CHAPTERS
11 | 1: A NEW OPTION FOR SELLING VACATION REAL ESTATE
15 | 2: FRACTIONAL OWNERSHIP - ANALYSIS AND TRENDS
25 | 3: WHY SELL A HOME FRACTIONALLY
29 | 4: WHY BUY A FRACTIONAL VACATION HOME
33 | 5: USE STRATEGIES
39 | 6: MARKETING
45 | 7: LENDERS & FINANCING
48 | 8: LEGAL CONSIDERATIONS
56 | 9: MANAGEMENT & EXPENSES
60 | 10: TAXES, RESALE OF FRACTIONALS AND INVESTMENT
LET’S TALK ABOUT YOU
Before we do anything else, let’s talk about you. Let’s talk about where you are right now. Let’s talk about the time and money you’ve invested in your home and the returns you’re getting.
As a home owner looking to sell, you invested time and money to purchase, maintain and upgrade your home, building a valuable asset. Faced with the need or desire to liquidate that asset, you realize that the market is soft, your asset has depreciated dramatically and there are few qualified buyers who are willing or able to commit to a sale. You are wrestling with a very difficult decision: if you needed the money your home was once worth, you won’t get it. If you sell now, you’ll never get the chance to recoup your loss.
CURRENT TRENDS
Current statistics taken from the National Association of Realtors tells us that the broad real estate market is in a general decline: sales have fallen nearly 21% over the past two years alone – and there is no relief in sight.
This means that, for all the reasons you might care to name, the old model isn’t working the way it once did. It means that, like it or not, you have two choices: You can cut your losses or you can become an expert who profits from the new model and enjoys record growth and success.
A SURE SIGN OF MADNESSSomeone once said that a sure sign of madness was to keep doing the same thing and expect different results. If you’ve bought and sold houses in the past and you’ve enjoyed success, we congratulate you. If you’re hanging onto those past successes in the hope that they will support you as today’s market continues to erode, we need to talk.
THE SOLUTION IS CLEAR – THE ANSWER IS HERE
The fact is, the driving forces that contributed to your past successes have changed. Some analysts are saying they’ve changed for good. Whether or not that is true, you know that the industry is at a crossroads. If you want to survive and thrive in today’s economy, you’re going to have to apply niche market thinking and adopt a model that works in today’s market. You’re going to have to educate yourself and upgrade your skills.
Question: In today’s down market, how do you create a unique opportunity for prospective home buyers that enables them to buy in spite of their challenges and sets you apart from traditional sellers?”
Answer: The answer is fractional conversion – transforming the single ownership model to shared ownership, providing buyers and sellers alike with a new and better paradigm for vacation home ownership.
When people look at vacation home investment, the issue they wrestle with is not whether they deserve it, want it or need it. The question they have difficulty answering is: Why pay full price for a place that sits vacant most of the year?
If you, as a home seller, could offer your buyers a chance to limit their costs, pay for their usage and maintain deeded ownership and appreciation potential, wouldn’t that be a more desirable scenario? Wouldn’t that represent a better option to them – not just for economic reasons, but for status, comfort and peace of mind as well?
Fractional ownership is catching on. Each year, more and more buyers are finding that the economics of shared ownership are hard to resist. This growing trend is driving up the demand for fractionals in every corner of the world, even while the rest of the housing market cools.
FRACTIONAL CONVERSION – WHAT DOES IT MEAN TO YOU? How you decide to capitalize on the coming trend in fractional ownership is up to you. What is essential to grasp at this time is that a solid education in this rapidly growing industry is key to your future success. Knowledge is power and it is this power that will allow you to create value for others. When you do this, your return on your investment is a thousand-fold higher than its cost you.
“There is no security on this earth, there is only opportunity.” General Douglas MacArthur (1880 - 1964)For anyone eager to get into a growth market, fractional ownership of vacation homes is clearly the breaking wave. Research study group Ragatz Associates confirms that the current down market has had no impact on the fractional industry, which has enjoyed a greater than 50% increase from only three years ago, numbers that illustrate the universal appeal and resiliency of this industry, especially in a down market.
