Fractional Ownership, Private Residence Clubs, Condo Hotels -
Buying Options
You're seriously considering buying a second home or vacation
home. What are your options? Is whole ownership the right
choice? What about fractional or shared ownership? What's more
important to you - investment or enjoyment? This report answers
these questions and more.
A second home is something many aspire to own and enjoy. You're
not alone. In fact, people are buying second homes like never
before. Second homes tend to be held for seasonal and occasional
use or whose usual occupants live elsewhere.
The expansion of second home growth has had two driving forces
behind it: increased wealth and favorable demographics. With tax
laws that benefited the transfer of wealth, the stock market
boom in the 1990's and renewed house price appreciation, average
household net worth has risen dramatically. These demographic
changes coupled with the recent languishing stock market have
intensified second-home demand and contributed coincidently to
the extreme rise in prices within destination resort areas.
Second-home purchases are most commonly made by middle-aged
heads of households in their prime earning years.
In 2004, the second home industry in North America achieved
record sales volumes. A total of 2.82 million second homes were
sold in the U.S., up 16.3% from 2.42 million sales in 2003. This
growth trend is attributed to several factors:
* The US economy recovered from a deep recession.
* Cash in money markets languished with the lowest
interest rates in decades.
* Confidence in the stock market remained and continues
to remain low with consumers seeking out alternative investment
opportunities.
* Consumers in the US and Canada saw second home real
estate as a safe haven for investment appreciation with the
opportunity to also enjoy the use of their new asset.
* Second homes also provide investment diversification,
which has become a critical concern among consumers since the
stock market crash in 2000 and 2001.
New Ownership Options Available to Meet New Market Demands
In response to growing demand, the resort industry has undergone
substantial change in the last five years. In order to broaden
market appeal, developers have crafted new second home real
estate products to better respond to people's needs and desires.
The most recent innovations in the second home industry are the
introduction and rapidly increasing popularity of luxury
fractional real estate and the condominium hotel - two of the
fastest growing segments of the real estate industry today.
Fractional Real Estate and Condominium Hotels are primarily
purchased for lifestyle enhancements. The variations between
these products tend to be in how the owners plan to use their
residences and what they hope to gain from their ownership. To
better understand these differences it is important to note the
two primary motivations for owning a second home - as an
investment and enjoyment from use of the residence.
Similar to whole ownership purchases, fractional and condo-hotel
owners are granted ownership by fee-simple deed with title
insurance. Since Fractional Real Estate and Condominium Hotels
are backed by deed and title, these purchases are considered
equity-based investments as opposed to the non-equity based
multi-site destination clubs also popular in today's market.
And, just as you can with a primary dwelling, the deeded
fraction or condo-hotel real estate may be resold or bequeathed.
Fractional Ownership
Fractionals are very upscale fully furnished second home
properties usually located within renowned destination resort
areas or select urban settings where cultural, dining and
shopping experiences are extraordinary. More important to the
consumer is that resort fractional projects are being located
within destinations that have been family favorites for
generations. These residence programs normally include superior
resort services such as concierge, valet parking and personal
gourmet chef services for in-home dining, as well as the use of
first class quality amenities and a variety of recreational
activities.
Common settings for fractional properties are ski and golf
resorts and beach communities. Popular destinations include
Aspen and Telluride in Colorado as well as the Caribbean.
"Fractionals are typically found in resort areas where prices
for second homes are very high and/or there is a scarcity of
available real estate," says Richard Ragatz, president of Ragatz
Associates, a hospitality market research and consulting firm
based in Eugene, Oregon.
Carl Berry, CEO of Scottsdale-based Star Resort Group, notes
that the luxury fractional or private residence club concept has
become attractive because property values in popular resort
areas has skyrocketed out of reach of all but the wealthiest
buyers.
For example, Mr. Berry notes that $1 million now buys a
tear-down cabin in Aspen, Colorado, whereas a fractional there
costs $200,000 to $500,000, "which is chicken feed compared to
what these properties are going for." Nowadays, $200,000 will
buy a piece of a $1.5 million property, according to Ragatz, who
notes that this concept has been around a long time. "People
have been investing in second homes with relatives and friends
for years, but divided-ownership property was never a true
product until recently."
I like to emphasize that the popularity of the second home
fractional is that it makes sense to purchasers who simply could
not justify the purchase that they might only use for a few
weeks out of each year. With a fractional, owners have the asset
and all the advantages of second home ownership without the cost
or year-round maintenance obligations. Professional management
relieves owners of the worry and anguish that often accompanies
second home ownership. When coupled with superior hospitality
service levels, the fractional purchase is an exciting and
sensible alternative in the second home marketplace. Fractional
choices are broadening as developers continue to design programs
that truly allow owners to use their second home as they prefer
at a fraction of the cost.
What Types of Fractional Ownership Are Available?
There are several different types of fractionals that serve
divergent interests. The most popular categories include
Traditional Fractions and Private Residence Clubs.
Traditional Fractional
This original fractional format was first formulated in the
1980's to formalize the sharing of a single family home within a
destination resort area. Traditional fractions now involve
condominiums and attached townhouses as well as detached single
family homes. These Traditional Fractionals are usually sold in
one-fourth interests, also termed Quarter-shares. Quarter-share
owners receive one week of use each month for a total of 13
weeks per year. Variations of the Traditional Fractional
include: Fifth-shares with a total of 10 weeks per year and
assignment of use every fifth week, and; Sixth-shares with 8
weeks of use per year and allocation of time every sixth week.
