Fractional Ownership of Real Estate

In business, fractional ownership is a percentage share of an expensive asset which is owned by  individual owners.

A fractional owner enjoys priorities and privileges, such as reduced rates, priority access on holidays and income sharing. Typically, a company manages the asset on behalf of the owners, who pay monthly/annual fees to a management company plus variable usage fees. For rapidly-depreciating assets, the management company may sell the asset and distribute the proceeds back to the owners, who can then claim a capital loss and/or purchase a designated fraction of a new asset.

Fractional ownership can provide a financial advantage over renting in some jurisdictions, with some countries and regions having tax laws that provide additional benefits for owners.

Fractional ownership is without doubt a growing industry, especially in the second home marketplace. Allowing several individuals or groups to become joint owners in a way that allows them to use the property at specified times of the year, but without the encumbrance of yearly maintenance as a whole.

There are two main “hiccups” to Fractional Ownership that are stopping it become a global market;

Mortgage companies are not yet willing to lend monies

The similarity to timeshare

Lets take the second point first

Timeshare has been sold, resold and invariably mis-sold around the world. We have all read headlines in our daily papers and seen documentaries about companies that somehow “hypnotised” people into purchasing a “red week or two” in a resort that the clients had no intention of returning to.

Fractional Ownership is a different beast altogether. There are no red or blue weeks, no points and no scratch cards offering a free holiday.

Fractional Ownership offers a way for people to invest in a stunning property that is typically “outside” of their budget, along with several other groups on a FREEHOLD basis.

Essentially buying a tranche or a percentage of the property;

• Should the property increase in value, all owners make a profit
• If it goes down in value, all owners feel the loss
• Owners pay a proportion of the maintenance and management fees to a management company on a monthly, quarterly or annual basis
• If repairs are required, all owners pay their proportion of the amount

Fractional Ownership is definitely NOT timeshare, but unfortunately it does get saddled alongside it.

Fractional ownership works on a “Rota”  basis only, which means that should you wish to go away at the same time every year, or go for a longer period of time it will NOT work for you.

Mortgage companies are in most cases unaware of fractional ownership as a viable “real” investment. There are only a few financial entities that currently offer fractional mortgages and these are in many cases 1-2% more expensive than conventional mortgages.

Most fractional properties today are purchased for cash or through equity release programs, although several developers are also offering developer finance.

Personal loans can be used to purchase fractional ownerships and recently Barclays began to do this with a maimum loan of £25,000