Fractionals are NOT NOT NOT Timeshares - You can bet your Bippy on it!

As I was evaluating a beach condo for possible earmarking as a fractional, the agent/owner said to me (with a great deal of condescension), " Well, Fractionals are just  this year's timeshares."  Yes, I was taken aback and even a bit irritated. But then, I realized that her statement was based primarily on incomplete and inaccurate knowledge.

If we had been in Colorado instead of Florida, the conversation would not have occurred because fractionals are so well known in many of the western states which have ski resorts. That's where they were adopted from European versions and "born" in the US. Now they're also known as well in some of the northeastern states, the Carolinas, and north Georgia.

In fact, Fractionals are so well known in Colorado that they have their own legal designation. In all other states for legal purposes, Fractionals, Private Residence Clubs and even the very expensive Destination Clubs are grouped together with Timeshares as multi-owner shared interests. 

The conversation could not have occurred If we had been talking just 11 years ago, since Fractionals have only been in the United States for the last ten years. That's not a very long time. Timeshares, on the other hand, have been around for 40 years.

Not a Time-Share

In every family there are similarities among the family members, as well as significant differences. The real estate family of shared ownership and use includes four distinct categories at different quality levels:  Timeshares which are usually right-to-use, Traditional Fractionals which are deeded,  Private Residence Clubs which are deeded,  and non-equity exclusive Destination Clubs.

The Traditional Fractionals may be confused with Timeshares because there are similarities, such as being shared with family and friends, sold, or left to someone in a will. But Fractionals don't really compare.  Fractionals are far more exclusive and include many more luxury amenities and services than Timeshares. They tend to be larger homes, usually three to five bedrooms, part of an exclusive condominium building complex, or purpose-built resorts.

While Timeshares are usually for just 1 or 2 weeks per year, Fractionals offer from four to 24 weeks, depending on the property's location and state. Major differences include:

Purpose

Fractionals are available at a variety of quality levels. They are a commitment to a particular leisure lifestyle in a specific desirable location to which one wants to return periodically.

A Timeshare, however, whether deeded or right to use, is really a "pre-paid" vacation plan to be used or exchanged to varying locations. Nothing wrong with that... I myself have timeshare-vacationed in Connecticut, Colorado, the Florida Keys, the Bahamas, the Riviera, and central Europe.

Price

A major difference between fractionals and timeshares is price. Timeshares can be bought for a few thousand dollars and are usually shared among many owners, usually 52 others.

Fractionals cost from about $40,000 to more than $1 million, and the number of owners may be as few as three or four but no more than 12.

Customer Profile

A fractional ownership purchaser is a second home buyer who probably is not interested in a timeshare and who has already made a commitment to maximize a leisure lifestyle, like skiing, boating, or the beach.

Timesharing is a vacation product for the broadest segment of the population, Mr. & Mrs. America, and is usually sold after a 90 minute tour and an intense marketing presentation.

Quality  

Sharing a Fractional home in a world-class destination with local and professional management brings peace of mind - knowing that a competent company is watching out for your welfare, and that your space will be shared by others of similar tastes and means.

Timeshares come in red, blue, and white weeks, because some areas and times are just not that attractive, causing problems in getting desirable reservations for exchanging. You don't even get your "book" listing all the resorts until after you've signed on the dotted line. That's when you learn, for example, that the blue or white week which you just bought won't allow you to exchange for Hawaii which only has red weeks.

Exclusivity

There are a limited number of Fractionals on the worldwide market. Most likely, that number will stay small because Fractionals are built only in the very best, most highly desirable locations. Therefore, demand outpaces supply and results in property appreciation.

Fractional real estate ownership properties are typically located in world famous resort locations where prime real estate is coveted and in extremely short supply. The residences are characteristically larger and have far more luxurious finishes and furnishings than Timeshare accommodations.

Timeshares are almost anywhere that people vacation.

Financing

Banks and mortgage firms consider fractionals to be appreciating assets and will often treat them like any other second ­home purchase. Fractional buyers either pay cash, use a home equity loan, or get a fractional mortgage, which will carry slightly higher interest rates and require a larger down payment than a loan for a primary residence.

Conventional financing doesn't work for Fractionals. However, there are at least two national lenders who specialize exclusively in fractional financing, and who work through local brokers and lenders.

Obtaining a bank or mortgage company loan on a Timeshare is difficult. Rates are high regardless of how good your credit is because most timeshares depreciate over time. Consequently, Timeshares are often financed in-house by the developer because financing with any bank or mortgage company is difficult. 

Appreciation

Why do Fractionals tend to appreciate while Timeshares usually depreciate? There are several reasons. First of all, there are a very limited number of fractional opportunities on the market, whether in resort areas, resort developments or in private residence clubs.  The number will stay small because the emphasis is placed on building only the best, using the most highly desirable locations, or accepting only properties in superior condition.

When demand outpaces supply, the result is property appreciation. Currently, demand exceeds supply with continuing appreciation for Fractionals and depreciation for Timeshares, which are far more common.

About $25 million in fractional inventory changed hands in 2006 through resales. Most of the secondary market Fractionals sold at a higher price than for what the owner purchased it from the developer. With Fractionals, more of the buyer's dollar goes to high quality finishes and "bricks and mortar".

For a Timeshare, however, 40-50% of the cost per unit goes to sales commissions and marketing expense. Furthermore, Timeshare values have historically been poor because of the large number of resales on the market, not to mention a continuous stream of new developments.  They are usually hard to sell.  Some folks say that if you buy a timeshare you're likely to have it for life, whether you want to or not.

Wrapping it Up

Most of the information included here comes from research, analysis, and synthesis of information about the national Fractional industry I've been studying during the last couple of years. There are local variations, and I'd love to hear from others about developments where you live. Please let me know the questions or topics you'd like to explore. Cris Burlew opened the discussion in our west Florida coastal area with his blog "Want a 2^nd Home, but don't think you can afford one?" on 9/25/2007.  My response # 16 to that blog, posted on 10/1, focuses on Baby Boomer buyers and money issues for 2^nd homes.  Many thanks to Cris for opening the discussion and to all of you who've commented so far!  I'll be addressing the issues as we go along. Please visit my fractional website at www.MyWatersideSecondHome.com.

Marge Coffing, Florida Fractional Lady