What Is Fractional Ownership In Real Estate?

By Realty Times Published Apr 26, 2022 05:23 am

Have you ever been browsing vacation homes in a dream location and found something that looks amazing, well below your expectations as far as price? Then, you read the description in a little more detail and see it’s for 1/8 of the home. That’s fractional ownership.

The idea of fractional ownership is one where a high-value asset becomes a shared risk among the stakeholders, who are the owners.

Fractional ownership shares are sold to individuals who are the shareholders. The shareholders then share the benefits of the asset. For example, if the property is rented out, they share the income.

An Explanation of Fractional Ownership

While vacation properties are often associated with fractional ownership, it’s also a structure used for airplanes, sports cars, and other high-value assets.

The cost of a property is split between people who are owners or users. If the fractional owners rent it out, it’s an investment property.

If you buy a vacation property and want to use it, you schedule the time you’ll be there with a management company. The property management company also usually oversees the maintenance of the home.

There are restrictions on how much time any one owner can spend at the property, and a fractional owner doesn’t have to use all of their time personally. They can let friends, family, or coworkers use their time.

Another option is for a fractional owner to rent out their time to other owners or make it available to outside parties who aren’t owners as a rental.

Participants usually share both the costs and the benefits of their assets based on the percentage they own.

The owners share costs like property management fees and repairs. The terms vary.

The Role of the Property Manager

A property manager who oversees a fractionally owned vacation home often has a network of properties in different locations. Then, as a result of that network, they can provide owners the chance to exchange time in other owners’ properties.

Fractional ownership can become part of an estate that’s passed onto heirs.

What Are the Pros and Cons?

The biggest advantage of fractional ownership in real estate is that it makes owning a vacation home more accessible.

If you only have part of the year available to use the home, you’re essentially paying for what you’ll use. You’re also sharing maintenance and upkeep costs, so this is less expensive than if you purchased a home on your own.

Of course, there are downsides.

It can be a challenge to find a real estate agent and a lender who will work on a mortgage for a collectively owned asset. It can also be more expensive upfront than putting a down payment on a vacation home you’d solely own.

A collective ownership structure means that everyone has to make decisions, which can be time-consuming.

You also have to be someone who doesn’t mind sharing your home.

If you have fractional ownership of a property, selling can get tricky. You might not be able to at all. Prospective buyers don’t want to get into a partnership with strangers, and your partners can make it hard for you to sell.

How’s It Different from a Timeshare?

A timeshare is very similar to fractional ownership, but it seems to have worse connotations in some people’s minds.

One of the key differences between a fractional and timeshare is the number of owners per home or unit. A timeshare can have as many as 52 owners for each unit. At a minimum, they have 26, so the owners get short stays, and they’re not frequent. When you’re part of a timeshare, you usually only visit the property once every year, for a week at a time.

You don’t have much emotional or physical connection to your timeshare.

There’s also more wear and tear since people are frequently in and out.

Fractional properties tend to be more high-end, with expensive finishes, high maintenance, and attention to detail.

A third major difference is that you have more control as an owner of a fractional property. A timeshare is usually controlled by either a hotel operator or developer. You’re more of a hotel guest with a timeshare than an owner at the end of the day. The fractional model does offer more of the feeling and experience of being a property owner.