|Fractional ownership: Get a piece
of a vacation home
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.
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
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,"
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.