When Does Fractional Ownership Make Sense?

If you would like to purchase a vacation home in Hawaii but can’t justify the high cost for occasional visits, a fractional property may be the solution. Fractional ownership allows you to split the home costs between multiple owners.

Here I’ve outlined a step-by-step process to finding and purchasing your fractional vacation home.

Timbers Kauai Fractional Resort

Select a Home Type (SFR or Resort)

A Fractional Single-Family Residence can be any home in any location. Realtors list shares in these homes or condos. The fractions, usually 1/4 or 1/8, are sold individually and deeded as fractional.

A Fractional Single-Family Residence can feel more like a home away from home and is likely to be in a residential area.

Resort homes are in a resort style location with resort amenities. The resort developer sells fractional shares in the resort.

Resort homes are easy to buy. Some of the more common fractional sizes for purchase are 1/8 to 1/24 of the resort residence. These homes come with amenities and may be situated on golf courses, have ocean views, and have spa facilities.

Popular fractional opportunities in Hawaii are located throughout Kauai and include the new Timbers Maliula Residence Club.

Choose a Location

If you already have a location in mind, this can help your search. Fractional listings are on the multiple listing service (MLS).

• Contact a realtor in your desired location and let them know you are searching for fractional home ownership.
• Call resorts directly in your desired area and ask if they are selling fractional ownership.
• Use specialized fractional ownership websites to find a property. These websites list both resort homes and single-family residences.

Review Your Fractional Size and Terms

With fractional ownership, there are more considerations than when you are the sole owner of the property.

First, does the allocated usage fit with your plans? Usage is the biggest consideration in making a purchase. Decide if the amount of time you are entitled to will match your needs over the next five to ten years.

Next, can you afford the ongoing costs? Maintenance costs are annual, and these increase over time.  Similarly, determine if you will be financially secure if the property depreciates.

Lastly, how hard will it be to resell the property? Since the market for fractional ownership is much smaller, selling your share can be difficult.

Do Your Due Diligence on the Fractional Property

There are a few key things you should know about the property before you make a final decision.

How has the price of your property changed over time? If you are concerned about the future resale value, check how the value has changed in the past.

As with any real estate purchase, it is worth doing some research on properties that have recently sold in the area. If the prices are surprisingly high or low, it should prompt you to review the details of the fractional ownership sale carefully.

The property upkeep can have a significant impact on your experience, so it is worth investigating the reputation of the property manager in charge of maintenance.

Avoid properties that sell ownership based on points, without deeded ownership. These are notoriously hard to navigate and resell.

Obtain a Usage Exchange Service (if applicable)

There are three main exchange services for fractional properties. Each exchange service operates differently.

3rd Home invites owners of well-appointed luxury homes or fractional resort owners to join. Each member offers a time when their property is available, and in exchange, they receive ‘keys’ they can use to stay at other properties. There is no membership fee, only a modest exchange fee each time you choose to stay in a home.

Elite Alliance is solely for fractional resort owners and offers two levels of membership, which both have annual membership fees attached. The level of membership determines how many trips you can take each year to other fractional properties.

Registry Collection allows you to ‘deposit’ time from your fractional property to exchange for a stay at another property. You must ‘deposit’ in increments of 7 nights and have a year to use your time. The Registry Collection operates with a membership fee system.

Hire a Fractional Home Ownership Attorney (optional)

The terms of the fractional ownership agreement are vital. If they are not clear, it can lead to trouble.

It is important to have the documents reviewed by an attorney who is experienced in fractional ownership and can guide you through the paperwork.

Meet the Other Fractional Owners (for SFR properties)

Besides getting to know your future partners, this gives you the chance to ask the current owners how they like it, and if ownership is working well for them.

Fractional ownership has a lot in common with buying a house together, but there are extra steps involved when it is a private residence, and the owners do not know each other.

Items You Should Discuss with Other Fractional Owners (For Single-Family Fractional Home/Condos):

• Costs and responsibilities. Members may want different amounts of usage. Determine if the financial contributions are split accordingly. Be clear on exactly what your expectations are.
• Determine which member of the group is the property manager. This person has the responsibility for collecting the expense money and hiring services. You can rotate the role every few years.
• Find out if a contribution is being made to a maintenance fund. This money will be essential for dealing with unplanned maintenance issues that may arise and will also give you a fund for updating the property over time.
• Make sure it is clear what will happen in the event of a death of one of the owners. If the plans are not laid out in advance, it could cause legal problems if a decision is made to sell the property.
• Determine an exit strategy for all owners. Typical exit strategies are to hold the property for 10-12 years and sell the home as whole ownership so that all owners can participate in the home appreciation.

Make an Offer on Your Fractional Property

Fractional properties attract a small group of buyers, so negotiating is more common. Start 10% under asking price and proceed from there. If the seller is not negotiable on price, you can ask for better time usage, a better floor plan (in a resort), or other amenities for the same price.

Work with your licensed real estate agent to construct a legally binding offer.

Specify all contingencies, including home inspection and any repairs to the property.

Enjoy your vacation home!

Guest post submitted by Clint Harritt