Purchasing Fractional Real Estate: What to Expect When You Write That First Check

by Sherman Potvin

Writing a CheckOnce you’ve made the decision to purchase a share in a fractional property or residence club, what should you know before you write that first check? The process of purchasing a fractional property is very similar to the purchase of a wholly-owned home with just a few additional items that you should be aware of.

Private Homes

If you are purchasing a share of an individually-owned private home, the process you go through will be determined by whether or not the current owner has a mortgage on the property. If so, the mortgage will need to be paid in full before you can close on your fractional share.

For example, let’s assume that the owner is selling 10 shares of the fractional home at $100,000 per share and the property has a $300,000 mortgage. The owner will then need to sell 3 shares in the home before any closing can take place. You will be expected to put down a small “soft” (refundable) deposit and to sign an agreement stating that the sale cannot take place until 3 owners have committed. How much you will be expected to put down will depend on the size and price of the fraction you are purchasing. In any case, your deposit will be put into an interest-bearing account and is refundable at any time up until you are notified that the owner has 3 committed buyers (or whatever stipulation was put into place in the agreement) and you have signed a Purchase and Sale Agreement.

When you receive notice that the criteria has been met, you are generally given 30 to 45 days to put down a “hard” (non-refundable) deposit that is generally around 20% and sign a Purchase and Sale Agreement. The hard deposit may be refundable for a short period of time under certain circumstances (see Rescission Period below). A simultaneous closing will take place, generally within 45 to 60 days, where all three buyers will close at the same time allowing the owner to satisfy the mortgage and transfer title.

In the case of a fractional home that has no current mortgage on it, the homeowner/developer will immediately ask for a hard deposit and signed Purchase and Sale Agreement.

Resorts and Residence Clubs

The process you go through when purchasing a share of a fractional resort or residence club in most cases depends on the completion status of the resort. Many resorts, such as the Ritz-Carlton Residence Clubs, will take reservations before even breaking ground and beginning construction. If this is the case, in most cases you will follow a similar scenario to the one described above for private homes with a current mortgage.

You will be asked to put down a small soft deposit and sign an agreement stipulating criteria that the developer must meet before you go into contract. The criteria could be “when the building’s foundation is completed” or “when the roof is completed”. Whatever it is, it will always be clearly laid out in the agreement. When you are notified that the developer has met the criteria, you will be given some time (usually 30 to 45 days) to put down a hard deposit and sign a Purchase and Sale Agreement.

If you are purchasing a share in a fractional resort or residence club that is completed and ready for occupancy, you will be asked to put down a non-refundable hard deposit and sign a binding Purchase and Sale Agreement. Many of the major branded resorts will ask for a conventional hard deposit right away, even if the building has not yet been completed.

Rescission Period

Once you have moved from a soft deposit to a non-refundable deposit and signed Purchase and Sale Agreement, you may be entitled to a rescission period where you can change your mind and back out of any signed contracts without monetary penalties. Whether a rescission period applies to you and how long in duration will be determined by applicable laws in the state where you are purchasing your fractional property. For more information on state-by-state regulations, you can ask your attorney. Attorney Andy Sirkin has put together comprehensive state-by-state laws which pertain to fractional real estate. You can visit his website for more information at www.AndySirkin.com.

If you have reserved a share and put down a soft deposit as in either of the cases described above, the rescission period will not begin until after: 1) the owner/developer notifies you that the criteria stated in your initial agreement (i.e. ‘X’ amount of committed buyers, construction completed, etc.) has been met; and 2) you pay the full hard deposit and sign the binding Purchase and Sale Agreement. 

Financing

Should you need to take out a mortgage for your fractional real estate purchase, the process will again depend on whether you are purchasing a share of a private fractional home or an established fractional resort or residence club. Many of the major resorts and residence clubs have made previous arrangements with a fractional lender to provide financing to their buyers. Most of the private fractional homes have not made buyer financing arrangements, although there are a few that are providing owner financing.

Fractional financing can be difficult to find in the current mortgage climate, although more and more local lenders are coming on board with fractional financing products.

Legal

You should have an attorney represent you through the purchase process and at the closing, just as you would if you were buying a wholly-owned residence. The attorney does not need to be well-versed in fractional purchases. However, if you would prefer to retain an experienced fractional attorney, there are a growing number such as Andy Sirkin in San Francisco and John Gosselin in Boston.

Tips

If you are one of the first to purchase in a fractional resort, residence club or fractional private home and have to wait for some criteria to be met before you can close, use your time wisely. Remember, you can back out of the deal at any time before the criteria is met and the developer does not want to see that happen. In the case of a fractional private home purchase that is waiting for multiple buyers before closing, quite often you can negotiate a stay of a week or more in the home during that waiting period.
 
If you’ve reserved a share in a larger resort or residence club that is under construction, you would be wise to use that time to completely understand the ins and outs of the usage plan, particularly if it is a flexible or dynamic plan, or if they allow reservations on a “space available” basis. You could very well come out with an advantage over the other buyers when it comes time to reserve your stays.

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4 Responses to “Purchasing Fractional Real Estate: What to Expect When You Write That First Check”

  1. Sherman,
    This is a very imformative article. Its great that you provide such detail to the fractional ownership process. Educated consumers are always the best clients for developers. You constatly provide in-depth and important information for all of the readers potential purchasers.
    Thanks You Again!

  2. Daljit Hundle Says:

    Pretty informative article. My question is why does the current owner have to pay the current mortgage in full before the new fractional owner can close on the deal for his purchase of fractional ownership.

    I own a 17 acre estate in south pacific region of Costa Rica and have a current mortgage of $900,000.00 for 20 years. The title is held with a corporation so the fractional buyer can buy his portion of the shares. The mortgage is being paid through auto debit with a bank. To ensure the continuity of mortgage payment a safeguard can be set up whereby the new fractional owner can monitor the monthly payment.

    Regards

    Daljit

  3. Pretty informative article. My question is why does the current owner have to pay the current mortgage in full before the new fractional owner can close on the deal for his purchase of fractional ownership.

    I own a 17 acre estate in south pacific region of Costa Rica and have a current mortgage of $900,000.00 for 20 years. The title is held with a corporation so the fractional buyer can buy his portion of the shares. The mortgage is being paid through auto debit with a bank. To ensure the continuity of mortgage payment a safeguard can be set up whereby the new fractional owner can monitor the monthly payment.

    Regards

    Daljit

  4. Sherman Potvin Says:

    Hi Daljit, Thanks for your note. The developer can hold title to his property in many ways avoiding the need to give “deeded title”. However,one of the attractions of fractional buyers is the fact that they can actually have a “free & clear title” just as they do at home? I have found that people in general do not understand trust, corp. etc.and it’s a much harder sale, hope this helps, cheers, Sherman

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