By Jay MacDonald, bankrate.com | Published: 11/01/2007
If this all sounds a little familiar, it should. In fact, perhaps the biggest hurdle facing the emerging fractional industry is that it is frequently confused with the time share.
Two things separate the fractional from the time share: ownership and control. With a time share, you typically bought the use of a property for two or three weeks a year; there was no ownership in the property itself and you had little, if any, control over when or where you stayed. With a fractional, you are actually a co-owner of the property, either by deed or, as is often the case with foreign fractionals, as a shareholder in a nonprofit business entity such as a partnership or limited-liability company. Although deeded ownership does not guarantee you any particular level of control per se, it does provide the opportunity to incorporate that into your governing documents.
The problem with time shares is that their investment value tended to decline rather than appreciate, especially when the developer moved on.
"I think with the average time share, something like 50 percent of it goes to commissions and fees, whereas the true brick-and-mortar value is really quite low," says Neil McAllister, co-founder of YourFraction.net, a fractional advisory service based in Florida and Edinburgh, Scotland.
How to Draft the Agreement
Hammering out the details of a fractional falls somewhere between drafting a partnership agreement and writing up governing documents for a condo association. Sirkin estimates the average cost at $2,000 to $4,000, with an additional $400 to run it by a real estate attorney in the county or country where the property is located -- definitely a good idea. But remember, those costs are shared by your co-owners.
Most of the fractions Sirkin has worked with number four to eight co-owners; the number is often driven by the desirable number of weeks each year and the proximity of the property. Among domestic destinations, Colorado ranks first, followed by Florida, Hawaii, California, Nevada, Texas and the Carolinas. A quick online search for "fractionals + (your desired location)" will put you in touch with local Realtors, developers and others in the know.
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