Scotsman Guide - June 2009 Residential Edition

In many ways, the evaporation of the credit markets and revaluation of real estate affect the second-home market to an exaggerated degree.

Because of this, mortgage brokers working with clients in search of vacation and other secondary properties should educate themselves about the advantages of fractional ownership and its associated financial implications. In addition, brokers should understand how fractional-ownership structures can help current owners facing financial hardships.

It should be noted that fractional loans have fallen out of vogue. This began to occur just before the subprime (aka, nonprime) mortgage meltdown. Fractional lenders, funded by only a few major banks, redirected their focus to the core compe-tencies and practices on which their banks were built. But they did leave clear signals

of a future resurgence of this type of loan.

Despite the current dearth of fractional loans, brokers can still make money on fractional real estate by learning to structure these deals and by bringing together interested parties.

How it works

Five years ago, writer Ron Lieber wrote in The Wall Street Journal that it’s possible to sell title to a private second home fractionally, to project equity and appreciation for fractional buyers and to differentiate that type of ownership. While some consider Lieber’s insights to be ahead of their time, others have understood fractional ownership and its investment value versus timeshares before Lieber entered the discussion.

In Colorado, for instance, second-home buyers long could declare their desire to “buy a fraction.” Almost any real estate

Mark Chesney is founder of GrandShare and a fractional-industry speaker. He trains mortgage brokers, loan officers and investors on buying troubled notes and fractionalizing title to maximum returns on investment. Chesney is author of the book The Grand Share Method, sold on Amazon.com. GrandShare assembles co-ownership operating structures and property administration for people with shared ownership in second-home real estate. To learn more, visit www.grandshare.com. Contact Chesney at mark@grandshare.com.

agent who heard those words could refer to the local multiple-listing service and accommodate the client.

Outside Colorado, however, it seems real estate practitioners scarcely knew anything about fractional ownership.

cost and recurring costs, including taxes, utilities and insurance. As an alternative to taking title individually, multiple buyers can collectively take title through a limited-lia-bility company. Individual title may be required where a fractional loan is involved.

“Despite the current dearth of fractional loans,
brokers can still make money on fractional real
estate by learning to structure these deals and by
bringing together interested parties.”

Here’s what the term means: Fractional buyers purchase absolute ownership of a property and agree to use the property under guidelines established for themselves and other fractional owners. This differs from timeshare structures, under which buyers typically purchase only rights of usage rather than the property itself. Fractional ownership, therefore, delivers the benefits of equity and appreciation that timeshares lack.

Fractional-ownership structures also can motivate buyers and sellers. Buyers pay only a fraction of the property-acquisition

Regardless, the buyers typically will sign a co-ownership operating agreement that governs shared use and shared expenses. An attorney familiar with local codes and homeowner-association regulations, which could affect overall feasibility, normally prepares the necessary documents.

Working both sides

To understand how this ownership structure works, consider a real estate investor buying a vacation property for $900,000. Once purchased, the investor arranges a