Buyers, developers, and mortgage companies are always looking for creative ways to finance second homes. The "fractional mortgage" has been gaining traction and popularity for more than a decade as an attractive way to buy a vacation property.

Wealthy consumers who wanted their own private jets were the original users of the concept behind fractional mortgages. Multiple owners would pool their resources, and share the financial burden, as well as the aircraft. In the mid-1990s, fractional ownership made its debut in the real estate market.

What's a fractional mortgage?

As its name implies, a group of people-usually family members, friends, or business partners-join together to buy the property as a team, then divide the ownership into fractions or portions. Since the costs and the benefits of owning the home are shared, the fractional mortgage makes it easier for everyone involved, while delivering the ultimate prize-namely, your own vacation property, albeit on a shared basis.

Some of the biggest players in the fractional ownership market are hotel chains or similar entities that are already in the business of vacations and short-term lodging. They manage the units and sell fractions as shares. Unlike conventional timeshares, the prices are generally higher, because ownership is divided among fewer people. These companies then sell shares, or fractions, at a premium to underlying real estate values, and typically pocket a profit of about 20 to 25 percent. Maintenance fees are steep; so many owners rent a portion of their allotted time to others, to make money to offset the costs. For most people who want to buy a vacation home, but don't plan to use it for more than a few days or weeks per year, the added convenience easily justifies the cost.

Special mortgage traits

Here are some of the features of fractional mortgage homes:

  • Each owner gets an equal number of days a year to use the property.
  • 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 inheritance.
  • Unlike timeshares-which usually cost a few thousand dollars-fractional ownership can cost $150,000 or more, depending upon the property.

Lenders normally avoid making fractional mortgages, for the simple reason that, if one participant defaults, it can be hard to foreclose. That's because other owners have a right to keep their share of the home. As a result, most fractional mortgages are offered by builders or developers.

If you calculate how much you spend each time you rent a hotel, condo, or holiday house for a vacation, it doesn't take a financial wizard to understand that you aren't getting much of a positive return on your investment. Thanks to the emergence of fractional mortgages, however, having a second home to call your own may not be such a far-flung concept. On the contrary, it may be entirely practical, attainable, and financially feasible.

Published on December 14, 2007