Fractionals: Real Estate Has Never Been So Good

Fractionals: Real Estate Has Never Been So Good

by Anthony Seruga and Yolly Bishop

The technical definition of a fractional is any ownership of a share of an expensive asset. However, fractionals in real estate have a much more specific meaning. When it comes to second homes, fractionals are making a big difference in the luxury real estate industry. These formalized versions of the very common practice of combining resources with friends or family have become a strong competitor to full time vacation home ownership. Investors who are interested in converting hotels and luxury homes should take note of this trend.

The change is happening because fractionals put high value vacation homes in developed, attractive places within ordinary people's grasp. Owning a fractional means that a person can enjoy the same privileges as a regular homeowner for part of the year. The fractional is usually divided up into parts, with the most common being fourths, eighths, and thirteenths. Each owner has the same privileges as any other owner, and the option to experience a luxury lifestyle without the price commonly associated with it.

Much of the time, purchasers buy their shares in a fractional from a management company. One of the keys to the success of fractionals in the market has been their professional management. Many of them are operated by well-known companies with a good reputation for resort operation. These include Millennium, Four Seasons, Starwood, Ritz Carlton, and Intrawest. Their five star services and amenities are an important part of the fractional experience.

The management company in question is responsible for scheduling owner visits, and maintaining the building itself. What started out as a way to own a vacation home without spending too much in resources has evolved into a resort-like experience. Some fractionals are called private residence clubs, and allow people who aren't particularly rich to enjoy the amenities of a luxurious home away from home. They enjoy all the services and amenities one would associate with a luxury vacation resort.

Fractionals appeal to many people because of the problem that many second homeowners encounter - it's expensive to own a vacation home, but not much time is spend there. Fractionals allow each member to spend less, even though occupation of the home by that person stays the same. The fractional itself is usually occupied for most or all of the year.

Investors and developers view fractionals' growing popularity as excellent news. Regular timeshares are available in most vacation areas, but fractionals are located almost entirely in high value, prestigious places. They'll command a better price, and are marketed towards people making at least two hundred thousand dollars a year. Timeshares generally cost between five and fifteen thousand dollars per member. Many fractionals garner prices around a hundred thousand, and some are marketed at two or three hundred thousand dollars per share, because of the luxury amenities and desirable locations they're associated with.

Unlike a timeshare, when someone buys a fractional, they're considered a deeded property owner. Members of fractionals will also share their property with fewer owners than members of timeshares. Development for fractionals in areas like Colorado (where the trend started) and Florida is often part of other development, like hotels and resorts. This allows resort developers to make a high cost project much more feasible, economically. It also gives fractional members access to the luxury amenities of the resort complex.

Selling a piece of property, such as a luxury home or converted hotel, as a fractional is much easier than selling it as a timeshare. Timeshares are considered to have very little depreciation, but fractionals actually have none at all. Lenders actually categorize them as appreciating properties, making it very easy for a buyer to become a part owner of a fractional. It's usually very easy to finance a fractional from the buyer's point of view - no harder than any other second home. Specialized fractional loans have even become available recently, making it much easier for buyers to purchase a share in one of these units.

Investors and developers who invest in fractionals lose less money to sales costs. In a conventional timeshare setup, as much as fifty percent of the total sale is often lost to commissions. There are plenty of timeshares on the market, and a steady demand for them. Fractionals have a continuously growing demand, even in the current poor real estate market, but there are few properties actually available.

This is wonderful news for developers and investors interested in this kind of property. As relatively few developments have currently been built or renovated for use as fractionals, there's room for expansion. Many of the fractionals that do exist are on extremely high-end property, which means that they are out of many buyers' price range. The chances of an investment in fractional development appreciating and turning a profit are quite good.

If a developer or investor currently owns a property and isn't certain what the highest and best use of it might be, fractionals should be taken into consideration. At this time, the majority of fractionals currently available are located in Colorado, at skiing resorts. In other locations, there's a significant lack of this type of development. For investors thinking about developing in other locations, serious consideration should be given to fractionals. More and more buyers are still finding out about this kind of development, and the convenience and luxury it offers.

Making a sale on a fractional requires certain things. The right kind of amenities must be provided, as buyers are looking for spas, pools, room service, and other high-class services and resources. It's important to be sure that a fractional is managed by a high-end company that can provide what buyers want. When selling fractionals, these amenities must be emphasized.

Developers who are considering fractionals will be happy to know that in many areas, these types of properties have experienced less of a slowdown than other types of properties. That makes them a viable option, likely to appreciate over time. Keep in mind that fractionals, like other luxury real estate, must be planned and marketed correctly in order to be successful.