weeks of vacation per year, so fractional ownership is enough for most of us. The pure economic common sense of only paying for the fraction you can use is a dynamic you don’t need to be a financial guru to understand but even Warren Buffet once commented that he did not own a private jet because it wasn’t a “justifiable expense”, then he bought a fractional jet company, making the ownership cost a bite-size expense. Fractional aviation has seen an explosion in sales, as have many luxury items – yachts, cars, and vacation real estate.

Fractionals often allow for economic justification of even higher priced second (and third) homes in prime rare-air locations. As resort real estate prices have soared, so has fractionals’ popularity. How can you own $1 million dollar condos in multiple locations? An eighth share of a $1 million condo may sell for $175,000 each. So if your client wanted use of two $1 million condos in different locations you could own both for just $350,000, that’s affordable luxury.

Through out the US, in all the best vacation home locations, fractional projects are being developed. Both condominiums and single family homes may be sold in fractional shares, but marketing of resort projects are often the norm and easier to sell to consumers as they offer a lifestyle benefit that is more than just real estate ownership. Resort rental programs rent your real estate when you cannot use your allotted time further increasing the investment benefit to owners of fractional real estate and minimize the hassle-factor associated with owning property that is too far away to manage.

Beginning a Trend

76 million baby boomers will seek retirement nests in the next 14 years, fractional will become a more popular and common-sense choice for those who want luxury at an affordable price and the best locations without the hassle and expense. Fractional is just one of many new vacation and possible retirement ownership options available to today’s consumers that is cropping up in every major resort market in America.

By: Bob Waun
CEO – Vacation Finance
www.vacation-finance.com
Waun@vacation-finance.com

Vacation Finance is America’s First Second-Home Lender, based in Birmingham, MI and lends to fractional, timeshare, condo hotel, cottages and vacant resort land, offering a unique wholesale solution for brokers seeking to capitalize on the baby boomer second home wave.