It’s pretty well known that demand for vacation homes has shot up in the past year as city folk become fixated on the idea of getting away and avoiding crowds. Whether the destination is a lake, a mountain range, the beach or just another city, almost everyone is looking for an escape.
But what if you can’t afford — or don’t want to pay the full cost — for a home in your dream destination?
Here’s an option: Buy a share of a house instead of the whole thing. That’s the concept behind fractional ownership properties, which are sometimes called private residence clubs.
Not to be confused with the out-of-fashion timeshare — where consumers buy weeks of time where they can use a vacation home or condo — fractional property is deeded real estate that is owned and can be sold, placed in a trust, gifted or inherited. Most fractional properties sold by developers are in the luxury category and tend to have far fewer owners than a timeshare. Maintenance, security and upkeep are often taken care of by a management company, essentially making your vacation home hassle free.
Timbers Resorts offers fractional ownership on properties in the U.S. and Italy. Prices range from about $355,000 for a one-tenth share of a home in The Sebastian, a development in Vail, Colorado, to $625,000 for a one-ninth share for a beachfront home at Kiawah Ocean Club & Residences on Kiawah Island, South Carolina. For a one-ninth share, an owner can spend four to five weeks in the home. Shares at Casali di Casole in Tuscany start at €325,000
A recent Escape Home survey found that before COVID-19, only a quarter of second home owners used their home more than four weeks a year. Now, during COVID-19, nearly a third use it more than they used to, while half use it the same amount.
“Fractional real estate is about ‘rightsizing’ your vacation home ownership to the actual amount of time you plan to vacation…. with all maintenance and upkeep handled by Timbers,” said CEO Greg Spencer. He said sales at Kiawah increased 30% last year.
Sales of fractional properties gained popularity during the real estate boom in the late 2000s, led by luxury hotel brands such as St. Regis, Ritz-Carlton and Four Seasons, which built developments dedicated to shared ownership in cities like New York and London as well as resort locations in Colorado, California and Hawaii.
Sales peaked at $1.7 billion in 2007, according to Richard Ragatz, who tracks the industry. But after the 2007-2008 financial crisis, the hotel chains stopped building new fractional developments as buyers disappeared and banks stopped offering financing. Sales totaled just $198 million in 2019. (These figures only count real estate developments that were built exclusively for fractional ownership or were converted for that use. The figures do not include friends or family members who buy and share a vacation home together, an increasingly common practice.)
With demand for vacation homes now accelerating, Mr. Ragatz believes 2021 will be the year when fractional ownership rebounds.
“More and more people want to own a vacation home but they don’t want to buy something that takes up too much of their income and they don’t want to buy more than what they can use,” he said. “Decades of research has shown that most owners of vacation homes use it only five to six weeks of the year, so buying whole ownership isn’t really rational.”
Mr. Ragatz expects some of the bigger real estate developers to increase construction this year. Meanwhile, newer companies have emerged recently with different models for shared ownership that are not necessarily part of a planned development.
One such company is Pacaso, which was created last year by Spencer Rascoff, former CEO of Zillow Group, and partner Austin Allison.
Pacaso works with real estate agents to find homes for sale in popular vacation destinations, sets up an LLC to buy the house, then sells one-eighth shares in the house, although a buyer could purchase up to one-half of the house. For a one-eighth share, an owner could spend about six weeks in the home. Current listings on Pacaso’s website, heavy with homes in California, shows asking prices of $267,000 a share for a property in Palm Springs to $2.5 million for one in Malibu.
Pacaso says it decorates and furnishes the home and provides maintenance and upkeep. It also says it manages any disputes that might arise between co-owners, which of course brings us to … the downsides of sharing a property.
Inevitable, there will be disputes. Who pays if furniture or furnishings are damaged? What if you don’t like the furnishings and want to replace or upgrade them? Who determines what is the proper code of conduct? When you’re working with several different owners, making decisions can be frustrating. Having a property manager certainly helps smooth out the problems, but doesn’t eliminate them completely.
Another problem is financing. Many big banks no longer lend on fractional properties, although some smaller lenders have emerged to fill the void. But buyers still need a lot of cash because many lenders won’t finance more than 50% of the cost.
A bigger risk is the possibility that a developer decides to sell the entire complex or turn over management to a third-party, which in some cases could reduce the value of the property. Several years ago, some co-owners of condos in the St. Regis hotel in New York sued after the value of their properties declined when the hotel changed management.
But for most buyers, the advantages far outweigh the disadvantages. And if it doesn’t work out, hey, you can always sell your share. Except that brings up another disadvantage: Real estate agents say it takes longer to re-sell a fraction of a house than to sell the whole thing.