A Fractional Could Offer Unique Opportunities in Real Estate and Vacation Ownership

Could some residential homeowners or investors find opportunity by selling properties as fractional ownership vacation homes?

Good question and one addressed in a recent issue of Perspective Magazine. David M. Disick, president of David M. Disick & Associates writes about the opportunity that fractionals may hold within the real estate market. Disick is considered to be a pioneer in the fractional vacation home industry. He is the developer behind the Private Residence Club, Franz Klammer Lodge in Telluride, Colorado and is currently developing Club ElyseeSM.

Is a Fractional Just Another Name for a Timeshare?

If you are unfamiliar with the concept, let’s start with the argument of whether timeshare and fractionals are the same product on different scales. Fractionals afford owners the chance to buy a percentage of ownership in a vacation home. The property is typically a luxury or uber-luxury home, located in a desirable vacation destination. Unlike a timeshare where there are often as many as 50 individual owners, each claiming a week or perhaps two of interval ownership, a fractional is typically owned by a limited number of owners (10 or fewer) who many own several months of interval usage time.

Good approach? Probably it is, since statistics show the fractional industry accounted for some $2 billion in sales in 2007 and another $1.5 billion in 2008. Fractional industry expert Sherman D. Poptvin points out, “Even in the economic downturn of 2008, the fractional market was still the fastest growing real estate product.”

The logistics of sales for fractional ownership vacation property comes down to this: A vacation home in a highly desirable location may be a tough sell at $5 million, but expand the ownership pool to 6 or 7 individuals at $750,000 apiece and you have a much greater market of potential buyers from which to draw.

But here’s the warning. While selling a luxury home (either as the current owner or as an investor) to multiple joint buyers may be a way to expand your market, Disick warns it, “is not for the uninitiated.” He calls the concept relatively simple and potentially very profitable but cautions, “A wide variety of skill sets is required for a successful development.”

Fractional Expert David Disick’s Advice for Selling a Vacation Home as a Fractional

• Before you do anything, consult a financial and a legal advisor.
• Location, location, location. Prime locations in prime resorts are essential for a successful venture into fractionalizing a property.
• Check the zoning laws. Not all properties can be turned into fractionals.
• Find financing sources for your venture. You may even have to educate them about the concept and the opportunity of fractionals.
• Study the rate of return expected as well as the return on investment.
• Look at your pro forma in a best and a worst-case scenario.
• Find properties that you can acquire at a favorable price.
• Be prepared to update the home’s furnishings and technology, or to furnish the home from scratch.
• Be prepared to make any necessary repairs to the property.
• Consider the needs that will arise for property management, concierge or reception services, reservations, bookkeeping and auditing procedures, and documentation for ownership, as your starting needs, with the eye-opening recognition that more needs will become evident as you move through the process.

And lastly, don’t let this list scare you off. As Disick advises, the market is sure to bounce back. He suggests that if the approach of selling fractionalized property appeals to you, then you should prepare now in anticipation of the “pent up demand” there is sure to be from people who have, during this recession, delayed their vacation ownership purchases.

(Source: Perspective magazine, July 2009.)