Fractional ownership is a growing trend, but how do you go about valuing a fraction in an existing scheme for sale? What rules should be in place in a fractional scheme to prevent potentially disruptive new members joining it?
The Popularity of Fractional Ownership
The recent increase in popularity of fractional ownership is well documented, with a lot of the growth coming from new development schemes fro large developers. With the larger numbers of fractions being bought, it is inevitable that some of them will be re-sold. But having decided to sell your fraction, how do you go about valuing it?
Valuation Methods for Fractional Ownership
The traditional method for valuing real estate would be to engage an expert realtor (estate agent in the UK) to the job for you. Ideally consult with several to get different opinions (this is usually easy given the number of real estate businesses there are). When valuing a real estate fraction this approach might is more difficult since the re-sale market is still small and the number of businesses working in this area is few (although growing quickly). So how can you value your fraction? The following are some ideas of ways to assess value:
1. Find out how much the developer is selling fractions for now. If the resort/home you bought a fraction in is still being actively sold it should be a simple matter to find out from the developer what their current price is. You would often need to discount this price to achieve a reasonable re-sale price.
2. Find out how much real estate prices have increased (or fallen) by since you bought your fraction. Apply this percentage change to the original price of your fraction.
3. Consult an expert. There are some emerging experts and websites in the fractional ownership market who should be able to give you an opinion on the value of your fraction. This advice should be free unless you decide to sell your fraction using their services.
My advice would be to use a combination of all of the above methods before deciding on a value for your fraction.
Advertising Your Real Estate Fraction for Sale
This presents another problem in that the fractional re-sale market is relatively immature. Probably the best places to advertise your fraction for sale are the types of sites/publications that you would advertise real estate in. In this way you can access a large potential market.
Rules on New Members of Fractional Ownership Schemes
Often there is a worry about the sale of fractions in existing schemes and whether this will cause problems. The main concerns are normally over the allocation of time, payment of maintenance dues, and changeover problems (not leaving at the agreed time or leaving things dirty/broken etc.). Sometimes there is an attempt to counter this in the fractional ownership agreement by having a clause that new members need to be approved by the existing members. In my view this is a mistake. The focus should be on ensuring that the time allocation and changeover rules are clearly defined in the original fractional ownership agreement. In addition there should be clear and extensive penalties for failure to comply with these. The worry over payment of maintenance dues is easily dealt with by having a clause in the agreement that the fraction owners cannot use the home unless their maintenance dues are paid.
It is also worth considering how disruptive a fractional scheme member might be if they had a sale lined up, only to be refused permission to sell. Would they then be a constructive and helpful member of the group or would they be bitter and resentful?
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