Fractional Retreats Community Blog

Fractional ownership is a new concept to many people. It has some of the same characteristics as 'timeshare' but just like a minivan has some similar characteristics as a sports coup – they really are two different animals. Below I’m going to list just three of my favorite reasons to own a fractional. These are not ALL of the reasons a person should consider fractional ownership, these are just three.

Leverage: When most people buy a home in the traditional manner, they use one type of leverage: bank debt. They borrow money and then repay it over a certain period of time. When you buy a fractional on the other hand, you are using a different type of leverage. Call it “other people’s money” where “other people” are co-owners in the property.

In this scenario, you can actually create a situation where you are putting down the same amount of money as a bank loan (20% for example) but with fractional ownership you don’t need to make payments on the other 80%. You simply give up ownership of that 80% and let other people use the asset. Call it “new financing” or “people funding” or whatever catchy name you can think of, I just call it: smart.

Good for the Environment (aka “green”): You have people that recycle and people that don’t. I for one do recycle, because I can’t stand knowing that all my plastic trash is going to the dump to be buried underground. That said, I wouldn’t consider myself “green” by any stretch of the imagination though.

When it comes to fractional ownership, there is an interesting “green” angle to consider… When you are a co-owner on a home, that means that at least one more home doesn’t need to be built. If you are one of six co-owners for example, FIVE homes now do not need to be built. That means less trees are cut down, five less lots need to be cleared and five less refrigerators need to be purchased. Sure from a strictly economic perspective this probably isn’t a good thing but from a “green” perspective it is a great thing. Not only that, but with fractional ownership there is more supply in exclusive areas so prices don’t have to keep people out who want to own a vacation home (think Vail, Lake Tahoe, etc).

Diversification: Finally there is good ol’ diversification. We all know what diversification is when it comes to stocks and mutual funds, but doing it with real estate is not as common because it is costly. Not only do you need to purchase separate homes, but there is the annual upkeep, taxes, insurance etc that comes with each home.

I love using examples so let’s look at a quick one… say you have $800,000 to spend on a luxury vacation home. You could purchase a single $800k home and visit it as often as you can, that is one option but of course there is no diversification in this scenario. Another option is to purchase four $200,000 homes and “diversify” your vacation home money, you could buy a home in four different locations: beach, mountains, golf, and river for example. You could then spend time visiting each home throughout the year. This uses the same amount of principle ($800k) but you now have 4x the annual expenses!

Here’s a better option. Purchase four $200,000 quarter-share fractionals in four $800,000 homes. Now you have spent the same amount of money for ownership and access to four beautiful homes in four diverse locations. You pay only 25% of the expense in each home. In effect you are keeping your same standard, getting diversification in the process an all you have to “give up” is the time you likely weren’t going to use the homes anyway.

As I’m fond of saying… this is a win-win!  

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It seems that from my standpoint, fractional sales are slowing down. This wasn’t the case at the beginning of the year and maybe now that the election is out of the way some of the uncertainty will evaporate… but I’ve talked with a number of sources that say the market is tougher now.

Personally I try to be optimistic about things. You may have read somewhere in one of my past posts that I don’t take a newspaper and have sold our television. To some this would seem pretty extreme, but to me is simply an attempt to stay positive. The news and general media can be so negative that just a few minutes a day is enough put most people into a poor state of mind.
That said, times are tough for a lot of folks right now there is no denying that. And while a person’s outlook has a lot to do with his or her happiness, it has less of an effect on how much money they have in the bank! The fact of the manner is that in times of uncertainty people just aren’t as willing to part with those precious greenbacks – especially for “luxury” items like new cars and vacation homes.
What do we do about this?

A couple of things: First, just keep the store open. Reduce costs as much as possible, but keep the tent up! Keep plugging along until sentiment changes. The alternative is to close up shop and hid in a hole. Nobody can make money in a hole (well unless you are mining ore, I guess…). The second thing is to try new approaches. Throw some more spaghetti at the wall and see if it sticks. I heard once someone use the term “try-storming” and I liked it so much that I use it frequently. Just brainstorm new ideas and try different approaches until something “clicks” – because it will.

To end this message, I want to briefly mention something new we here at Fractional Retreats are trying... It’s a new fractional listing site aimed at helping buyers understand and learn about fractionals and give sellers a place to list their fractional homes, boat or aircraft. The site is called “Discover Fractionals” and can be found here: http://www.discoverfractionals.com  Over the next few weeks you will probably hear more about it, right now we’re fine tuning everything and while we do that we are letting anyone with a fractional property, boat or aircraft to list it for free. Keep in mind that there are still some “bugs” and if you run across one of them please let us know! 
 

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Many of the questions I get on what seems like an almost daily basis involves fractional financing. Why wouldn’t they? It is rare indeed, the individual that purchases real estate with all cash (though giving the current lending situation, this may be happening more and more for people with the means). The fact of the matter is that fractional financing for single family fractional homes has all but dried up. It’s just a sad reality of the current market.

So, here’s a thought for now I’ll call the “One Fifth Solution”…

Let’s talk about an average second home buyer who wants to buy a vacation home. In the past, and even more so today, second home buyers need to put up a large down payment due to the fact that the home is not acting as a primary residence and therefore is slightly riskier for the banker. So, that said, let’s say for a decent interest rate, 20% down is needed…This is 1/5^th of the asking price.

