What is a fractional?

Owning a second home is great in theory. Trouble is, you may not be able to spend enough time at your vacation house to justify the cost - namely the mortgage and maintenance cost.

Enter fractional ownership or sometimes referred to as "fractionals", which allow you to buy a share of a multi million condominium in a prime vacation spot and have at your disposal a full staff of valets, concierges and housekeepers. Some high-end fractional resorts are referred to as "private residence clubs".

What are the benefits of fractional ownership?

There are five primary benefits:

Better Value - Fractional ownership essentially lowers the cost of access. Why buy a half a million beach front residence that you use a couple weeks a year, when for $50,000 or so you can own a piece of that residence and have all the use that you desire. Instead of paying 100% for an asset you use 10% of the time, fractional ownership matches cost with use. Fractional ownership significantly reduces the financial burden of vacation home ownership through shared ownership.

Abundant and Flexible Use - A condominium at a fractional is usually divvied up among 12 owners or less, which ensures that all owners have access to the peak seasons. Fractionals guarantee at least 4 to 6 weeks of access with unlimited use on a space available basis.

No Hassles - Many potential second home owners overestimate the time they will spend at their second home and underestimate the hassles associated with maintaining that second home. With fractional ownership, there's no need to worry about getting a phone call in the middle of the night from the property management company. Each home is professional managed and provides for a hassle free ownership experience.

Concierge Services -Fractionals provide their owners with on site concierge services. For example, prior to each family's arrival, the staff goes grocery shopping, unpacks personal items from storage and accommodates any other special requests. Once there, owners have access to free transportation, round-the-clock concierge service and amenities on par with a five-star hotel. When they leave, their belongings are put back in storage and the unit is prepared for the next owner reservation.

Deeded Ownership - Fractionals provide each owner with an undivided deeded interest. Title is evidenced by a real estate deed, which is recorded and guaranteed by a title insurance policy. Each fractional owner can sell, will or transfer their fractional just like they would any other piece of real estate.

Fractional versus Timeshare

Is a fractional a timeshare? No. The typical timeshare owner buys just one or two weeks of time, which means one unit could potentially have 50 owners. As mentioned above, fractional use is abundant and flexible and is usually divvied up among no more than 12 owners. Compared with timeshares, fractionals are located in more desirable destination communities and are larger and more luxurious, with more amenities and services than most timeshares.

Another big difference relates to the amount of money spent on marketing costs. Marketing costs for timeshares account for more than 50% of a timeshare's sales price, according to Richard Ragatz, president of Ragatz Associates, a consulting firm for the resort industry. The marketing costs for fractionals account for less than 25% of the fractional's sales price. "The consumer is getting a lot more value because less of the purchase price goes out the window to marketing and sales," Ragatz said.

Some timeshares buyers have faced big losses when selling. By contrast, fractional resale prices have historically tracked the prices in the local real estate market more closely. That's partly due to the fact that most fractionals are located in highly sought after resort communities where demand remains high and it can cost millions to buy a similar property outright.

Is Financing Available for Fractionals?

Yes, financing is available and is more akin to financing a second home - though more than half of all fractional buyers pay cash. Rates are comparable or slightly higher than a traditional mortgage.

Fractional deeded ownership can be executed by a tenancy-in-common ("TIC") that provides for co-ownership and is evidenced by an undivided interest in the property. The TIC structure facilitates fractional loans, which enables each co-owner to have their own mortgage facility, substantially decreasing the risk of co-ownership. In the event of default by a co-owner, the lender can only foreclose on that individual borrower's undivided interest. The undivided interest of the other owners remains secure and protected.

How do you determine the value of a fractional?

Another important thing to keep in mind as you consider fractional ownership is that fractional values do not equal whole ownership values. Comparing fractional values to whole ownership values is like comparing apples to oranges.

How do you know that the fractional value is an accurate representation of the real value? Because banks will lend on the fractional value. For example, at the Victorian Residence Club in Sosua, Puerto Plata, Dominican Republic, banks will lend on 70% of fractional value. Shares at the Victorian start at $50,000 each. The bank requires 30% down or $15,000 and will finance the remaining 70% loan to value - just like any traditional mortgage. Since most fractionals have historically moved in the same direction as the local real estate values, when you decide to sell your fractional, any increase or decrease in value should be similar to any increase or decrease in local real estate values. The change in value will be based on your purchase price or $50,000 in our example - not the whole ownership value.