Although it is something that is relatively new in the state of New Jersey, a new trend that is occurring within condo and townhouse communities (as well as popular vacation-area resorts) around the country is fractional ownership, where resorts and condo/townhouse communities allow people to live in them part-time.
Don’t get scared off by the name. Fractional ownership is similar to any other real estate purchase, except as the name implies, you will be purchasing just a fraction of the property instead of the whole property.
“It’s an ideal situation for someone because the average second home owner only gets to use their property 1/3 of the time, so it basically sits dormant the other parts. Maybe you could rent it out to pay off some of the expenses, but why own the whole thing when you are only going to use part of it?” says Ian Lazarus of the Landis Company, which represents properties on the Jersey Shore. “Fractional ownership is ideal for the Jersey Shore because it allows people who couldn’t afford an entire property a chance to own these great beach properties.”
Each development will have their own rules about how many fractions they will sell each unit for. The fractional shares can vary from a thirteenth (1/13th) to a half share (1/2). A thirteenth share, for example, provides one week’s use of the property each season for a total of four weeks per year. The quarter shares seem to be more popular and under this unique form of ownership, an owner has a registered title to a one-quarter interest in the condominium, estate or townhouse.
In years past, this was something that was limited to vacation spots in places like Florida, Hawaii and Vermont, as beach and ski vacations seemed like smart targets for this. But in the past few years, more and more locations are considering the fractional option for their properties.
The Jersey Way
Looking at properties in New Jersey, it seems that many are considering going the fractional route as several places have been examining the idea and coming up with a business plan.
Glenn Schechter, a broker/manager for New Jersey’s Mountain Resort Properties, says his group is in the planning stages of starting fractional ownership at their properties.
“We think it’s something that will be very popular here,” Schechter says. “Instead of going out and buying a property for ‘x’ amount of money, and then you have the full taxes and maintenance and full upkeep, now it can be shared with the other owners.”
Mountain Creek, a resort in Vernon Valley/Great Gorge area, is also going the fractional route within the next year.
“Our corporation is involved in other resorts around the world that do this, and we are talking about this in Wildwood and the [Jersey] Shore. It offers a tremendous amount of potential and opportunities if correctly done,” says Doug Ganssle, a broker for Black Creek Sanctuary and The Appalachian at Mountain Creek. “This is a great area for this.”
Another group that has been working on bringing fractional ownership to New Jersey is called Shared Synergy, which started developing a business model for beach communities in 2005. The plan involves offering 1/2 shares to their owners for shares in the luxury homes that would have all the top amenities.
“Recent property values in this area (specifically the communities of Avalon, Sea Isle City, Ocean City, New Jersey) priced the average consumer out of ownership options years ago,” said the group’s owner on the Shared Synergy blog. “Fractional ownership is the answer to this problem. The buyer essentially gets the deeded interest in the home and 12-13 weeks a year to use (or rent out) the house under a [Tenants-in-Common] agreement.”
According to someone working in the group, the plan is currently in a holding pattern as they look for more financing, but they expect to be operational by 2011.
One of the main reasons people buy fractionals, even when they can afford the entire purchase, is that the expense and responsibility of ownership is reduced. This makes the second home truly a vacation, as you can simply go there, and know everything is in order. At the same time, you have the deed to the property, and you can pass it down through generations in your family, or resell it through a broker.
“You’re buying into a million-dollar property and a lot of times people can’t afford the whole thing by themselves,” Ganssle says. “Many times the developers really dress them up and make them the best of the best and top-of-the-line, and they should. This is attractive to the buyers.”
Fractional ownership has many advantages that are attractive to part-time residents. This lifestyle choice includes many extra services, such as a concierge and valet, as well as perks such as priority tee times, fitness facilities, pools, saunas and much more that you couldn’t count on if you committed to wholly owning a second home.
“Someone can be in a luxury property and only be paying a share of the ownership for when they use it and they can also trade those shares out,” Schechter says. “That helps them out if people’s plans change. It’s not rigid where it has to be the same week all the time.”
In the past, someone may have looked to their relatives and friends to buy a property with them that was too expensive to own on their own. This sounds good, but a lot could go wrong with this method.
“There are a lot of people who buy partnerships with relatives or friends and everyone has to sign on the same mortgage. If one of the other partners loses their job, or gets divorced or can’t make payments, the other partners are responsible,” Lazarus says. “Here, there are each separate notes and mortgages so you will never be responsible for someone else’s debt.”
Consumer loans are becoming more readily available for fractional purchases, which is proof that fractionals are a readily acceptable niche in the market. Mortgages with rates similar to those on traditional homes are becoming more and more the norm.
Not a Vacation
Fractional ownership is not to be confused with a timeshare, which more commonly is done for vacation-purposes and in a one-week or two-week block.
“People need to understand that there is a thing called timeshare and a thing called fractional ownership and they are by no means the same thing,” Ganssle says. “It’s a major difference because it is deeded portions of a property.”
While the various fractional ownership plans may share some characteristics with a timeshare, the differences are significant.
Timeshare is a vacation product for the broadest segment of the population, and as such is a wonderful concept that gives millions of families the opportunity to vacation a week or two in locations and accommodations that may have been beyond their means. Fractional ownership is more than a vacation. The fractional ownership purchaser is a second home buyer, who, most often, is not interested in just a vacation timeshare. The fractional owner returns to the resort on a regular and frequent basis.
You Can Manage
When it comes to dealing with fractional ownership, management of the property is most often taken care of by a third party or a homeowner’s association. In some developments, the HOA leases the units from the developers, and the fractional owner subleases the unit back. In some cases, an annual budget is established and owners make monthly or quarterly payments to cover utilities, insurance, taxes and the like.
“It’s still a homeowner’s association and you have maintenance fees and every aspect of owning the property would be shared,” Schechter says. “The board would still be set up by the homeowners and everyone in the fractional ownership would have a vote or percentage of a vote.”
In other words, the owners have a say in the operation, maintenance and budgeting for the property and everything else that a typical board would vote on.
Wave of the Future
The reason that fractional ownership hasn’t been done in the past in New Jersey stems from the fact that it wasn’t needed, as there seemed to be plenty of willing buyers. But with mortgage issues and the high price of properties, this has become an excellent way for someone to own a million-dollar luxury property.
“Another big part about fractional ownership is that the properties are fully-furnished and accessorized and people can walk through the door and enjoy the place,” Lazarus says. “This is something I expect will become much more popular in the years to come.”
Keith Loria is a freelance writer and a frequent contributor to The New Jersey Cooperator.