Answer: When it is part of a fractional ownership scheme.
The irony here is that fractional ownership schemes are marketed with the advantage that they are underpinned by the value of real estate. However as soon as a home/apartment is put into a fractional ownership scheme it will no longer be valued in the same way as it would have been as a complete unit.
This isn’t necessarily a bad thing because resale fractions could (and sometimes have) been valued at more than their fraction of the original real estate value. This is by no means always the case though.
It is important to understand why real estate has proved such a reliable investment over the long term (ignoring the last year or so).
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It is “produced” using a scarce/finite resource – land. This has a greater effect in crowded countries like the UK but is true to a greater or lesser extent with all locations.
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It has an enduring utility value. Everyone needs a place to live. Even properties in typical vacation locations have this utility value, since they can be used by the support staff that are needed to run a resort.
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Unlike most investments, you can borrow to buy it. This gives the potential benefits (and losses) of investment “gearing”.
If you compare a fractional ownership unit with the above you can see that 1 is still true, 2 isn’t (or is much reduced) and 3 is difficult to achieve (perhaps more so with the recent credit problems).
This is why I would advocate a winding-up clause in fractional ownership schemes, to enable re-alignment with the underlying real estate value (if this is advantageous).
Neil Robertson
March 31, 2008 at 8:29 pm
Hi Neil,
I will disagree with your underlying premise here. That is to say, are fractional ownerships to be considered as “investments”, or are they to be considered as vacation homes? If the primary purpose of a fractional owner is as an investment, then I would agree that a dissolution or “winding-up” clause is essential. I think a term of 10 years would be a more appropriate window than 5 years.
If however, the primary objective of a fractional ownership is to provide an affordable route to a 2nd (or 3rd) home for a vacation/holiday by the owner, then a winding-up clause merely serves to terminate the primary purpose of the purchase. While I am not saying that Owners should have the option of selling, (so long as a vast majority, at least 2/3 agree), to force a sale after 5 years seems to defeat the entire purpose of the purchase, which is to have a place to return to year after year.
I have always downplayed the investment side of the purchase, even though that aspect is present in any real estate ownership scheme, whether fractional or otherwise. Rather, I have encouraged the prospective purchaser that this method provides a unique way to enter into what are otherwise prohibitively expensive destination markets for those who were not born with a silver spoon in their mouth.
Thanks for letting me throw in my 2 cents (or farthings as the case may be).
Steve
March 31, 2008 at 8:45 pm
Correction to my last post:
“while I am not saying that Owners should NOT have the option of selling [the property en masse]…
Next time, I will read my posts twice before posting!
March 31, 2008 at 11:58 pm
Steve
Thanks for the comments. I suppose it is in the nature of group ownership that you have to compromise. An assumption that a scheme is going to continue, with the option to end it via a majority decision might inconvenience someone who wants out. Equally my suggestion might be annoying for someone who is happy with their fraction and finds that they have to sell because it is impossible to get a unanimous decision to continue.
Having some mechanism (either yours or mine) to release the underlying asset value (if needed) should actually make it less likely to happen because it should improve the value/saleability of the fraction on the re-sale market.
I accept you point that a sale clause after 5 years is perhaps too soon, and that 10 years might be better.
I think the point of overriding importance is that the consequences of any such clauses are discussed with the prospective fraction owners, and the different scenarios worked through (as you are obviously doing). This will help to prevent any bad feeling in the future.
Neil
And by the way, with the exchange rate as it is I would take pennies over cents (the US ones)