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Fractional ownership: Get a piece of a vacation home
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Two-thirds of Alpine Quarters' buyers pay cash or finance the purchase through a home equity line, Freyschlag says. About a third will finance the deal. Buyers should expect terms that are similar to those paid by real estate investors -- a percent or two higher than they would get if they were buying a primary residence with a down payment of about 20 percent.

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Financing rare
That's if they can find a bank willing to do the deal. Lenders are gun-shy about taking on the loans because they see them as high risk, says Anthony Hsieh, president of the California-based Home Loan Center. If the borrower defaults, it could be difficult for the lender to sell the property.

"It's a very non-conventional product," he says. "If there is financing available, it's generally through the builder or developer."

Some boutique banks will do the loans on an in-house basis; borrowers should expect to pay higher rates because the bank can't resell these loans to the secondary market.

They also can expect a hefty annual maintenance fee -- rates of $5,000 a year or more are not uncommon. But then, they can call the management company a few days before they get to town, have the fridge stocked with their favorite goodies, arrange a tee time or a day of deep-sea fishing, and make sure the AC is set at their favorite temperature.

To defray those costs, most people who buy a fraction in a vacation home wind up renting it out for at least part of the time, Freyschlag says. "It's logical and practical to do it," he says. "You could buy 52 weeks, which is whole ownership, but you would be dependent on many, many weeks of rental to cover expenses. This way, you need fewer weeks of rental. The risks are really minimized."

Who's learning their fractions?
Who buys into fractional ownership? Typically, they are people who could afford a vacation home, but don't have the time to use it, says Ron Davis, a real estate agent in South Carolina who sells fractions in oceanfront homes on the Isle of Palms.

"I had an attorney who sold a house for $1.5 million and bought a share for $160,000," Davis says. "This is making an appointment with yourself for your vacation. It has some inherent motivating factors to use it."

The more expensive the property, the more it makes sense. "When an oceanfront lot went from $400,000 to $2 million, that's when people started looking at fractional ownership," Davis says.

It's not an investment you make because you think you're going to make a killing in real estate, Davis says. The shares usually are sold at about a 20 to 25 percent premium, so unless the property values in a market just go through the roof, your gains will be modest. But the vast majority of fractional ownership buyers aren't real estate investors; they just want a getaway.

Bankrate.com's corrections policy -- Posted: Dec. 11, 2003
 
 
More stories by Pat Curry
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