Familiarizing the Brokerage Community with Fractionals

by David M. Disick, Esq.

One of the keys to a successful fractional sales effort is familiarizing the brokerage communities with the overall prominence of fractionals and the profit opportunities for brokers who are knowledgeable in this segment.  This Paper briefly outlines ten elements in that familiarization process.

The Growth and Expected Growth of Fractionals

Since the mid-1990s, when the author developed Franz Klammer Lodge in Telluride, Colorado, the fractional industry has grown enormously, reaching an estimated $2.3 billion in 2007 sales; and even in the meltdown years of 2008 and 2009, reaching  sales of $1.5 billion and $860 million, respectively.  In each of those years, fractional sales significantly outpaced the sales of whole ownership.

In his 2010 report on the Shared Ownership Resort Real Estate Industry in North America, Dick Ragatz opined that:

  • Currently, about 60,000 U.S. households own shared ownership.

  • There are roughly 5.5 million households that are income qualified.

  • If the shared ownership penetration rate reached 5% of the estimated income qualified households, that would result in another 215,000 buyers with still 78.1% of the qualified households remaining.

  • "Regardless of the penetration rate scenario used, it is obvious that potential market depth for shared-ownership is just beginning to be tapped and that a high number remains.  Most likely, the penetration rate will surpass 5.0% within the next decade."

    These facts underscore the enormous profit opportunity for brokers knowledgeable in fractional real estate ownership.

    A Natural Evolution from Prior Vacation Real Estate Structures 

    Vacation homes are among the ultimate discretionary purchases – something most people want, but do not absolutely need.  Vacation homes can be hard to justify because of the expenses of whole ownership and the burdens of property maintenance.  In the ongoing effort to increase the attractiveness of vacation home ownership, vacation ownership concepts have, over the past 40 years, evolved into new structures seeking to improve on their predecessors.  Fractionals are simply one of the most recent developments.  Accordingly, fractionals are not a one-shot phenomenon but rather a stable outgrowth of ongoing experiences.

    Responsive to the Economics, Buyer Psychology and Vacation Desires of the Current Climate

    One consequence of the current economic climate is the pressure on prospective buyers to make an economically sound purchase in terms of price points and carrying costs.  Given that most second home owners don't utilize their property more than three to four weeks a year, a fractional makes economic sense.  Especially today, buyers ask "why pay 100% of the cost of purchasing and maintaining a vacation home used only a fraction of the year?"

    The luxury fractional is more than the bricks and sticks of real estate.  It is the feeling of belonging and offering a lifestyle.  It is an experience based product. Today's educated consumer puts a premium on the "experience" – the items that may cost little but provide significant satisfaction. Moreover, properly trained management generate in Owner-Members the feeling of belonging in a privileged circle of members, not simply owning a piece of real estate.

    Easy To Explain and Sell

    There is a feeling among some in the resort industry that fractional ownership is somehow complex.  This is not the case.  A fractional ownership deed is, in all material respects, the same as a whole ownership deed with the obvious exception that it grants a fractional interest as opposed to an entire whole ownership.

    From a marketing and sales point of view, the legal treatment of fractional interests and timeshares is similar and simply "an inconvenient truth."  From a legal point of view, a property whose use rights are specified based on time, is considered to be "shared ownership" or timeshare.  In reality, equating fractional interests to timeshares is like comparing a Ritz Carlton hotel to a roadside inn.   Both provide a place to sleep, but the experience in each is quite different.

    Benefits for Buyers 

    The logic – The average use of second homes in the U.S. is approximately four weeks annually.  A dramatically growing segment of the second home ownership market has the means and desires to own a second home, but is not prepared to tie up substantial assets in owning and maintaining a single property used only a few weeks a year.  For these buyers, a decision to purchase a luxury fractional makes good financial sense.  And moreover, fractional affordability allows the buyer the opportunity to purchase much higher quality than he or she might otherwise acquire.

    The magic – Just as important as the logic, is the emotional choice of the fractional ownership lifestyle – the "experience", the freedom from the responsibilities of maintaining a whole ownership property, and the freedom to explore many vacation places and not be tied down to just one whole ownership vacation spot.  

    Benefits for Sellers 

    Experience shows that a vacation home sold fractionally can generate at least 1-1/2 times its costs as a whole ownership property.  While marketing costs are somewhat higher, there is still a substantial benefit to the seller.  

    A fractional price point broadens the number of potential income qualified purchasers, thus facilitating sales that otherwise would have been lost and accelerating sales velocity.

    With mortgage financing limited, the lower fractional price point may appeal to cash purchasers wishing to strike a good bargain.

    Due to the overhang of unsold existing whole ownership inventory, a number of developers look to fractional interest sales as an exit strategy.  Having said that, one must also emphasize that fractionals are not a magic bullet.  The project; the residence; the experience must still be valid.  

    Benefits for Agents

    The basic salability of Fractionals in the current climate creates the opportunity for agents to generate prompt income, instead of waiting for the whole ownership vacation market to turn around.

    Moreover, in those cases where a whole ownership owner sells to a fractional developer, the agent has the opportunity to earn two commissions – on the sale of the whole ownership and on the fractional resale.

    Furthermore, as our team was fond of saying in the development of Franz Klammer Lodge, "Your fractional buyer today may be your whole ownership buyer tomorrow."

    Single-Family Fractionals: A Growing Trend and a Profit Opportunity for Agents

    Opportunities to acquire properties favorably – Developers and home owners wishing to sell currently face significant challenges.  Sellers have endured months and sometimes years of low offers or no offers at all.  Understandably, prices have declined.  This creates an opportunity to buy properties at favorable prices from homeowners and developers.

    The single family "experience" – Single family residences allow owners a level of privacy that matches their expectations and needs.  The ability to enjoy the lifestyle of the single family home not surrounded by the general mass of the resort enables owners to enjoy the intimacy of their own home for a fraction of the cost, while at the same time being proximate to major area amenities.  

  • About The Author

    David Disick has been involved in the fractional vacation home ownership industry since 1992. His pioneering development, the award-winning Franz Klammer Lodge in Telluride, Colorado, was the first property to be branded as a Private Residence Club.  This trend-setting property set the stage for the creation of the wide variety of private residence clubs in today’s market and was essential in establishing the prominence of this luxury segment of the industry. 

    Mr. Disick has written numerous articles on fractional ownership and spoken at many industry conferences.  Fractional Life has named him to its list of The Top 21 Fractional Real Estate Professionals of 2010. He is the author of Fractional Vacation Homes: Marketing and Sales in Challenging Times, which expands on the material in this article.

    Contact us at dasirkin@earthlink.net or (00)(1)(415) 738-8545. Sirkin & Associates has offices in California, Colorado and France
    ©November 25, 2009 by D. Andrew Sirkin.