Fractional Ownership vs. Timeshares

fractionals and timeshares pool view

Own Your Slice of The Pie.

Almost everyone who has considered purchasing a vacation home is familiar with the term “Timeshare,” but perhaps less familiar with Fractional Ownership.

Both are frequently referred to as “shared ownership,” and they share similar characteristics. Both provide an opportunity for people who want to purchase a vacation home but can’t afford the type of property desired or can’t justify the expense based on the time available for use. However, there are significant differences between fractional ownership vs timeshares. Let’s look at those differences.

Timeshares

A timeshare purchase gives the buyer the right to use the property for a designated length of time, usually one or two weeks per year. There are multiple buyers; each has the same right of usage. However, the title remains with the property owner. The primary benefit of timeshare ownership is the right to use a vacation home for the same week or two every year without being required to make reservations.

While the traditional timeshare purchase provides a fixed week or two at the same location, an alternative type of structure uses a point system that permits access to properties at different resorts worldwide. Some programs even allow unused points to be accumulated for use during the following year.

Fractional Ownership

Fractional ownership is a method of property purchase involving several buyers, typically five or six. Each owner holds an equal part of the title. It permits purchasers to have a stake in an asset without having to pay for the entire property, associated maintenance expenses, and taxes. These costs are divided among the owners.

While a traditional timeshare limits access to the property to one to two weeks per year, a fractional ownership could be available for 13 weeks or more per year.

Equity and Investment Value

With fractional ownership, the buyer owns a partial equity (shared with the other buyers) in a valuable asset without putting up the cash to purchase the entire asset outright. As the value of the property appreciates, the value of the purchaser’s equity also appreciates. A net capital gain is realized should the buyer sell his/her equity or the collective group of owners decide to sell the entire property. As a result, lending institutions view fractional ownership as a better investment than a timeshare and are more willing to finance a purchase.

Timeshare ownership is not distributed but entitles the buyer to occupy for a week or two per year. No benefit is realized from a change in the value of the actual property. The property title is 100% owned by the principal owner.

“Very few timeshares increase in value,” says Alisa Stephens, executive producer at RedWeek.com, an online company that rents and resells timeshares.

In fact, their values tend to decrease over time; therefore lending institutions are reluctant to issue mortgages. Since they are considered higher risk, any financing available tends to be more expensive with higher interest rates.

Also, maintenance fees increase with time. This makes a timeshare resale very difficult. In past years there have been cases in which an owner has offered to give away a timeshare because he/she can no longer afford to pay the monthly maintenance fees.

wyndham timeshare interior

Interior of a typical Wyndham timeshare.

Vacation Value

Timeshares are viewed by many as a vacation expense and not a financial investment. Whether renting a hotel room or buying a timeshare for vacation, neither one offers a financial ROI. They are a lifestyle enhancement.

The value of a timeshare may be determined by analyzing lifetime vacation expenses. For example, a 2-week vacation in a hotel property may cost $3,000 each year. Ignoring increases in hotel room rates, in just ten years the total expenditure is $30,000, which is $10,000 more than the average cost of a timeshare. Additional savings are realized by eating some meals in the timeshare unit, rather than all the meals at restaurants.

A survey conducted by the American Resort Development Association (ARDA) showed an 83% satisfaction rate among timeshare owners. They are happy with the purchase that grants them the discipline of better vacationing, gives them the feeling of owning a second home without the expense and provides access to a vast network of properties all over the world.

The sales figures confirm owner satisfaction with timeshare purchases. In 2016 the U.S. timeshare industry (products including timeshare weeks, points, fractional and/or Private Residence Clubs) celebrated its seventh consecutive year of growth. Sales volume increased nearly 7% from 2015 according to the State of the Vacation Timeshare Industry: United States Study 2017 Edition, conducted by Ernst & Young for the ARDA International Foundation.

Management

In addition to the purchase price, buyers of a fractional ownership property are required to pay fees. Shared by all owners, the fees cover property management, maintenance and repair expenses, taxes, insurance, and housekeeping services. These additional fees can significantly add to the overall cost of the purchase.