You can probably already see where I’m going with this… if a family can buy a whole ownership home for 1/5^th down and then take on monthly payments for the balance – wouldn’t a 1/5^th fractional ownership home with ZERO debt be a better option?

It sure makes a lot of sense when you stop and think about it… Same initial outlay (in cash), use the home for 10 weeks a year (more than most people use their vacations home now), save 80% on the expenses every month… and best of all NO DEBT.

It is even better when a slightly smaller fraction is considered like a 1/6^th or 1/8^th assuming the owner is comfortable with the amount of time allocated to their ownership share of 8 weeks or 6 weeks respectively.

It doesn’t matter how much money you have – simple value for your dollar wins every time. The “One Fifth Solution” is just another way to achieve that value.

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I get so tired of “panic” talk. When you turn on the news today you are bombarded by negativity. This is one reason why I have stopped my newspaper… it’s not a “head in the ground” approach – instead it’s emotion control.

There is a quote I love from Thomas Jefferson that says: “I do not take a single newspaper, nor read one a month, and I feel myself infinitely the happier for it.”

I feel happy too because I try to restrict the amount of “hysteria” that I expose myself to.

If you stop paying attention to the media, it ceases to have any impact over your thoughts and actions. You can make plans and take action with an optimistic view toward the future while everyone else is running for cover.

While I understand that many people are losing money right now, it is no time to put your money under a mattress. Inflation will probably eat it away even before the dust mites get to it…

Everyone, regardless of his or her financial situation should be looking for opportunities in the market. Whether it is the stock market, the real estate market or the corn market – there are opportunities to be found.

Now is the time to plan your next move and fly in the face of the crowd. Education is the best thing for you if you have the urge to sit on the sidelines. Get educated about new opportunities so that when things calm down (or you can muster up the courage) you can make your move and seize all of the deals in the marketplace that are going unnoticed because the public has it head in the sand...

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Sometimes the most obvious solution isn't the best one.... I'd like to start sharing some lessons and tips on this blog that I pick up as I work my way through the new but interesting world of fractional home conversion... (I'd actually like to make this a regular contribution to my blog so that all of my readers can learn right alongside me!)

This lesson here, is a small one but it shows the power of fractional ownership. It involves the current project we have going on in Mexico at the moment. In the process of setting up the use plan we decided that we were going to have three 3-month blocks and three 1-month blocks during the summer. This would provide us the best overall flexiblity for prospective buyers who have different needs. This is all covered in an earlier blog post so I won't repeat it here.

The "Ah-ha" moment came when I naturally assumed the most "valuable" block of time would the Nov-Dec-Jan block, but this turned out not to be the case.

As we investigated a little further, it turns out that from rental records for the area (a beach community known to Canadian and American "snow birds") the most popular time is actually February, March and April! So that made the Feb-Mar-Apr block the most appealing from a sales perspective and thus it could command a premium. The reason is logical - the "snowbirds" like to be around their homes for the holidays but by February, the holidays are over and they are sick of the snow! Makes sense to me. 

So that is an example of how you can go into a situation with certain assumptions, but those assumptions turn out to be false when you really look at the data.

Take care everyone!

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Here is a great little video on the fractional home conversion process. It spells out the process in a fun and easy to understand way.  Check it out on YouTube here: http://www.youtube.com/watch?v=fnEK3P7_U8Y

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I just spent the past nearly two weeks in Mexico looking at a client’s home. It’s a fantastic home in a prime beach location. One of the revelations that hit me while I was there working through the use plan, is how flexible fractional ownership is.

Here’s what I mean… This home is located in a destination that attracts a lot of Canadians during the winter months – these people like to go south in the winter so they can avoid the harsh winters up north. They will often buy a place where it’s nice and warm just so they can spend October through March in a sunny locale and avoid all the snow.

That’s one group of people we’ll call the “Snowbirds”

Another group is composed of fishermen, boaters and scuba divers who like to come down during the summer months because the water temperature is warm and that is when exotic fish can be found in the ocean surrounding the town this home is located in. They play in the sun and enjoy the hot summer weather.

That’s number two – we’ll call them the “fishermen-scuba-boaters”.

Finally, the owner of the place is just so enamored with the area that he wants to be there during specific springtime months. According to him – “it’s the perfect temperature in the spring.”

That’s number three – “the owner”

So that is three completely different groups that can share a vacation home and be pleased with using their respective time slots and have no desire for other time in the home. It sort of reminds me of the three blind men who are feeling an elephant – one feels the trunk and says that the animal must be like a snake another feels the tails and thinks it is small and hairy – finally the third one feels the foot and…well you get the point. A fractional home can be a different thing to different people.

 Another element of this particular fractional arrangement is that the “snowbirds” want the home for longer periods of time (3 to 6 month increments) while the “fishermen-scuba-boaters” only want a month or so each. It works out perfectly.

Fractional ownership is one of those flexible, common sense arrangements that more and more people are looking at. Now throw in the financial considerations… I won’t even go there though because that could be a whole other blog post! Let’s just say (to take the words from another fractional consultant I know), “it makes total financial and lifestyle sense.”