If you have purchased a vocational home, you are likely to be familiar with the term “timeshare.” However, you might be less familiar with fractional ownership, given that it doesn’t feature as much in vocational homeownership.
Both terms are frequently referred to as shared ownership because they have similar characteristics. Despite the close association, these terms have significant differences between them. This guide will compare timeshares and fractional ownership, highlighting the significant differences. Read on to learn more!
Fractional Ownership
This might be a new term to most vocational homeowners. It is a unique method of property purchase that involves several buyers, around 6-12. Given the significant number of buyers, each owner holds an equal part of the property.
They all have a stake in the asset without having to purchase the entire property, pay taxes, and the resulting maintenance costs. While timeshares limit access to the property to a few weeks in a year (1-2), fractional ownership has its limit at five weeks or more in a year. This depends on the number of owners with shares in the property.
Timeshares
This type of purchase gives the buyer the right to use the property for a specific period of time. In most cases, the time is limited to one or two weeks in a year. Timeshare purchase involves several owners, with each one of them given the same period of usage. While buyers have equal usage of the property, the title remains with the property owner.
The biggest benefit of timeshare ownership is the right to use the home for two or so weeks without having to make reservations. This saves you a lot of time and energy, especially if you always vacation around the same of the year. There are timeshares that use a point system that gives owners access to properties at various resorts across the world.
Having known the meaning of these two terms, it is time to compare them based on a wide range of factors. This evaluation is meant to enlighten you on how each ownership method performs in various fields and helps you choose the ideal one for your needs.
Equity and Investment Value
With fractional ownership, an individual owns partial equity in the real estate property. In that case, when the value of the real estate property appreciates, the value of the purchaser’s equity also appreciates. Should a buyer sell their share, a net capital gain is realized. The same is also experienced when the group of owners decides to sell the entire property.
Perhaps, this is why most lending institutions view fractional ownership as a better investment than timeshare. Such institutions will be willing to finance a purchase because they know it has financial security. Timeshare ownership entitles a part-owner to occupy the property for one week or two in a year. There is no benefit when there are changes in the actual value of the property. This is because the principal owner owns 100% of the property title.
Generally, very few timeshares increase in value. This is one of the reasons why investing in timeshares is met with some resistance from lending institutions. In fact, the value of timeshares tends to decrease over time, making it challenging for financial institutions to issue mortgages. Given that timeshares are considered higher risks, any lending institution willing to offer a mortgage gives higher interest rates that can be very expensive.
This is meant to reduce the number of applications and scare people away. Besides, the maintenance fee will also increase significantly. In the past, there have been cases where the owner has offered to give away their timeshare for free because of increased monthly maintenance fees. The amount an individual is charged as maintenance fees depends on the size of the home and their shares.
Management and Fees
Apart from the purchase price, buyers of fractional ownership are needed to pay management fees. With every owner in the group paying this fee, it covers repair and maintenance expenses, property management, and housekeeping services. These additional fees can significantly add to the total cost of buying the house.
Like fractional ownership, timeshare owners also pay maintenance fees. According to ARDA (American Resort Development Association), the average purchase price of a timeshare property in 2012 stood at $20,000, with an annual maintenance fee set at $680.
While both types of ownership involve paying monthly maintenance, they are a slight difference between them. The difference lies in the degree of owner control. For instance, while a fractional management company is tasked with managing day-to-day operations, owners retain the ultimate control and authority over the property.
On the other hand, control of most timeshare remains with the principal developer or hotel developer. For that reason, the project developer has minimal incentive to maintain high standards. This is unlikely to be the case, especially if the project has been sold out. Cases of increased or decreased values in timeshares are also minimal.
Vocation Value
Many view timeshares as vacation expenses rather than financial investments. Whether buying a timeshare or renting a hotel room for vacation, neither of them will give you a return on investment. In simpler terms, timeshares are a lifestyle enhancement.
The value of a timeshare can be determined by evaluating all lifetime vacation expenses. For example, two-week vacation in a luxury hotel property costs around $3,000 every year. Without considering the increase in hotel rates as time changes, you will spend a total of $30,000 in just ten years.
This is $10,000 more than the average cost of a timeshare. You will save additional money by eating some meals in the timeshare units rather than ordering all your meals from the restaurant. Perhaps, this is why there is an 83% satisfaction rate among timeshare owners. Most of them are happy with the timeshare purchase that gives them the ability to vacation better and at an affordable price.
