Is Fractional Ownership a Good Investment
Sep 03, 2013
You’re likely very familiar with the phone calls, newspaper ads or airport pitch, “free hotel stay! Free dinners! Free spa services! Free boat cruises!” And so on… all in exchange for only ‘an hour or two of your time’.
These are the recognizable ploys of a timeshare sales script. But with the exposure of scams associated with timeshares exposed over the years, most folks know to avoid them altogether.
However, they haven’t disappeared. They’ve just changed the format, referring now to ‘fractional ownership’. Granted, you’ll be assured that buying into a fractional is nothing like a timeshare. That they’re an excellent investment and very secure.
But is that the full story?
When you purchase a fractional, you actually own a portion of the property – as opposed to simply the right to use it. Typically, each ‘owner’ receives a percentage ownership in a corporation that holds the property. This can work if you’re set on a dream vacation home in a location you simply can’t afford... say, Paris, with a view of the Eiffel Tower or on prestigious Lake Como in Italy. But if that truly is your dream vacation/retirement destination, and fractional is a consideration, here are some points to mull over:
Cash – because it’s nearly impossible to get a bank or financial institution to finance a fractional ownership purchase, you will need to have cash available to buy into the fractional.
Legal – Although most countries don’t have specific laws in place to govern fractional ownership, you want to ensure that what you’re buying into adheres to any particular legal requirements the country requires.
Price – Be mindful about buying into an overpriced fractional. In some cases, villas will be on the open market for a listed price (i.e. $1 million), or as the option to purchase one of four fractional pieces. Don’t automatically assume that owning a quarter of the villa will only cost you $250,000… it’s not uncommon to see prices in the $300,000 - $400,000 for a quarter share. Bottom line? Don’t be expecting fast appreciation on a fractional, especially if the math doesn’t exactly add up.
Re-Sale – Consider your re-sale options on a fractional before diving in headfirst. If given the opportunity, most people would prefer to purchase a place they can call 100% their own, or go in together with friends or family. Plus, remember how you had to pay cash when you first bought? Your buyer will also need to pay cash, which can be a tough sale for some.
Usage – Depending on how many owners are buying into the fractional, it can be difficult to get your preferred times. In some cases, the weeks vary from year to year, in other cases the weeks are fixed. If you’re buying into a beachside hacienda so you can escape the cold winters for a few weeks, are you going to have trouble getting the dates you want? If it turns out that you will only get January/February months every 5 or 10 years, is it really worth it to you?
Fees – Make sure you confirm all additional fees before signing on the dotted line. There are always management fees with fractionals; and sometimes they’re extremely high.
Co-Owners – When you buy into a fractional, in most cases you will not know the other owners. When issues over maintenance, fees and usage arise, it can be tricky to navigate possible conflict. Find out if your management company offers mediation or arbitration to assist in these kinds of situations.
Foreign Ownership – You want to make sure you’re able to even own property as a foreigner before you jump into fractional ownership. It’s not uncommon to see fractionals for sale in countries where foreigners aren’t able to own property. Even if you’re buying into a ‘corporation’, and no one will know you’re a foreigner, if it’s illegal, you shouldn’t want any part of it.
The reality is, there are many affordable options around the world besides purchasing a fractional. Unless you absolutely have to own something that’s beyond your budget why not consider the following:
Buy Smaller – Ok, so the 5-bedroom, 4-bath villa with it’s own guesthouse may be tempting to buy into, but consider everything that comes with running a home that size and compare that to how much time you’ll get to even spend there. In the end, buying a smaller place, in the same area, may be a better choice.
Developer Financing – Most, if not all, reputable developers will offer financing options (go HERE to learn more about working with our preferred developers). Interest levels are often very low, or non-existent and monthly payments are very affordable.
Leverage Friends & Family – By purchasing a home with loved ones, you may not avoid all conflict, but at least you have a relationship with everyone involved in the ownership. Much easier then dealing with and trying to resolve conflict with people you don’t know or can’t communicate with.
Expand Your Horizons – Don’t like the idea of buying into a fractional, but everything else is out of your price range? Maybe you need to start looking at other options… an ocean-view property in Costa Rica’s popular Tamarindo Beach region may be too pricey for you, but by heading down the Nicoya Peninsula towards Playa Tambor, you’ll find ocean-views that are still affordable (go HERE to learn about properties under $100,000!).
Purchasing your vacation/retirement home via fractional ownership makes sense when you simply can’t afford your dream property. But, that being said, there are always alternatives. Think long and hard before obligating yourself to a fractional… do your homework and ensure that it’s the only possible option for you.
If you’d like the opportunity to do some research on purchasing a property in a beautiful locale before committing one way or the other, Discovery Weekends are ideal. You get a chance to see the countryside, meet your future neighbors and chat with the developer and builder, and all with no pressure to buy.