Our focus with this guide is to introduce you to the largely untapped market of individual, stand-alone fractional homes and the incredible opportunity they offer to anyone who recognizes that interest in these types of fractionals is going to increase exponentially.
Ragatz suggests that we are looking at the tip of the iceberg today. That with a current penetration rate sitting at just 1.5%, fully 75% of the market has yet to be tapped. 3 This statistic is HUGE. It means that the opportunity in this market represents TENS of BILLIONS in sales over the next decade as people warm to the concept of shared ownership. Even if sales stay relatively constant – at the current $1.7 billion annually – the total comes to $17 billion in new sales in the fractional ownership industry over the next ten years.
The questions you’re asking right now are…
1. Who are these buyers?
2. What’s driving this growth in fractionals?
3. How can someone capitalize on this trend?
The trend is being propelled by buyers (mainly baby boomers) who are looking for better ways to buy and own vacation real estate. The demand is growing thanks to the early adopters. As they start spreading the word, mainstream buyers will jump in. We’ve seen this with past trends driven by the Boomers as the generation matured. Think back to…
At the turn of this century, the first wave of Boomers turned sixty and began thinking about their retirement years. A primary focus was to maximize their ability to support a luxury lifestyle in vacation destinations here at home and around the world.
The Boomers won’t be running out of money any time soon. As the generation that raised them passes, an estimated multi-trillion dollar wealth transfer will keep the party going for the Boomers for the next three decades at least, as individuals in their forties, fifties and sixties continue to invest in lifestyle purchases: cars, clothing, dining, travel and vacation real estate.
2. What’s driving this growth in fractionals?
According the National Association of Realtors (NAR), the average vacation
home buyer spends less than 2 months per year in vacation homes that cost, on average, $300,000! Furthermore, fewer than one quarter of these owners rent out their vacation homes when they aren’t using them.
As the huge Boomer population drives the trend, resort and vacation real estate is appreciating rapidly and will continue to do so, despite the current down turn in traditional markets. For many people just entering their retirement years, this means they are finding themselves priced out of their favorite vacation spots. Do they want to find ways to circumvent this dilemma? You bet they do!
This trend has appeal for Gen X, Gen Y and Echo Boomers as well. Thanks to today’s technology, vacation living is not just for retired people any more. People can stay connected no matter where they reside, which means that they can travel to remote areas of the world and stay in touch with the office. What better way to run your business than from a getaway destination that you actually own?
3. How can someone capitalize on this trend?
Though the model was created by big developers with high-end resorts, it is equally workable for small developers, individual home sellers and real estate agents looking for a way to join the party.
They’re coming to the table with vacant spec homes in a vacation area; they’re bringing vacation homes that they’d love to be able to sell three quarters of; they’re agents looking for new options to take to their current clients; and they’re prospective buyers looking for more details on “fractional ownership”.
The bottom line:
People are drawn to the fractional ownership concept because they want to have their cake and eat it too, at a price that makes sense to them. What it means to you is that this is your chance to catch the breaking wave.
CHAPTER 1 | A New Option for Selling Vacation Real Estate
A New Option for Selling
It is understatement to say the current market conditions are tough for home sellers and real estate agents. Home sales have been falling since the market peak in the second quarter of 2005. With too many sellers and not enough buyers in the marketplace, it doesn’t really matter who is to blame. The great real estate bubble has burst and we need to deal with the realities we face.
Is there a way for you to tip the balance in your favor? Is it possible to do something “outside the box” to attract buyers and turn your listing into a unique opportunity they cannot resist? The answer is called Fractional Ownership.
Residential homes in prime vacation destinations have appreciated two, three and even 10-fold over the past decade and many new buyers find themselves priced out of these markets. This creates an undesirable situation for the home seller and the listing agent because the pool of available buyers is relatively small. A smaller pool of buyers and an unstable future economy means that vacation home listings sit for months and even years with little or no activity.
Fractionalizing provides a fresh perspective to the homeowner who is unable to sell a high-priced vacation home the traditional way. Fractional conversion brings affordability to the table by creating a shared ownership arrangement for buyers unwilling or unable to pay the full asking price. The seller is able to increase the pool of qualified buyers by two, five or even twenty times because shared ownership can be had at a quarter, a sixth or even one-twelfth of the full price.