Timeshare owners must also pay maintenance fees. According to the American Resort Development Association (ARDA), in 2012 the average purchase price of a timeshare property was approximately $19,000, and the annual maintenance fees were $660.

Where fractional and traditional timeshares differ is the degree of owner control. While the fractional management company has responsibility for day-to-day operations, owners retain ultimate authority and control over their property.

Control of most timeshares remains with the project developer or hotel operator, who consider timeshare buyers as yearly guests, not as property owners. As a result, the project developer has little incentive to maintain high standards once the project has been sold out.

Prepared Vacation

Another benefit of fractional ownership is the vacation home preparation provided by the management company. The staff can get to know owners. They can prepare the home according to owner preferences, including personal touches such as putting up family pictures and concierge services like filling the refrigerator with food before arrival.

Timeshares are usually limited to housekeeping.

Owners of both timeshares and fractional vacation properties can deposit their weeks to vacation elsewhere.

Number of Owners Per Unit

An important distinguishing characteristic between fractionals and traditional timeshares is the number of owners per home or apartment.  Most timeshares are designed to have 52 owners per unit (some have 26 owners).

With so many owners, stays are infrequent and short, typically once per year for one week. As a result, there is little emotional connection between the owners and the property. The lack of “pride of ownership” promotes an apathetic attitude toward the property. The high traffic through the unit also means more wear and tear.

By contrast, fractionals typically involve 2-12 owners per unit, with owners visiting the property more frequently and staying longer. With more significant ownership shares and more time spent at the property, fractional owners have a greater stake in how the property is maintained and how it appreciates over time. Fractional owners take great pride in their property investment. With fewer owners, fractional ownership properties are subject to less physical wear and tear.

Interior of a Timbers Fractional Resort.

Interior of a Timbers Fractional Resort.

Property Quality Differences

To purchase a timeshare, the minimum qualifying household income starts at about $75,000. The minimum income for fractional properties is approximately $150,000. For private residence clubs (a more luxurious fractional), minimum qualifying household income is about $250,000. The significant differences in household income for timeshare and fractional ownership result in a distinctly different clientele. Property types are different as well, with timeshares typically one or two-bedroom units while fractional tend to be larger homes with 3 to 5 bedrooms.

Most fractional properties have a better location within a resort, superior construction, higher quality furniture, fixtures, and equipment as well as more amenities and services than most timeshares.

Fractional buyers pay more to purchase and expect higher maintenance and management fees. High-quality construction and finishes, more resources for maintenance and management, and fewer users contribute to the property’s appearance and smooth operation.

By comparison, many timeshare properties degrade over time, making them less desirable for original purchasers and less valuable as a resale. Lower initial quality, inadequate maintenance and management, and higher user traffic contribute to the devaluation.

Public Image of Timeshare vs. Fractional Ownership

In the 1960s and 1970s timeshares in the United States gained a bad reputation due to developer promises that could not be delivered and high-pressure sales tactics that discouraged many potential buyers.

In response to buyer complaints, state legislators passed stringent disclosure and other consumer-protection regulations.  Also, the American Resort Development Association (ARDA), adopted a code of business ethics for its members.

In the 1980s, the timeshare ownership reputation improved significantly when major national hotel brands such as Hilton and Marriott entered the industry. They legitimized timeshares by enhancing the quality of the timeshare buying experience giving it credibility. Despite these efforts, however, the timeshare has not entirely lost its stigma.

Fractional ownership, on the other hand, has developed a reputation as a reliable investment.

In the United States, fractional ownership started in the 1980s. It began primarily in New England and Canadian ski areas; then it spread in the 1990s to western United States ski areas. By 2000, national luxury hotel companies Ritz-Carleton and Four Seasons, as well as others, began offering properties, further augmenting the image and value of fractional ownership.

