Understanding Fractional Ownership Exchange Programs

This article explains the various types of fractional vacation ownership exchange programs and introduces some of the key issues in evaluating these arrangements.


Exchange Terminology

In the context of fractional ownership, an exchange is a transaction where one fractional owner exchanges usage rights with another. Exchanges can be informal, where fractional owners arrange the exchange themselves, or organized, where the exchanging owners subscribe to an exchange program that facilitates finding exchange opportunities and coordinating the exchange transaction. There are internal exchanges, where fractional owners of the same home or within the same development exchange with one other, and external exchanges, where fractional owners in different and unrelated properties exchange.


Informal Fractional Ownership Exchange

Informal internal exchanges, where one fractional owner informally exchanges usage rights with another fractional owner of the same property, are common in all fractional vacation ownership arrangements. These exchanges can be facilitated by a property manager or on a website, or simply arranged by the exchanging owners via email or telephone. Informal internal exchanges are useful for adding flexibility to fixed-date usage and fixed rotation plans without the added operating costs of a usage reservation system.

Informal external exchanges, where a fractional owner informally exchanges with the owner of a distant property, are generally restricted to fractionals that allow rentals. A variation is where a fractional owner exchanges with someone who owns an entire vacation home elsewhere. Informal external exchanges are becoming more common as websites and agencies to facilitate such exchanges are created. Nevertheless, these exchanges can be complicated by the difficulty in agreeing on the value of the properties to be exchanged, and by the need to coordinate scheduling.


Organized Exchange Programs

Organized exchange programs, both internal and external, are popular among fractional buyers and are often mentioned as one of the most important factors in the selection of one fractional property over another. Internal exchange programs are operated by the management teams of most multi-unit fractional developments, while external exchange programs are offered both by developers that operate fractional projects at multiple locations, such as Timbers, Ritz Carlton, and Hyatt, and by independent exchange companies, such as RCI, Resort To Resort, and Registry Collection. Many independent exchange companies accept individual fractionally-owned homes as well as fractional developments.

Most organized exchange programs operate on a point system under which the operator assigns points to each property based on location, size, amenities and demand. For homes in seasonal locations, the points assigned to a particular home may vary based on the time of year when usage is offered for exchange. Owners wishing to exchange place usage rights on offer, and receive points if another participant in the exchange program reserves the usage. Owners with points can then use them to reserve other properties. The program operator facilitates all aspects of the exchange. In developer-operated exchange programs, the cost of the program is often included in the owner dues or maintenance fees. Independent exchange companies generally charge an initiation fee (that includes the cost of visiting the property to determine the number of points to be assigned), annual fees, and per-transaction fees.


Comparing and Evaluating Exchange Programs

In comparing organized exchange programs, it is important to look beyond the brochure. The fact that a certain property is part of the exchange program does not guarantee availability, and lack of availability undermines the usefulness and value of the program. The ability of an owner (call him “Joe”) to exchange will depend on four factors: (i) the demand of other owners for Joe’s property; (ii) the frequency with which the owners of the property Joe hopes to visit offer their usage for exchange; (iii) the amount of competition from other exchange program participants for the property Joe wants to visit; and (iv) the relationship between the number of points Joe earns from exchanging his own fractional to the number of points Joe needs to use the property he wants to visit.

Ideally, before deciding to join a fractional property exchange system, one would determine the number of points that will be awarded for usage for the property one is considering placing in the program, and how that number compares with the number of points needed to use other properties in the program. Unfortunately, it can be difficult or impossible to obtain this information before committing to the program because the answer requires a thorough and expensive evaluation by the exchange system operator. It can also be hard to gauge the true availability and waiting times for other properties in the system. This issue is important because the most common complaint from participants is that the property they want to reserve never seems to be available.

Beyond the usability of the exchange program, it is important to consider how the system might improve sales of the fractional interests. Certain fractional exchange systems are more well known and sought after by buyers, and choosing one of these might be a deciding factor in finalizing a sale. Exchange participation also exposes a fractional project to more potential buyers, both because it is included in the exchange operator’s pamphlets and website, and because non-owners visiting a property through an exchange may turn into buyers (or refer friends and family). Different exchange systems will have different potential for generating sales leads based on the popularity of the program, its marketing budget, and the demographics of the members who use the exchange system.


ABOUT THE AUTHOR

Andy Sirkin has focused on fractional real estate projects since 1985, and has been involved in the creation of projects throughout the United States, as well as Europe, and Central and South America, ranging in size from a single house or condominium up to hundreds of factional interests. This breadth of experience allows the firm to draw on a huge library of fractional project documentation as well as extensive knowledge of marketing and registration requirements for virtually any location where a project might be located or potentially marketed. Andy is the author of two books as well as numerous published articles, and has compiled a searchable disk containing the complete text and a summary of fractional ownership law for all 50 U.S. states. He has also created an extensive library of instructional material for fractional developers, brokers, and buyers, available at sirkinfractionallawyers.com. He is an accredited instructor with the California Department of Real Estate, and frequently conducts workshops and appears at conferences throughout the world. He currently splits his time between offices in Paris and San Francisco, and can be contacted via email at DASirkin@earthlink.net, or by phone at 33-1-7666-0202 (EU) or 1-415-738-8545 (US).

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.