REAL ESTATE

4 downsides to part-ownership

Fractional real estate can be a poor investment

By Inman News Feed
Add Comment Add Comment | Comments: 6 | Posted Apr. 16, 2010

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Fractional real estate can be a poor investment

Steve Bergsman
Inman News

My winter vacation this year was in Yellowstone National Park, and while on the route home my wife and I opted for one night of opulence and stayed at the Four Seasons in Jackson Hole, Wyo. Since I'm a journalist and really never stop looking for a good story, I met Kimberley Hoffman, the director of marketing for the hotel, who was kind enough show me around the property, situated at the base of the Teton Village ski mountain.

After a tour of the main hotel, Hoffman asked if I wanted to see the condominiums, which she said were originally sold as fractionals. My ears began to tingle and my fingers twitched. Fractionals? Slowly, I turned -- for pen and paper.

Although not a new concept, fractionals, as with other vacation-home programs such as condotels and destination clubs, became very popular during the past decade, or at least before 2007 -- a time when everyone had money to throw around at bad real estate investments.

On the face of it, a fractional seems to make sense. People generally use their vacation homes for about 25 to 35 days a year. The rest of the time the houses sit empty. The fractional idea was to purchase only the amount of time you would actually use a property. The difference between a timeshare and fractional was that with the latter you got an actual deed based on percentage utilization -- so for all practical purposes this meant property ownership.

The downsides to this great concept were numerous, but I'll just focus on four:

  • Time management. In places such as Jackson Hole, everyone usually wants the same weeks: Christmas to New Year's and seven to 14 days in the heart of the summer. No one really wants the rest of the year. So, how do you fairly allocate usage amongst fractional owners for prime time? Even if the management company figures out this conundrum, as a fractional owner you get prime time only every few years, not every year as you would want.
  • No appreciation. No one likes complications in real estate investments, and fractionals are about as intricate as you can get because of the shared ownership. Historically, these don't usually appreciate in value. No one makes money on a timeshare investment, which isn't about real estate, and few, if any, make money on a fractional, which supposedly is.
  • All cash. In the freewheeling finance markets before 2007, a mortgage could be found for just about any structure that had claim to a roof. After the subprime blowout, lenders became much more conservative and a mortgage for fractional ownership no longer could be obtained. For the past three years, if you wanted to buy into a fractional you had to come in with cash.
  • For the developer. Fractionals, again like other vacation-home programs such as condotels, are great deals -- but only for the developer. A study by Ernst & Young back in 2008 showed fractional developments were generating price premiums of 100 percent to 200 percent per square foot over full-ownership products. At the Four Seasons Teton Village, for example, a 2-bedroom/2-bathroom condo was on sale earlier this year at $1.8 million. Let's say that was a reduced price because of the recession and the owner originally wanted $2 million. A one-seventh fractional ownership for a two-bedroom at the Four Seasons sold at peak at around $550,000. Do the math: Seven fractional sales would equal $3.85 million -- a nice premium to the developer.

According to Hoffman, originally 32 of the 57 condominium units would be sold as fractionals, but within 12 months the Four Seasons made a very wise decision to end fractional sales. Now only 14 remain fractional and the other 43 condos were put on the market as whole units and sold out.

Condominium owners at the Four Seasons here in Teton Village can put their unit into the pool for hotel usage as in a condotel concept, or not. Let's say you don't. As a straight condominium there is a lot of value added because owners can use the facilities of this five-star hotel.

After returning home I gave a call to William Van Gelder of Sotheby's International Realty in Jackson Hole, who has always been my go-to person for information about that local real estate market.

As it turned out, fractionals have had a rocky history in Jackson Hole. Also in Teton Village was another fractional property that Van Gelder says ended up in bankruptcy, and a nascent fractional development at Teton Pines that never really got off the ground.

Part of the problem with the reportedly bankrupted Teton Village project, Van Gelder noted, was that it didn't manage the prime-time problem well. As a result, the desirable weeks sold out fairly quickly, but that left gaping holes in the schedule. "The developers were stuck with April and November, which are affectionately known as off-season and unaffectionately known as mud season," Van Gelder said.

The original plan was to develop 24 units, but only eight were built.

