Fractional Ownership Explained

What is Fractional Ownership?

As its name implies, fractional ownership is when a group of people–usually family members, friends, or business partners–join together to buy an asset or property as a team. Instead of one person owning the entire asset or splitting it equally among multiple buyers, ownership is divided into shares, which can vary in amount. 

For example, if 4 friends bought a home together, they could divide ownership equally so each friend owns ¼ or 25% of the home, or they could divide the home into uneven fractional shares. For example, one friend could own 40% of the house, while the other three own 20% each. 

How Does Fractional Ownership Work? 

In a traditional fractional ownership agreement, the parties with more stake in the asset or property pay more maintenance, tax, and insurance costs but are entitled to more time with the property or asset. 

Fractional Ownership Mortgages

Obtaining a mortgage for fractional property ownership can be challenging and is not a common practice in the mortgage industry. Traditional mortgages are typically structured for equal property ownership, and fractional ownership introduces complexities that many mortgage lenders may be hesitant to navigate. 

It’s important to point out that co-ownership of a home is not the same as fractional ownership. Suppose you took a co-borrowing situation where two people were buying a house. In that case, the difference between fractional ownership and co-ownership is that with fractional ownership, one of the buyers could purchase more or less than half of a property. In contrast, traditional co-ownership involves multiple people equally purchasing an entire property together. 

Here are some of the features of fractional mortgaged homes:

• Each owner gets a set amount of days to use the property based on their share amount. 
• Owners typically buy shares from a management company, which handles maintenance as well as scheduling of usage.
• Like timeshares, fractional ownership homes can be rented, sold, or given away as an inheritance.
• Unlike timeshares, which usually cost a few thousand dollars, fractional ownership can cost $150,000 or more, depending upon the property. With timeshares, you only buy time in the property, while fractional ownership allows you to own a portion of the property. 

Fractional Ownership of Real Estate

Some of the biggest players in the fractional ownership market are hotel chains and luxury resorts already in the vacation and short-term lodging business. 

When larger real estate properties use a fractional ownership investment structure, it involves 

dividing a hotel or resort property into shares, which are sold to individual investors or buyers.

Each fractional owner has the right to use the hotel or resort property for a specific period each year, with the schedule often rotating among owners. The higher the share, the more time an owner is subject to. Fractional owners can also access the hotel’s amenities and services, such as pools, restaurants, and concierge services.

Owners typically contribute to property expenses, while a management company handles the property’s day-to-day operation, maintenance, and guest services on behalf of the fractional owners.

Fractional Ownership vs. Timeshares

Timeshares and fractional ownership are both arrangements that allow multiple individuals to share ownership of a vacation property or resort accommodations, but they differ in several key ways:

Ownership structure

In a timeshare, buyers typically purchase the right to use a specific unit or property for a set period each year. They do not own a share of the property but have the right to stay in it during their allotted time.

Fractional owners own a percentage or share of the actual property. They have a deed or title to the property, representing their ownership stake. This means they have an equity interest in the property.

Length of ownership

Timeshare ownership is often structured for a fixed period, such as one or two weeks per year, and typically extends for a predetermined number of years (say 20 or 30). After the contract expires, the ownership ends.

Fractional ownership typically allows owners to hold their shares indefinitely or until they choose to sell their portion of the property.

Upkeep costs

Timeshare owners typically pay annual maintenance fees, which cover the costs of property upkeep, taxes, and amenities. These fees can increase over time. Fractional owners also share in the property’s expenses, but since they have a more substantial ownership stake, their share of the costs is typically higher than that of timeshare owners.

Equity and resale value

Timeshares often have limited resale value, and depending on the market, owners may find it challenging to recoup their initial investment when selling their timeshare.

Fractional ownership can have greater potential for equity appreciation. Owners may have a better chance of selling their share for a profit, especially if the property’s value increases over time.

Is Fractional Ownership a Good Idea? 

For some, fractional ownership can be a convenient way to access and enjoy lavish properties, while for others, traditional ownership or other real estate investment strategies may be more suitable.

Before you decide to make the jump, let’s review some fractional ownership pros and cons: 

Fractional Ownership Pros

• Access to desirable vacation homes, resorts, or investment properties that you might not be able to afford on your own.
  
• Costs like property maintenance and taxes are shared among co-owners, reducing the individual burden.
  
• Depending on the ownership agreement, you may have flexible use, allowing you to use the property throughout the year.
  
• Fractional ownership involves equity ownership, which can appreciate in value over time.
  
• You can sell your fractional ownership if you no longer wish to use the asset.

Fractional Ownership Cons 

• Fractional ownership arrangements are more complex than a typical mortgage. It may take much longer to close on a fractional ownership mortgage or agreement than another type of mortgage. 

• Your use of the property could be limited to specific times, forcing you to stick to a predetermined schedule with little flexibility. 

• Reselling your ownership share might be more challenging than selling a whole property and may yield a low return on investment.

• Differences in use preferences, maintenance decisions, or property management can lead to arguments.

To determine if fractional ownership is a good idea, consider your financial situation, how often you plan to use the property, your long-term goals, and your willingness to share responsibilities and expenses with co-owners. 
It’s also essential to thoroughly research the specific fractional ownership opportunity and consult with legal and financial advisors such as a real estate attorney.