Individuals interested in breaking into the overseas real estate market may be interested in fractional ownership of property, although buyers should keep some things in mind before getting involved. Fractional ownership is unlike a timeshare in that the buyer retains an actual interest in ownership (and possibly profits) as opposed to a limited right to use the property. Fractional ownership does come with restrictions, though, including limited resale ability, restrictions on use, management fees and the fact that buyers usually have to pay in cash due to lack of available financing. For more on this continue reading the following article from Pathfinder.
Fractional ownership is a buzzword in a certain section of the real estate community. Some developers love fractionals because they believe it will net more buyers—and ultimately more profit. Sales marketers describe them as the perfect way to get a foot on the first rung of the overseas property ladder.
And fractionals intrigue buyers because they look so affordable when compared to buying a property as a whole.
Fractionals differ from timeshares in that you own a percentage of the property rather than just the right to use it. You usually get a percentage of shares in a corporation that holds the property.
But fractionals and timeshares have some similarities. You face restrictions on the amount of time that you can spend in the property. Fractionals are not easy to re-sell, either.
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Plus, you usually over-pay when you add up the price for all the fractional shares and compare it to the cost of buying the property outright.
We regularly turn down developers who want us to advertise their fractional offerings because we don’t think they offer good value.
And if you’re thinking of buying a fractional, here’s what you should consider.
- Fractionals cost more. If you have ten owners, you won’t pay 10% of the property’s value each. You could pay up to 200% more than the value of the property compared to buying the same property as a single full owner. I saw a villa worth $1 million selling as four fractional ownerships for $400,000 each. The villa is still only worth $1 million. So do your math, and don’t buy a fractional property for fast appreciation.
- You’ll need cash. It’s hard to get financing on fractionals from a bank or financial institution.
- Think about re-sale potential. Fractionals are tough to sell on, partly because most buyers prefer to own a property outright, or to club together with friends and family on an informal basis to buy as a group. Plus, you’ll need to find a cash buyer.
- Check the legal setup. Some countries (Canada, or France, for example) have laws in place governing fractional ownership. Many countries don’t. Make sure the fractional you’re buying into meets all requirements of the host country’s laws.
- Find out what the fractional management fees will run to, and what they will cover. Some fractionals have very high management fees.
- Find out if you can own as a foreigner. Some fractionals are set up to get around limits on foreign ownership.
- Bear in mind that disputes among co-owners over use, fees, and repairs, may prove difficult. Find out if mediation or arbitration services are included in the ownership contract to cover such scenarios.
- Fractionals limit use. You may get very little use of the property at peak times, depending on the number of owners. Sometimes the weeks or months you get vary from year to year; sometimes they’re fixed. If you buy a share in a chalet because you want to go skiing in winter, check how much time you’ll get in peak skiing season. If it’s only once every five or ten years, is it worth the outlay?
Our advice if you’re looking at fractional ownership because you can’t afford to pay cash upfront for a property is to consider these options:
- Buy using developer financing. It’s often interest-free, and comes with relatively low monthly payments. You can own a condo in a five-star Caribbean resort from $800 a month, for example.
- Club together with family and friends. That way, you spread the cost without incurring a higher purchase price or the conflicts that may arise with unknown co-owners.
- Buy a smaller home in the same location. Yes, the fractional share of that enormous single family home is tempting…but think about the overhead and running costs…and the fact that you won’t get that much time there. Buying a smaller home in the same location may work out better in the long run.
- Look for more affordable locations. If you want a beach or ocean-view home, but think a fractional is the only way you can afford one, look at locations like coastal Ecuador. You can buy a brand-new, 1800 square-foot home in a beachfront community for only $115,000, for example.
Buying a fractional really only works if the property is located in a place with a long (or year-round) season, so you have some flexibility on when you use it…and when it’s a property or location that you couldn’t afford by other means.
But in most cases, with so many other options available when you know where to look, fractionals simply don’t make sense.
This article was republished with permission from Pathfinder.