Old Friends Reconsidered: The Emerging Fractional One-Off and Co-Ownership Trends in the Shared Residence Industry

Monday, March 30, 2009 at 02:53PM

The current recession has had major economic and monetary implications, but arguably, has had even deeper behavioral consequences. Since the last quarter of 2008, three major destination clubs have declared bankruptcy, displacing members who had paid many thousands (and hundreds of thousands) of dollars to be part of a club they assumed to be stable. According to the Ragatz statistics collated last year, the Destination Club industry lost 47% of its sales volume since 2007. This kind of loss affects all tiers of the vacation ownership industry, even though the high-end fractionals, AKA the PRC industry only lost 24%. Although the feelings of dis-ease, and basic discomfort with anything shared residence, can’t be quantified, they still can be felt.

What was interesting and somewhat unexpected at the most recent Ragatz Fractional Interest Conference, held this month, March 2009, was the renewed interest in "Fractional One-Offs", as well as in the "Co-Ownership" concept used by many developers and private citizens. This model has been around for awhile, and at the present time, seems smaller and safer than many others in the industry.

A "fractional one-off" is a high-end or mid-level property or estate whose owner wishes to fractionalize it. Why would he or she do this, instead of selling? Well, NOW is not the best time to sell anything. And perhaps there is fiscal advantage to not selling. With such a decision, certain nuances must be considered. When considering whether to market or sell a single-family home or condo, a prospective seller must determine if there are adequate financial resources to prepare and sell the property as fractional interests. This is because there are certain expenses not incurred when selling a home outright.

Two well-known attorneys, Andy Sirkin of Sirkin Paul Associates, and Mark Sanders of Weinstock & Scavo Attorneys at Law, both presented at sessions about fractional one-offs and co-ownership models at the Ragatz Conference. “There is certainly a growing interest in these models, and perhaps because they are very structured,” said Mr. Sirkin, “ I believe these models are becoming the lucrative touch-points of the future. The owners often all know each other, and the legal contracts that outline every detail of the relationships as well as the ancillary transactions (in purchasing furniture, entertainment systems, towels, sheets, etc.) will be completely transparent. I believe this transparency will be a major magnet to many who have been burned by the recent problems in the club industry.”

Mark Sanders added another relevant reason for the one-offs' new popularity: “People are recognizing that fractional one-off homes have the potential to offer them more bang for the buck than whole ownership of the same property. In other words, depending on the particular fractional one-off program, a fractional owner could wind up using a fractional home as much as that person would use the same property owned on a whole ownership basis, but only pay a fraction of the purchase price and a fraction of the cost for maintenance and upkeep. This seems to resonate with people in the current economic climate as much or more than it ever has on an historical basis.”

Selling individual homes and condos as fractionals can be a great option for properties that are not selling well as whole ownership. And, after the economy begins to steady itself, more people may be prone to see this type of fractional ownership as a less expensive and lower risk option to whole ownership, and a much better, more intimate alternative to vacation rentals and hotels.

"However," cautions Mr. Sanders, “sellers of fractional one-off properties will need to be mindful of creating programs with effective management and budget arrangements to help promote the most seamless use of such properties by their fractional owners. Additionally, purchasers of interests in fractional one-off properties may see more limited financing options available to them in the short term. However, there are existing sources of financing, and we may see consolidation among lenders to this industry as well as new lenders coming into this space as necessary to meet an increase in demand.”

Last year, Sherman Potvin, a fractional expert, authored a book called Fractionalize To Maximize on the one-off idea. In it, he discusses the process of readying a home of fractional purchase. Mr. Potvin says the "up-side" of fractionalizing your home is tremendous. “The beauty is that almost anyone can turn his or her whole-ownership vacation home into a fractional,” says Potvin. “In a “hot” real estate market,” he continues, “you can realize 1.3 to 2 times the Fair Market Value for your home. In a cool market, you can get your house sold, usually for Fair Market Value, even if similar homes aren’t selling at all! And if you love your vacation home; you can keep a piece of it and have time to enjoy it each year without all the hassle.”

In addition to this option, there are a number of fractional management companies that will help provide consultation and management services for fractionalizing vacation properties from start to finish. See Dream Quarters and Dream Shares for details.

Whatever the seller chooses, the fractional one-off is an old friend, becoming new again.