Understanding Fractional Real Estate

Fractional Real Estate is a fairly new concept in vacation homes and resort real estate. Unlike timeshare property, fractional ownership is deeded ownership to a house or condo type of property. These properties are usually furnished beautifully and are ready to occupy immediately.

To understand how fractional real estate transactions work, lets take a house and sell it to 4 different parties. Each party will own 25% ownership of the property. This entails each party to one weeks usage a month to use for themselves or to rent their week out. Typically there is an annual calendar that rotates the weeks so each owner will get a holiday week like Christmas every four years. You also have the option of switching weeks with another owner if the parties agree.

The benefits of fractional ownership give you the opportunity to own and use a million dollar home for a $250,000 initial purchase price. You get a luxury furnished property that is ready to use for a price that was unaffordable in the past. As the property appreciates, your quarter share gains in value also. This type of arrangement works great for people that only use their vacation homes part time. In addition, if you can't use it for your designated week you can rent that week and get income from the property.

Like all real estate transactions, a quarter share agreement should be a written agreement between the co-owners to share expenses and use of the property. This agreement specifies that title is to be in the name of the individual owners. Holding title in a corporate, Limited Liability Company or joint tenancy could create tax problems and prevent an owner from obtaining financing. Resort Lenders are now doing fractional real estate loans. If the property is a condo or townhouse, it's advisable to read the existing condo documents to make sure fractional ownership is allowed. In most cases it will be allowed.

Financing is the primary pit fall of fractional ownership. Many lenders don't understand the concept and if the seller of the property has a mortgage, this mortgage must be paid off in full to transfer ownership. Many times buyers of fractional real estate must wait until at least 3 shares are under contract before closing on their transaction to facilitate a complete release of the sellers existing mortgage. This is usually done with a reservation and deposit. When a person buys a fractional with other parties and decides to sell a few years later, any fractional mortgage can be immediately released at the closing.

The final issues to be worked out are provisions for first right of refusals, holding over, default for non-payment, remedies and prohibitions on further "division" of an interest. Also, use of the property, the budget, calendar, furnishings, pets, smoking, rentals, cleaning, property management, and personal storage are items that tend to be property specific. Each group of owners must make their own arrangements and agree on these items.

AnyFractional ownership agreements should be drafted by a knowledgeable attorney since no two are exactly the same.