Paying for Convenience
Fractional buyers are typically willing to pay a slight premium for their fractional share. The reason they will do this is that the convenience and affordability of fractional ownership makes it worth their while.
As an example, consider the humble pizza as an illustration: If you wanted a whole pizza you might pay $12. But what if it’s just you with a craving for just one slice? You’d probably pay $2 for the convenience of getting just what you wanted because the extra fifty cents means you’re not burdened with the cost or the nuisance of leftovers you can’t eat by yourself.
For the pizza seller, the deal works equally well. He’s free to sell the remaining pieces to other patrons, making an extra fifty cents per slice. At the end of the day, you get the slice you were craving and the seller earns more money than if he’d sold the whole pizza to one customer.
This reasoning can be applied to fractional sales of vacation homes. Here’s why:
If you purchase full ownership in a vacation home and it sits vacant most if the year, the money you spent for the time you don’t use it is wasted. If you are able to purchase one ‘slice’ instead of the whole pie – the amount of ownership you are likely to use – you can enjoy your home and put your savings to better use elsewhere.
Fractional ownership can be arranged in a virtually unlimited number of ways. To minimize the headaches and maximize the returns, a flexible yet standardized conversion system – one that can be applied to almost any stand-alone vacation home scenario – always works best.
With a consistent and standardized way to fractionalize a home, a real estate professional can present his or her clients with options clearly defined. They are free to sell their home the traditional way AND they can introduce a shared ownership option, often simultaneously with a full ownership listing.
The buyer is the ultimate judge and jury in a buyer’s market. From a seller’s perspective, offering choices is good business sense because it says to the buyer, “This deal is one in which you get to decide!”
FRACTIONAL RETREATS
The program we have designed provides a comprehensive educational resource for anyone who wants to learn more about fractional conversion and fractional ownership. At the back of this summary guide, the Resources section has a listing of the tools and training we offer with brief descriptions. More information is available on our website, www.fractionalretreats.com.
With a solid foundation in the principles of fractional ownership and a clear understanding of the benefits of uniform conversion systems, you will be able to make almost any home listing more accessible and affordable to a larger target market. Your grasp of the growing fractional ownership industry will enable you to enjoy the rewards in one of the hottest trends in the vacation home market today.
With the ability to fractionalize a stand-alone home and offer it to multiple buyers, you are able to offer something unique that speaks to the emerging needs of today’s marketplace.
CHAPTER 2 | Fractional Ownership Analysis & Trends
This chapter gives you the language and statistics specific to this niche market, identifying concepts and outlining their relevance in today’s economy.
Residential Market
The National Association of Realtors gives us a picture of the declining state of the residential market today. Existing home sales in 2007 were 12.8% lower than in 2006. Sales in 2006 were 8.5% lower than in 2005, when the industry was at its peak. This represents 21.3 % drop. Because sales inversely affect inventory, current inventory levels were higher than last year with “months of supply” growing from 6.5 months to nearly nine months of unsold inventory.
Second/ Vacation Home Market
While no one can predict the future, we can examine the current situation and look for potential opportunity and growth. What we see is that while the broad market is in a general decline, the vacation home market is gaining ground.
Second home ownership, and specifically vacation home ownership has been in a growth phase recently. With many baby boomers enjoying their peak earning years and even more entering the empty nest phase of life, there is a “perfect storm” brewing in terms of the future potential in the vacation home market.
From the National Association of Realtors, former Chief Economist and Senior VP David Lereah talks about the relationship between the second home market and baby boomers: (5/11/06) “Middle-aged, middle-income households are the driving factor in the second-home market with favorable demographics providing a solid fundamental demand in this sector for the next decade. Boomers believe in diversifying their assets and most second-home owners see their purchase as being a better investment than stocks.”
A 2006 survey confirms his findings with 40% of home sold in 2005 being second homes, this was an increase of 36% from 2004. This percentage represented more than 3.3 million new and existing home sales.
Changes in tax laws and low interest rates
Tax law changes allowing home sellers to exclude up to $500,000 from capital gains taxation (on primary residences) means that these funds are now available to be invested in second homes. In addition, low interest rates provide ease of financing, which means more people are able to invest in more homes.