A number of investors who bought fractionals in Jackson Hole are now trying to get out. At the Four Seasons, unit pricing is now down about 40-50 percent. As for the other project, Van Gelder noted, "Prices are all over the map. It's not easy to get realistic numbers."

Jackson Hole is about as pretty a place as you can imagine with its glorious neighbors, Teton National Park and Yellowstone National Park. In the winter, the Teton Village ski mountain boasts an astounding 4,139 feet in vertical rise and an average of 459 inches of snowfall -- in short, you won't get bored skiing this mountain.

In the summer, the great outdoors is -- literally -- at your feet, whether you hike, camp or climb. So, a condominium here does make sense.

But, what about fractionals?

I'll just quote Van Gelder: "99.9 percent of the people (who) are purchasing shouldn't look at a fractional product. It just doesn't make a whole lot of sense unless you are buying a particular lifestyle (such as a Four Seasons lifestyle) and you are OK with the fact that you will never get any money out of your investment."

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COMMENTS

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1. Sherman D. Potvin said... on Apr 19, 2010 at 10:57AM

“Steve Bergsman, I must say that you should truly be ashamed of this above article. For someone like you whom obviously has little fractional knowledge but reach many people to write before research is a crime! I might also add your "expert" in Jackson Hole has even less knowledge. May I suggest that the next time you wish to write fractional articles you at the least do minimum diligence, Sherman D. Potvin
www.lfguide.com & www.fhintl.com & www.frax2max.com”

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2. David A said... on Jul 8, 2010 at 11:10AM

“Very good article. Fractionals are like cdos, rather than selling 1 unit to 1 buyer they want 10 buyers to buy a share in 1 unit at double the aggregated price. Bad investment = no future as a product. Investors dont continue to invest in poor investments. Simple . Sherman must be in the fractional sales business. This product stinks.”

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3. Piers Brown said... on Aug 13, 2010 at 11:26AM

“There is a place for timeshare, fractional and whole ownership in the new economy.
I pitty those that got caught up with the investment wave and bought whole ownership properties to flip. It's these 'investors' that grew the bubble we're all paying for now.
The consumer and technology has changed the marketing landscape for ever. Any developer / sales person who is not totally transparent will inevitably not last long.”

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4. Eray said... on Feb 24, 2013 at 05:22PM

“First, your information on Teton Village is somewhat faulty and I am not a fractional salesperson. I do agree that fractionals are not to be bought as investments and the crash has hurt them but it has hurt ALL vacation properties as far as I can see. Fractionals are a great product for those who do not want to be tied to one location and are not looking for a retirment home and who want 5 star service at their second homes instead of having to do housework, fix things, etc while they are at their vacation home. You have to be flexible with your vacation time and you should not finance them if you can pay outright. They rent very well so you can always rent the weeks you do not use, at least in beautiful Teton Village. Make sure you understand the product and it fits your needs and you will have a wonderful place to enjoy with your children and then pass on to them when it is time. Since not all of us can afford to buy a Four Seasons condo of our very own but like to live the life”

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5. Susan said... on Jan 24, 2014 at 02:47PM

“My family stayed at The Four Seasons Jackson Hole last June. We live in Chicago and have a 10 year old. We fell in love with Jackson and are seriously considering fractional ownership. We love to travel and have no plans to spend the summer or winter in any one place, but we also love getting to know our destinations and repeat visiting. For us, fractional ownership would give us that great opportunity to experience Jackson in the winter, summer, and perhaps in the shoulder "quieter" season. We would not want more than 5 weeks in Jackson. Also, with a 10 year old who want to be with her friends in the summer, Mid- June is a great month for us and her spring break is usually late March or early April. These things are individual! for us it would work. Don't forget the opportunity to turn one of those weeks into a visit to another Four Seasons as well.”

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6. Chris said... on Sep 20, 2014 at 05:53PM

“You are correct in this is not a financial investment. Looking at it from that angle is not sound judgement. Therefore, an article such as this outlining the financial pitfalls of such a real estate venture should be a prerequisite read for anyone with this mindset. However, if you make the decision to buy (not invest) with the right expectations, you can be a very satisfied owner.”

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