Fractional ownership in luxury resorts remains a big industry, with sales reaching $480 million in 2017 (per Ragatz Associates)
However, sales for fractional SFR's are non-existent, with only a few homes in vacation areas sold annually.
This is due to complications in the process, but also the changing vacation industry - which is making fractional private homes rare.
What is a fractional home?
Fractional homes are vacation homes with multiple owners and deeded as fractional.
If the owner wants to keep their home and use it occasionally, they partner and sell to multiple buyers on the MLS, who use the home other times of the year.
A fractional is ideal for work-at-home couples (who can live in various parts of the world at different times) or anyone that that takes extended vacations to a specific destination.
Few current listings!
Using the popular holiday destination Hawaii as an example - there is currently (as of July 2018) just three residences for fractional sale across the whole state. There have been (very) few condos sold in Hawaii as fractional ownership over the past year. Here is a Kauai condo for sale as fractional.
Additionally, the private homes that do get sold as fractional can take a significant amount of time to sell – we are talking several years!
Anyone who wants extended stays in Hawaii can benefit from a fractional property, as real estate values continue to increase. 2017 saw property values up by 5.5%, with another 3.2% forecast for the next 12 months.
So, if fractional properties offer so many benefits, what are the problems with fractional single-family residences? Why are they so hard to sell?
Here are the reasons:
- Lack of clarity – people do not understand fractional ownership. It can be more precarious than traditional homeownership. There are often legal situations that are unique to fractionals and many questions arise about usage, responsibilities and exactly how sharing works.
Fear of other owners – a homeowner will often be dubious about sharing their space with another family. It can be difficult to ensure you have found someone trustworthy. What if the other owners smoke in the house or are unclean? If there is damage to property or furniture, who is responsible for fixing it and will they do it promptly? What about regular or urgent maintenance costs, or utility bills? These are legitimate concerns when considering fractional ownership.
Lack of marketing – In my opinion, this is the single biggest reason for lack of sales. Homeowners who try to sell as fractional often do not have the marketing skills it requires. This can include using poor quality photography on listings (with equally poor staging or decor) or not pricing the property correctly. You might even find they rarely respond to attempts to contact them - which is incredibly unusual compared to a good sales realtor, who would be in frequent contact trying to get a sale.
Not incentivized to sell fractional properties – fractional properties usually offer the same 1.5%-3% commission. Since the price is lower, usually under $200,000, there is no real incentive to promote these to buyers. It just doesn’t make for a worthwhile commission.
The up-front financial commitment is high - there are no lenders who will lend to fractional buyers. It will usually have to be an all-cash purchase. It isn’t possible for a lot of buyers to come up with the required money without the help of a lender.
Competition from fractional resorts and luxury rental sites – high-end resorts (i.e., Timbers, Ritz-Carlton or Four Seasons) have attractive and successful residence packages for fractional ownership. These resort condos have almost no appreciation potential, but people are still buying them, due to their luxury atmosphere and fantastic high-demand locations. Resort properties are also guaranteed to be well kept and maintained.
Leasing of ultra-luxury homes – homeowners that own luxury vacation homes are finding rentals are easy in a good economy. Instead of selling the shares in the home, they are renting them to companies such as Inspirato, which guarantees monthly rental income. Airbnb, VRBO, and Inspirato have also made significant changes to the long-term vacation rental industry. These sites have made it faster and more straightforward for people to find and consider holiday home options, including long-term stays. You can easily research and book your rental yourself; comparing prices from across multiple sites to make sure you are getting the best deal. Some of these sites even offer a “verified” service, meaning the listings are guaranteed to be of great quality.
Compare this to purchasing a fractional home in which you have all the up-front and ongoing costs and the risks and uncertainties of owning a home with other people – which certainly seems like the less enticing option.