Private Fractional Arrangements
Private fractional arrangements are individual stand-alone homes that are “fractionalized” so that they are co-owned and shared by multiple owners. These arrangements can be arrived at in a number of ways:
group of homes) and then sell it as a fractional development (NOTE: when it becomes a large scale luxury development it is called a private residence club).
Just as there are different ways to arrive at a private fractional arrangement, the details of the arrangement can be equally diverse. As a general rule, private fractional arrangements consist of between four and thirteen owners, with fewer owners being the norm. These owners share the costs and responsibilities of the management and ownership of the vacation home.
Private Residence Clubs (PRCs)
Private residence clubs sell deeded ownership interests in luxury vacation homes located in planned development settings. They focus on luxury accommodations at top resort destinations like Vail, Colorado and Sun Valley, Idaho. These developments are predominately self-branded. A handful of well-known luxury hotel companies such as Ritz-Carlton, Four Seasons and Marriott have their own branded private residence clubs as well.
Private residence clubs typically appeal to an affluent clientele who desire high levels of service and amenities with their vacation experience. The type of high end service these clubs offer includes valet parking, 24-hour concierge service and oftentimes a personal chef. With these luxuries comes a high per share price tag as well. Prices range from $300,000 to well over a million dollars, depending on share size, location and amenity level.
Destination ClubsDestination clubs differ from private residence clubs in two ways:
1. A destination club is based on a membership arrangement and no deeded interest is exchanged.
2. Members of a destination club pay for use in a network of homes across the world rather than having ownership in a single dwelling.
Destination clubs attract buyers who want a diverse vacation experience and a high level of luxury accommodation. In general, members are not as concerned about deeded ownership as their private residence club counterparts. Exclusive Resorts and Quintess are two examples of this category.
Timeshares
In general, timeshare buyers are buying a very small slice of time (one to two weeks is common) in a large resort development. Accommodations are typically one or two bedroom condos. Owners often have exchange options with other locations. If there is a deeded interest associated with the timeshare purchase it is often of no consequence and because of the very high front-end sale charges, the buyer has little hope of appreciation.
Fractional Ownership vs. Timeshare Ownership
Fractional ownership products (private fractional arrangements and private residence clubs) are often lumped together with timeshares. There are four key differences that set them apart:
1. Share Size
2. Entry Price
3. Level of Accommodations
4. Deeded Ownership/Appreciation
1. Fractional Share Size
In general, a fractional ownership arrangement is defined as having less than 13 ownership shares available. The minimum amount of ownership is typically four weeks, which equates to a 1/12th or 1/13th ownership share.
1. Timeshare Size
In a timeshare, buyers receive a very small deeded ownership or “points” that can be exchanged for time in various locations. The ownership share will typically equate to one week of use (a 1/52nd ownership share).
2. Fractional Entry Price
Fractional arrangements take a vacation home and make it more affordable relative to full ownership of similar homes on the market. They bring down the entry price and ongoing maintenance costs by introducing other owners into the equation. Entry prices can range from $50,000 to well over a million dollars, depending on the size, location and use of the home. The average price is typically between $100,000 and $500,000, putting fractional ownership within reach of most upper middle class families and some middle class or average income families with a high net worth.
2. Timeshare Entry Price
Timeshares are often sold through the use of high pressure tactics that play to the impulse buyer. For real estate to be an impulse
purchase, most consumers look for a price point that is very low.
Timeshares are structured with so many owners for this very reason – to keep the entry price affordable. When you slice up a condo
development by unit and then again by time, you are creating a very low-cost product. Even with the high sales and administrative costs associated with timeshares, prices will typically be under $20,000 and will more commonly Fractional products are more like traditional full ownership homes, in that they are not impulse
decisions for most consumers. In fact, many fractional buyers can buy the same home outright but choose not to, because they realize they won’t be getting their full money’s worth with the amount of time they plan to spend in the home. They look to fractional ownership as a logical alternative to second-home ownership because they can pay much less without compromising on the quality and location they desire.
be in the $5,000 to $15,000 price range.
