- Number of Owners Per Property. Timeshare properties are designed to have 50 to 52 members who use a certain property – without owning it. A collectively owned property rarely has more than 12 owners.
- Vacation Use Per Year. Timeshare owners typically have access to a property one week each year while collective property owners usually have a month or more of use.
- Household Income Variation. According to David Disick, writing for The Fractional Consultant, the minimum qualifying income for a timeshare purchaser is about $75,000 per year, while a fractional property owner typically has an income of $150,000 annually.
- Quality of Property. Fractionally owned vacation homes tend to be more expensive per unit ($1,000,000 vs. $100,000) with greater amenities and more luxurious furnishings.
- Reputation. Timeshares in the U.S. developed a bad reputation in the 1960s and 1970s due to sponsors over-promising and under-delivering. As a consequence, state governments passed stringent disclosure and consumer protection laws affecting the industry. In contrast, fractional ownership of vacation homes became associated with glamor, luxury, and the lifestyles of the rich and famous. The emergence of such hotel chains as Ritz-Carlton and Four Seasons in the fractional ownership industry increased its popularity.
An Explanation of Fractional Ownership
While appearing similar to a timeshare property, a fractional interest in a property is quite different. Owners own a fractional share of a specific asset, with each of 3 to 12 owners entitled to use the asset in proportion to their ownership percentage. Owners are each responsible for their pro rata share of expenses or profits should they arise. For example, luxury real estate chosen wisely can appreciate over the years. When the property is sold, the fractional owners receive their proportional share of the profits and are liable for any capital gains tax due.
A sponsor/manager typically develops a fractional ownership property and markets the units to individual property owners. Owners are also responsible for their financing, although many project sponsor/managers establish a relationship with a local lender for potential buyers’ convenience. While many sponsor/managers retain fractional ownership units until they are sold to new fractional owners, some may continue to own fractional units and be bound to the same contract terms as other fractional owners.
Management of the asset – including the preparation of tax documents, scheduling of owner use, and ongoing inspections and maintenance – is typically provided by the sponsor/manager initially, with fees detailed in the purchase contract. When all of the units are sold, the owners typically establish a board to replace the sponsor/manager.
The board determines the budget for the property and negotiates management fees with a property manager. Fees are typically a flat monthly amount, but depend upon the services provided to the fractional ownership group. Operating expenses such as insurance, maintenance, repairs, improvements, utilities, and project management are divided into proportion of ownership so a 12% fractional share would pay 12% of the expenses.