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
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 firstname.lastname@example.org.
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
Continued on Page 33
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