3. Fractional Accommodations Fractional ownership arrangements are quite different. They typically consist of stand-alone homes with three to four bedrooms. This creates a more convenient
arrangement for larger families and extended stays.
Private fractionals are identical to full ownership homes. The décor and fittings are driven by the target
3. Timeshare Accommodations Timeshares are generally
condominiums that are part of a resort development. They are often one or two bedrooms with a “lockoff” unit that can create a onebedroom / studio configuration. They are aimed at small families, couples and individuals as a hotel room alternative.
buyers and their expectations at a particular price range. The
furnishings for a $2.4 million vacation home in Aspen will be much different from a one bedroom condo in a second-tier resort development in Mexico.
Fractional buyers are looking for the second home ownership
experience in a level of home that matches their lifestyle. They have no desire to compromise simply because they are on vacation. If they are buying an alternative to full second-home ownership, they don’t want to compromise on the deeded ownership and appreciation that make fractional vacation home ownership so attractive and
timeshare ownership less so.
4.Deeded
ownership/Appreciation
Deeded ownership in a fractional arrangement is much more tangible than in a timeshare. Fractional owners will have a fee simple deed in an amount that equals their ownership share of
4. Deeded
Ownership/Appreciation
Deeded ownership goes hand in hand with share size. For
timeshares that offer deeded ownership, the actual share is either 1/52nd of the individual unit or a much smaller share of the between 1/4th and 1/13th of the full deed. Fractional ownerships are tied more to the underlying real estate and will appreciate
approximately the same as the surrounding real estate market for similar homes. While there are additional costs involved in
creating and selling the original fractional shares, they are nowhere near as high as timeshares and depend on the type of fractional arrangement purchased. For example, private residence clubs, because of their emphasis on service and amenities, will have a much higher markup than a standalone fractional that was created between friends and is self
managed.
project itself (1/1000th, for
example). This does not lend itself to appreciation, even if the markup was not a factor.
In nearly every timeshare
development, the developer needs to charge huge markups for timeshare ownerships. If you are a real estate agent, imagine selling the same home 52 times! All of these costs go into the product price. As a result, timeshare owners have had a difficult time when it comes time to sell. Due to sales markups, many timeshare owners have had to discount their timeshares by as much as 50% to sell it on the secondary market.
Private Fractional Arrangements versus Private Residence Clubs. There are a few key differences and many similarities between private residence clubs and stand-alone private factional arrangements. The two are similar in the following ways:
Deeded Ownership
Buyers hold ownership in the form of a tenants-in-common fee simple deed. In some instances, especially with international property, the ownership may be held in an LLC (Limited Liability Corporation), but in general, actual tenants-in-common deeded ownership is the norm. This is also necessary from a bank financing point of view when an owner is considering a loan on a fractional share.
Accommodations
Many private fractional arrangements will have upscale furnishings and décor. It all depends on the home. Private fractional arrangements can be anything from a sparsely furnished cabin by a lake to a multimillion dollar estate. The norm will more typically offer large three and four bedroom stand-alone homes.
Price Range
While the price can be the same and the accommodations comparable, the difference is the amount of ownership you get. At a private residence club the purchase price might buy a 1/12th or a 1/10th share, while in a private fractional arrangement it will buy 1/6th or 1/4th ownership. Buyers get more time but less service and amenities.
Service and Amenities
They depend heavily on how the home was originally set up and the menu of services offered by the current management company. Some are designed for luxury accommodations and will include many of the same services and amenities as a private residence club. These fractional arrangements require a professional management company to facilitate the owners’ vacation experience. On the opposite end of the scale, many fractional homes are set up for simplicity and self-management and offer owners no services and few amenities. Often these are full ownership vacation homes shared between friends and family. It is difficult to have a fractional vacation home with a multitude of services and amenities without the help of an outside manager of some sort.
Reservations
Ideally, the more money spent to design and build a development, the more attention is paid to the reservation and use system. In simple fractional arrangements with a rotating calendar, no reservation is needed; owners simply use their assigned week. If they can’t, for whatever reason, they are often allowed to rent out or exchange weeks.
Fractional Ownership Industry Sales Trends
The fractional ownership industry is starting to move into the spotlight as more and more co
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