Fractional Ownership - A Guide To The Different Schemes On The Market

Many companies market fractional schemes, but how can you tell whether they are truly fractional ownership? In this article the responsibilities and benefits of various types of fractional schemes are compared.

Definition of Fractional Ownership - What's in a Word

If you think about it, the definition of fractional ownership is very simple: Fractional means that the asset (whether home or yacht or car) is split into fractions for the purposes of expenses, use, etc. Ownership means just what it says - the individuals who together form part of this fractional scheme actually own an interest in the asset and can benefit (or lose out) from changes in the asset's value.

When this definition is applied to the "fractional" marketplace that has developed, it excludes a large number of schemes that are marketed as fractionals. As ever in life a simple rigid definition is not sufficient to describe reality. In this article I compare types of fractional schemes against the two contrasting forms of traditional ownership - outright purchase and renting. These are at opposite ends of a spectrum of different ways to gain access to an asset. All types of fractional ownership (and also timeshare) fall somewhere between these extremes.

Features of Outright Ownership

If you own an asset outright you can use it whenever you want to, and this applies for as long as you own it. You are solely responsible for maintenance. You are entitles to profit from any gains in the asset's value and can dispose of it at any time.

Individual or Developer-led Fractional Ownership

These forms are very similar to each other, the only difference being that in developer-led schemes there tends to be a premium to the underlying asset cost (to compensate the developer for additional legal and administrative work). The distinctive feature of these schemes over anything below is that the fraction owners actually own (either directly deeded or through a limited/incorporated company) their share of the asset.

In this form of ownership you have to compromise on your right to use the asset, this being decided by some form of rota or booking system. You are responsible for paying your share of any maintenance or service charges associated with the asset. You are entitled to a share of any increase in the value of the asset, but crucially you need to examine how this increase could be realized.

Ownership Clubs (Private Residence Clubs, Destination Clubs, Car Ownership Clubs etc.

In this category it is necessary to disregard the name and look at the fundamentals. Some schemes marked as private residence clubs actually involve buying a deeded share of a property which would put them into the above category. Where they differ from simple developer/owner-led schemes is in the level (and cost) of the luxury/services provided.

In this category you have to share use of the asset through a booking/rota system. You also have to pay (often very high) service charges for the luxury facilities on offer. The key point for clubs that involve homes is to investigate the legal ownership arrangement, and your rights to profit from any increase in value. This aspect is not so important for other asset classes, since one is not expecting them to increase in value. Some clubs offer a simple money-back arrangement, either complete or a percentage. This does at least separate them from timeshare, but does mean that someone is getting to keep any investment gains that are made with your money!

Timeshare

Timeshare is in effect paying up-front for the rental of a property for a number of years for a specified period of time (typically a specific week each year). No ownership rights are given to the timeshare owner. The timeshare carries a (sometimes very high) annual fee that can wipe out any benefits of owning the timeshare. You have no flexibility as to when you can use the property (unless you swap with another timeshare owner) but you do have assured access to the property for the week that you have purchased.

Rental

This is at the opposite end of the property spectrum to ownership. You have no ownership rights or maintenance costs. There is no assurance that if you like the property you will be able to stay in it again next year. You don't have to pay any maintenance fees.

Conclusion

Do your homework if thinking about purchasing from a "fractional" scheme. Just because the company says it is fractional or isn't timeshare doesn't mean anything. You need to find out the fundamentals of:

Right to Use

Responsibilities for fees (and how can these be increased)

Rights to investment returns

Exit strategy