Fractional ownership, also known as “shared ownership,” is a concept often lumped in with timeshares, but they’re only distantly related. Like a timeshare, you have access to a piece of property for a specified period of time each year, which varies depending on the number of owners who share each property. However, the key distinction between fractional ownership and a timeshare is that in fractional ownership, you buy deeded real estate—you buy a home—not merely “time.” You own property that can appreciate in value and can provide a return on your investment, should you decide to sell.
This asset-sharing idea was conceived to make large luxury homes, especially those in expensive resort destinations such as Vail or Martha’s Vineyard, attainable to a broader cross-section of the population. But this concept has trickled down to include camps and cabins, and in light of the financial events of recent years, it’s become an attractive way for log home enthusiasts to afford the vacation homes they’ve dreamed of.
If you’re considering entering a fractional ownership arrangement, there are a few things you may want to consider to protect your rights and your financial investment.
1. The most popular type of fractional ownership agreement is the “Usage Assignment Approach.” Each co-owner is assigned the exclusive right to use a home during a specified number of days, weeks, or months each year. These can be fixed periods (such as “the month of July” or “the first two weeks of February and July”), variable (meaning they are renegotiated each year), or a combination. It’s important to determine these parameters up front.
2. Expenses such as property taxes, insurance, maintenance, and improvements should be divided in proportion to ownership, for instance, a 30 percent owner will pay 30 percent of the costs.
3. If you’ll be mortgaging the home (and only 30 percent of fractional owners typically do), you’ll need a “group mortgage.” To keep it simple and avoid unnecessary confusion in the long term, the down payment and monthly mortgage payments should be divided evenly and in accordance with the percentage of ownership.
4. Make sure it’s clearly spelled out, in writing, how the maintenance and household responsibilities will be divided, even if you are entering the fractional ownership agreement with family or close friends, and have all owners sign the agreement.
5. Establish a system for making decisions regarding the property. Whether it’s a majority vote or weighted based on percentage of ownership, all parties should agree, again, in writing.