Within each traditional fractional format, the weeks are
assigned through a calendar that rotates to distribute the most
desirable times of the seasons in a fair and equitable manner.
The owner may either use or gift their weeks, or they can place
their unused time in a rental program and split the revenue with
the property manager after costs. Quality of the residence and
furnishings is in the 3 to 4-star ranges. Service levels are at
the 3-star level, if included in the program offering.
Private Residence Club (PRC)
A Private Residence Club (PRC) is designed to meet the needs of
the same affluent buyer that would normally consider purchasing
a luxury wholly owned second home. The purchase decision is
primarily based on the buyer's motivation to enjoy the residence
and the resort area, although potential value appreciation is a
factor.
Affluent purchasers recognize they have limited leisure time and
are looking for real estate that is price proportionate to
actual use. The Private Residence Club ownership model follows a
"pay for what you need and want" philosophy in an intimate,
exclusive community together with highly personalized service
and a wide range of amenities. As in the Traditional Fractional,
owners purchase a share or "fraction" of a Private Residence
Club home. They receive a deed with title insurance.
Private Residence Clubs comprise a high-end luxury product sold
on a one-seventh (1/7) to one-thirteenth (1/13) share basis.
Quality of the residence and furnishings is in the 4-star to
5-star ranges. Service levels are superior with every need or
request by an owner accommodated by an attentive staff.
As pioneered by principals of Star Resort Group, the defining
quality of the Private Residence Club is in the owners' ability
to access their time in a flexible manner and literally as often
as they want, similar to a golf country club and subject to the
project's Reservations Policies and Procedures.
Dave Hanna, President of Star Hospitality and a member of the
first PRC development team explains, "In the Private Residence
Club program, the owner's use of the residence is on his
schedule and not controlled by a calendar. Generally, ownerships
are granted a set amount of time, termed 'Pre-planned
Vacations', to guarantee each owner access to their residence
during peak seasonal times. In designing a particular use plan,
we consider the length of the peak season and set a ratio of
owners to each home that allows enough flexibility so owners can
be assured of securing the times that they want each year.
Spontaneous visits by owners are accommodated through a 'Space
Available' reservation program that allows for use as little as
one night at a time and up to seven nights per reservation. Some
owners may use the program less in certain years, making more
time available at the resort for the other owners."
Carl Berry adds a note on hospitality service levels: "Certain
Private Residence Club projects prefer to promote their program
with "5-star service" levels. When compared to the rating system
utilized by the hospitality industry for luxury hotels,
residence clubs that do not provide fine dining alternatives,
butler service and other requisites that earn the 5-star rating
are at 4 to 4.5-star levels. That is not to say that the service
isn't excellent, for it is. It's just not 5-star by hospitality
industry definitions. Owners at Star Resort Group projects
appreciate the tradeoffs between having a 24-hour butler staff
versus having to pay for that convenience in their annual fees."
PRCs are seldom rented, since the owners generally prefer to
keep unused time available for the owners while maintaining
exclusivity. The Homeowners Association supports their thinking
by not facilitating or encouraging rentals. Should owners decide
to rent any of their guaranteed weeks to friends or associates,
the renters are treated as the owner's unaccompanied guests.
Condo-Hotels
Statistics show that the market for homes with rental income
potential is nearly twice the size of the market for vacation
homes that are seldom rented. However, both markets are growing
rapidly in double digits. As expected, the typical buyer is at
least partially motivated by investment and rental income and
may be younger and less affluent that the luxury whole ownership
second home buyer.
A Condo-Hotel unit is a condominium sold on a whole ownership
basis with the intent of the owner using some of the time when
they wish, while placing the balance of their unused or
unscheduled time into a hotel rental program. An operating hotel
with attendant services is critical for this program to be
successful. The appeal of a condo-hotel ownership to prospective
buyers is that there may be an opportunity for rental income to
cover yearly operating costs. Strict rules apply toward
representation of the condo-hotel product as an investment. It
is first and foremost a real estate product predicated on the
owner's planned use.
Although most condo hotels are sold as whole ownership, some
condo-hotel regimes have structured a hybrid fractional overlay
model into the mix of products in order to reduce the price
point and diversify the market. Aside from the prevalent whole
ownership condo-hotel model, traditional quarter shares or fifth
shares tend to be the most popular hybrid within the condo-hotel
platform.
Whole Ownership Second Home Options
For those who choose to use their resort residence for longer
periods of time, or are inflexible in their use times, or for
those who simply prefer not to share and are willing to pay the
price, whole ownership of a second home is the only acceptable
format.
You're One Step Closer to Your New Home
Now that you're armed with all the facts, the next step is to
start shopping for your new second home. And now that you know
all about your fractional ownership options and all of the
benefits of only paying for what you need, you just might find
yourself owning your dream home sooner than you thought possible.
For more information on fractional ownership in private
residence clubs and on condo hotels, including listings and
photos of available properties, visit the Star Resort Group
website at http://www.starresortgroup.com