Fractional ownership has continued to differentiate itself from its cousin (time share). Some individuals with second homes in the most desirable locations have asked me how to go about making their home a fractional ownership residence. I figured I would put a “how to” out there and answer many of the frequently asked questions.
- Deciding how you want to structure the property. The two most popular options are LLC operating agreements and restrictions.
- LLC operating agreements. You can take a property and have it titled or deeded over to an LLC or other entity. That entity can give ownership in shares or interest. You also have a nice clean way of stating the rules and regulations owners will follow. The disadvantage to this is financing. It is very difficult to find a bank that is interested in financing something when you offer shares of an LLC or other entity as collateral. Another disadvantage is resale. It will be much more difficult to establish value and sell shares or interests in an entity compared to a title or deed with restrictions.
- Restrictions on a title or deed. There are some attorneys who have done a very good job putting restrictions on a title or deed. These tend to be very similar to condominium documents. They clearly show the rules and procedures the owners will operate under. They are then recorded in the county records. One of the major advantages is financing the individual interests in the property. Several banks will actually lend qualified individuals money using the fractional ownership deed as collateral. Another advantage is resale. It will be much easier to sell titles or deeded interests with restrictions through a real estate agent in the properties' local area. Because of the financing that is available, this will also assist in getting a true market value of your property interest.
- Assure you have the ability to sell your property as fractional. Your property can not have any restrictions--whether they are in a subdivision, community, or condominium--that prohibits fractional ownership.
- Decide if you are going to try to sell all of the fractions at one time and closing or if you are going to sell them off individually. In a perfect world, you would be able to market your property as a fractional ownership residence and have all of the fractional buyers go under contract and close at the same time. In the real world, the odds of you finding more than one fractional owner to go under contract and close on the same day are slim. You are most likely going to sell the fractions off individually. There are several catches to this. The first is that once you sell a fraction to the first fractional buyer, you are married to the fractional ownership restrictions. In the event you can’t find other buyers, you are still obligated to all of the restrictions and/or operating agreement rules you put in place when you closed with the fractional ownership buyer. The second catch is your existing loan on the property.
- Handle existing loans on the property. If you have an existing loan on the property, you will have to pay off that loan completely at your first fractional closing. There are solutions available for those of you who owe more than what would be paid to you by the first fractional buyer. On closing day, you can replace your existing loan with a commercial loan that will have a partial release clause. This clause allows you to sell to other fractional owners and pay back the loan in pieces as you close with other buyers. The interest rate will be a little bit higher, but it will serve its purpose. Commercial loans will have different requirements than your traditional mortgages on property. You are usually required to have at least 20% equity in the property and negotiate a clear path to have most of the closing proceeds applied to the principle of the loan as you close additional fractional owners until the loan is paid in full.
If you owe 90 – 100% on a mortgage, have less than good credit, or are upside down in the property, it is very unlikely that you will be able to qualify or find a commercial loan to assist you in fractionalizing your property.
- Market and sell your property. While you can do this on your own, it is usually best to find a licensed real estate agent with significant knowledge of fractional ownership and experience. This should save you a lot of time and headaches navigating through the process of selling the fractions.
- Provide fractional ownership management and scheduling. You will most likely need to find a management company to manage the property. After all, your goal was most likely to make your second home a true getaway rather than the place you go to fix all of the things you didn’t get done on your last vacation. Fractional Ownership Group has a central online place where all of the owners can schedule time at the property, view bills and accounting, open tickets for things that need to be done, and reference commonly asked questions.