Fractionals: Have your vacation home and afford it, too
"This way, they have use of the house when they want it, the house is not beaten up by being rented out, and they're not bearing the entire cost of acquiring or maintaining the house. Plus, they don't have the management headaches of renting it out. That is what is causing people to turn to this in increasing numbers."
Ownership and control
If this all sounds a little familiar, it should. In fact, perhaps the biggest
hurdle facing the emerging fractional industry is that it is frequently confused
with your parent's version: the time share.
Two things separate the fractional from the time share:
ownership and control. With a time share, you typically bought the
use of a property for two or three weeks a year; there was no ownership
in the property itself and you had little, if any, control over
when or where you stayed. With a fractional, you are actually a
co-owner of the property, either by deed or, as is often the case
with foreign fractionals, as a shareholder in a nonprofit business
entity such as a partnership or limited liability company. Although
deeded ownership does not guarantee you any particular level of
control per se, it does provide the opportunity to incorporate that
into your governing documents.
As your parents may attest, the problem
with time shares is that their investment value tended to decline rather than
appreciate, especially when the developer moved on.
gave older time share concepts a bad name was that people didn't really have any
control at all, so what happened was, either the property became run down over
time or costs went up exorbitantly, or both," says Sirkin. "So it got
to the point where you were paying more than you would for a much nicer hotel
room down the street. They were too big, the developers had no incentive to keep
it up once they sold out the project and there was no one to actually take care
Neil McAllister, co-founder of YourFraction.net, a
fractional advisory service based in Florida and Edinburgh, Scotland,
says fractionals have learned from the mistakes of time shares.
with the average time share, something like 50 percent of it goes to commissions
and fees, whereas the true brick-and-mortar value is really quite low," he
says. "The finance people we're using have said they would prefer that the
total of all the fractions does not exceed 130 percent of the value of the property."
Fractionals are all the rage just now, with megadevelopers
such as Ritz-Carlton, Four Seasons, Marriott and Interwest busily
marketing private residence clubs, or PRCs, in their luxury resort
properties, hoping their four-star pedigrees will lure boomers away
from do-it-yourself options.
Would you rather be a direct owner
in a small fractional or a luxury PRC member? Sirkin says the choice once again
comes down to equity and control. "If you buy a nice house in a desirable
resort area, that is going to hold its value, period. Even if the group doesn't
do such a good job of being a group, the basic real estate value is there,"