During the same period, the fractional ownership concept extended to other industries. Jet and yacht industries ran successful advertising campaigns convincing consumers of the benefits of purchasing super-luxury possessions with shared ownership. The fractional method of ownership became associated with luxury and glamor and living the lifestyles of the rich and famous.

Resale Potential

The purchase of a timeshare unit is sometimes compared to the purchase of a car. The car’s value depreciates the moment it is driven off the showroom floor. Similarly, timeshares, begin the depreciation process as soon as they are purchased and do not hold their original value.

Much of this loss is due to the substantial marketing and sales expenses incurred in selling a single residential unit to 52 buyers. These expenses often amount to 50% of the original price and are passed on to purchasers. When timeshare owners try to resell, the marketing and sales costs do not translate on the open market into real estate value.

In addition, the competition for timeshare buyers is intense. Sellers must not only compete with vast numbers of similar timeshares on the market for resale but must compete for buyers looking at new products on the market.

Sales of fractional ownership, by contrast, is similar to deeded ownership of one’s primary residence. Statistics show that fractional ownership property resales rival sales of whole ownership vacation real estate in the same location. In some instances, fractional resale values have even exceeded those of whole ownership properties.

Fractional Ownership vs. Timeshares

Fractional Ownership Timeshare Ownership Comments
Number of owners 2-12 owners Usually 52 owners, 26 owners for some projects Fractional owners have a higher financial commitment and are willing to pay higher costs
Time for owner use  4-8 weeks depending on the number of owners One week per year Fractionals have less wear and tear with fewer occupants
Equity Owners have a share of the title, based on the number of owners. Appreciation potential No property equity Timeshare ownership is usually a vacation purchase that eliminates hotel expenses. Fractional ownership in an investment
Management Owners have good control over property management Project developer or hotel operator maintains management control Fractional owners are willing to pay higher management expenses
Maintenance expenses Owners pay maintenance expenses and taxes on the property Maintenance expenses and taxes are paid in monthly fees Timeshare owners must expect monthly fees to increase every year
Resale Value Resale value tends to appreciate Resale is difficult even at reduced prices Intense competition for timeshare resales from other units and new developments
Owner services Owners decide Minimal service offered Private residence clubs are a type of fractional with many amenities
Property Quality and size Higher quality and larger vacation homes Usually one or two-bedroom units with basic quality Owners of fractionals have an incentive to maintain the property in good condition
Income requirements $150,000 annual revenue min. $75,000 annual revenue min. $250 annual revenue minimum for private residence clubs
Most attractive feature Less costly alternative to whole ownership of a vacation home Affordable alternative to hotels for vacation Buyer must decide which type is best based on objectives for the property

 

Fractional Ownership Agreement

While timeshare owners must only agree to the conditions stipulated in the purchase contract to complete the sale, fractional owners are sometimes required to create a legal agreement document. Buyers should consider the following for the property ownership agreement.

The ownership agreement must comply with state, county, and city regulations. In some cities, fractional ownership is not permitted inside the city limits. A local licensed real estate agent can advise regarding codes and regulations. An attorney should be consulted for drafting up the document.

Schedule of Usage

Fractional owners should agree to the property usage. Typical questions include:

  • Will the same owner be guaranteed to have use of the facility during the same time each year?
  • Does unused occupancy time roll over to the following year?
  • Can the unit be rented to non-owners?
  • How are maintenance expenses and improvements divided among the owners?
  • If an owner uses the property less than the allocated time, are the expenses reduced or remain the same?

These are just a sample of the issues that should be addressed in the owner’s agreement. Perhaps more important, owners must decide how to handle an equity resale by one of the owners. The agreement should specify the process for approving the sale. Even if the individual owners are related or have a close relationship at the onset of the agreement, the issue should be predetermined. Relationships can change with time, and a contract is a guarantee for fair treatment.

Conclusion

Before deciding to take part ownership in a vacation home, review the similarities and differences between a timeshare and a fractional ownership. One type of ownership is not necessarily better than the other, but one will be best for you based on your priorities.