It's common to think of acquiring a second home as a full owner. In its purest form, full...
Second Homes: What Is Fractional Ownership?
Fractional Ownership is an emerging partial ownership model. The concept has gained popularity in the past two decades as companies have marketed vacation homes specifically to be sold as fractional ownership properties. Private parties can independently organize fractional ownership arrangements, but the latest marketplace buzz has arisen from commercial ventures.
How Does Fractional Ownership Work?
First, a company will purchase properties or develop them from scratch. Then, a limited liability company (LLC) is formed based on each property, and shares are marketed. Each share represents the number of days/weeks annually the share owner can use the property. For example, if there are ten shares, each owner is entitled to five weeks per year at the property. (This assumes maintenance consumes two weeks per year when the property is unoccupied.) Owners can typically buy more than one share if desired. In this case, an owner of two shares could have rights for ten weeks annually.
Not a Timeshare
Fractional ownership property often is misinterpreted as a traditional timeshare. Indeed, some sources define fractional ownership as a type of timeshare called a "shared deeded contract." However, the most well-known type of timeshare is a "shared leased" or "right-to-use contract." This means the buyer is entitled to a certain amount of time in the property but has no underlying ownership.
Fractional shares can be sold as real estate assets. The shares can also be passed to beneficiaries after death. In contrast, many shared leased timeshare "owners" have trouble selling their contracts. In fact, a wave of companies has evolved in the last twenty years to help timeshare owners exit their contracts.
The Pros and Cons
Ownership of a real estate asset
Multiple owner management
However, for fractional ownership, the role of a competent property management company cannot be overstated.
The Property Manager
Often, the developer of the fractional ownership property forms the property management company. Once all shares are sold, the owners can continue to retain this property manager or hire another.
The property manager handles most operational aspects. These may include:
- Maintenance of interior and exterior building features and surrounding grounds
- Maintaining insurance on buildings and contents
- Housekeeping, including cleaning of the property between owner visits
- Utilities like electric, water, gas, telephone, internet, and satellite
- Handling legal, property tax, and accounting tasks for the property LLC
- Cleaning, maintenance, and storage for communal amenities like kayaks, bikes, fire pits, etc.
- Oversee funds slated for future improvements and refurbishments.
At an Annual General Meeting (AGM), the property management company and owners review financials like the current year's budget results and the proposed next year's budget. Any other issues concerning the property are also discussed at this meeting.
A Fractional Ownership Case Study
Aaron and Mila Hasmatali live in the Toronto, Canada, metropolitan area. They were interested in owning a lakeside cottage in their province of Ontario but found the prices for suitable properties were out of their price range. They also were looking for a low-maintenance alternative so they could focus on relaxing rather than property upkeep during their stays.
After talking to a friend about fractional ownership options, they decided to research the topic. "One of my business partners had mentioned to me about this concept of fractional ownership that one of his friends was doing, and it sounded great.", said Aaron. "It just seemed like a good concept for someone who really doesn't want to show up and have to do work before I can start to enjoy my week."
After gathering information about vacation home fractional ownership in Ontario, they found a cottage in a seven-home development about two hours away. The property had ten owners, and one was selling his share. They purchased the share, which entitled them to five weeks per year at the cottage, one in each season plus a "floating" week.
The Hasmatalis fell in love with the place, especially the convenience factor. "You show up there, things are already done. You walk into the place, and it's spotless. Everything is there.", said Aaron. They have settings and everything for 10 people, so you don't have to worry. You're not showing up with a bunch of things."
All the convenience comes at a price. Aaron and Mila pay around $3000 annually as an owner's fee. Yet, they feel it's good value for the money. "We pay that one-time thing, and we know everything's covered within that.", said Aaron. There are no other surprises. There's nothing else coming at you. This is your fixed cost for the year."
As will all partial ownership arrangements, there are tradeoffs. "You can't just go whenever you feel like going to the cottage.", Mila commented. "You have your set weeks that you pick a year in advance. So, you still could plan it in advance, but you just can't pick up and go anytime you want."
Their summer week in July is the Hasmatalis' favorite time at the cottage. However, a nice surprise was how much they enjoy winter getaways. "We never in our wildest dreams ever thought we would want to go to a cottage in the winter.", said Aaron. "I can't believe it. We're out snowshoeing, walking on the lake, people are cross-country skiing on the lake, people are setting up ice rinks. It's so nice."
Another complication of fractional ownership is coordination with the other owners. However, the Hasmatalis have found that people tend to be cooperative. Mila noted, "In (another) cottage, there was a woman that had hip surgery, so it was very hard for her to go down the stairs because the stairs didn't have railings. So, they put out an email saying, is it okay if the maintenance guy builds a railing so that I can go down the stairs? They had to agree to that, so they built stairs for her."
Overall, the Hasmatalis feel very positive about their fractional ownership experience. As for advice for anyone considering this type of second home, Mila said, "Be flexible." Aaron added, "That's very important. Because at the end of the day, you are only a tenth owner. But for us, we found that it was just such a convenient thing. We know our five weeks, we show up, we don't have to worry. So we're pretty much 100% happy with this decision for fractional ownership, and I think it's a great concept for people like us."
- Should I Invest in a Second Home?
- What Are the Different Types of Second Homes?
- Second Homes: Buy or Rent?
- Second Homes: Full vs. Partial Ownership
- Is a Second Home a Good Investment or Income Opportunity?
- What Does a Second Home Really Cost?
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