8 key considerations for buyers of fractional second homes
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For many buyers, the concept of fractional ownership will be new to them. Here, we look at the most important issues they should be considering.
1. Does the price of each fraction seem reasonable?
A key benefit of buying a second home on a fractional basis is that it allows you to own a share of a property you would not be able to afford on your own - paying €150,000 for a sixth share of a €900,000 luxury villa is very attractive. But you still need to be comfortable you are getting value for your money.
It is quite normal for the aggregate price of all the fractions to be up to 20% more than the price that the property might be offered for sale on a whole ownership basis. However, some unscrupulous owners and developers take advantage of what is known as the 'fractional uplift' or 'fractional multiplier' by marking up the price of their property by as much as 50%, or sometimes more. Ultimately, the price of each fraction will be affected by several factors including how many fractions are being offered (which in turn will depend on several other factors), the nature of the property and its location and the extent of amenities and services.
2. Can I use the property when I want to?
The most common question we are asked by prospective owners is whether they will be able to use their home when they want.
Given its importance to the co-owners and the fact that it will dictate most other elements of the ownership arrangements, we always invest time in designing clear usage rights which strike a fair balance between certainty and flexibility.
There are a range of different usage structures and the most appropriate will depend on the property location and size, its seasonality, the likely length of visits and the target market. Most popular schemes now incorporate some form of rotating calendar, a bespoke reservation system, or a combination of the two.
In most cases, we will design the general principle of usage rights at the start to discuss with prospective buyers, but only finalise the detail once we have discussed with them their preferences in terms of length and time of visits. For example, some owners may not want to use their property during the peak summer months - possibly to avoid the busy school holiday weeks or the hottest months of the year.
3. How many other owners will there be?
A key attraction of fractional ownership is the feeling of exclusivity it creates in terms of ownership of a luxury second home. However, that feeling can be diluted if ownership is shared with 20 or more other owners. Although having more co-owners will reduce the price for each share and the annual costs each owner will pay, it will also reduce the amount of usage available for each owner. For that reason, all of our homes have no more than 8 owners, and some as few as 2.
4. Is the ownership structure clear and easy to understand?
At a time when fractional ownership is still a relatively new concept outside the United States and Canada, transparency is key to the success of a fractional product.
Although the legal structure can differ slightly depending on the location of the property, the most common arrangement is for ownership of the property to be in the name of a corporate entity with each owner being a shareholder or member (depending on the precise legal status) of that entity. The entity does not need to be set up in the same jurisdiction as the property and it is normally beneficial for it to be incorporated in a jurisdiction (such as England) with well established company, contract and trust laws.
This sort of structure also ensures that when an owner wants to sell, the other owners do not need to be involved in the process (other than having the option to purchase another share) and the sale will not be subject to local real estate laws.
5. How will the property be managed?
Fractional ownership management tasks can be split into 3 categories - cleaning, repair/maintenance and accounting/regulatory. It may be possible for these jobs to be handled by the co-owners but they will normally be contracted to outside professionals, particularly where the owners reside some distance from or in another country to the property.
6. What will the annual costs be?
Buyers will want to be clear before they buy what the annual maintenance and management costs will be. Whether or not a professional management has been appointed, a budget should be prepared for each year setting out in detail the anticipated costs of cleaning, maintaining and managing the property. Each owner will then be required to pay their share of the total cost, normally in one payment at the beginning of the year.
There should also be provision for payment into a reserve fund to cover the cost of periodic decoration of the property and replacement of furniture and equipment.
7. Will I be able to rent the property out if I don't use all my usage allotment?
The ability to earn rental income, even if for just a few weeks a year can be attractive - a large villa in Marbella or Tuscany can generate €4,000+ per week during the peak summer months. The downside is that allowing third party rentals means more people can use the property which diminishes the feeling of exclusivity and increases wear and tear.
The fractional ownership documents will set out whether owners are able to rent out their unused weeks and if they can, the conditions of doing so. For example, the property manager may need to be notified of the details of the guests and any damage caused to the property must be the responsibility of the owner who has arranged the letting.
8. How can I sell my fraction?
Buyers should be comfortable with the procedure for selling their fraction. Most schemes will allow for the sale of fractions, normally by offering them to the other owners first. Some schemes may provide for the sale of the property after a fixed period, perhaps 8 years - this gives owners a guaranteed exit route but may be unattractive to owners who wish to retain their ownership for the long term.