The timeshare industry in the US celebrated its seventh consecutive year of growth, with more people venturing into this service. According to the State of Vacation Timeshare Industry, the sales volume increased nearly 7% in the past year, meaning more and more Americans are warming up to the idea of timeshares. The fact that both timeshares make vacations cheaper makes more people interested in investing in it.
Number of Owners Per Unit
One of the factors that differentiate fractional ownership and traditional timeshares are the number of owners per apartment or home. Generally, timeshares are designed to have 52 owners per unit, with some having 26 owners. Given the high number of owners, stays are short and infrequent.
As mentioned earlier, the stay limit for timeshares is one to two weeks in a year. This means there is little to no emotional connection between the owners of the property. With no pride of ownership, there is an apathetic attitude towards the property. With many people staying at the house throughout the year, chances of wearing it down are high. This means the maintenance costs are extremely high with timeshares.
By contrast, fractional ownership typically involves 5-12 owners per house or unit. Therefore, owners have the freedom to visit frequently and stay for longer. Given the more significant ownership shares and more time spent at the house, fractional owners have a greater stake in how the property is managed and maintained.
They can also manage their appreciation as time goes by. Unlike timeshares, fractional owners take great pride in their investment. The less traffic throughout the year means the house will remain in good condition for long — there is less physical wear and tear.
Customer Service
Fractional ownership edges out timeshares in customer service. The service provided by the management company is better than that of timeshares. With fractional ownership, the staff gets to know the owners. They can arrange the house according to the owner’s preferences, including concierge services like filling the refrigerator with food and putting up family pictures.
On the other hand, timeshares are limited to housekeeping. Owners of both fractional vacation and timeshares can deposit their weeks to vacation elsewhere. However, these can only happen if there the vacation decisions vary. Besides, the vacation times might vary from one person to another.
Property Quality Differences
To purchase a timeshare, the minimum gross income is set at $75,000. On the other hand, the minimum gross income for fractional properties is approximately $150,000. If you want to invest in private clubs, which offer more luxurious vacations, you should have a minimum household income of $250,000. The massive differences in the gross income requirements for fractional ownership and timeshares could result in a distinctly different clientele.
The property types are also different, with timeshares typically having one or two-bedroom units. On the contrary, fractional properties tend to be larger, with around 3-5 bedrooms. Furthermore, a majority of fractional properties have a better location within the area and come with superior construction, high-quality furniture, equipment, fixtures, and more amenities. These houses also have more services than timeshares.
Fractional buyers pay more to buy a home and expect higher management fees and maintenance costs. More resources for management and maintenance, high-quality construction and furnishes, and fewer users often contribute to the property’s smooth operation and appearance. Unlike timeshares, fractional owners have the freedom to exchange their vacation for a new destination cheaply and easily.
This can be done on sites like Third Home. When you compare them, many timeshare properties degrade over time. This makes such properties less desirable for original purchasers and less valuable for resales. Inadequate management and maintenance, lower initial quality, and higher use traffic contribute to such downgrades. This makes fractional properties better and more reliable.
Resale Potential
The purchase of a timeshare unit is sometimes compared to purchasing a car. When you buy a car, its value depreciates the moment it’s driven off the showroom. The same applies to timeshares. They start the depreciation process as soon as you purchase them — they never hold their original value. A significant part of this loss is due to the sales expenses and substantial marketing. You can imagine the number of expenses that go into selling units to 52 buyers.
These expenses mostly amount to 50% of the original price and are passed on to the potential buyers. When timeshare owners decide to resell, the marketing and sale costs don’t naturally translate on the open market, as is the case in real estate value. Besides, there is intense competition for timeshare buyers. Sellers must not only compete with a large number of similar timeshares on the market but must also go head to head with buyers looking for new products.
On the contrary, fractional ownership is the equivalent of deeded ownership of your primary residence. Generally, fractional ownership property resales are almost the same as the sales of whole ownership real estate properties. This means that fractional properties have a high value that appreciates over time. In fact, the sale of fractional properties has surpassed whole ownership properties in some areas.
Is Fractional Ownership Better Than Timeshare?
The fact that most fractionals don’t share the same characteristics as timeshares make them the better option. However, this does not mean that all fractionals are good deals. Instead, it means that fractional buyers need to thoroughly analyze the details of the agreement before purchasing it.
You should avoid getting distance by the label attached by the seller. You need to find answers to these questions to make an informed decision; Is there a realistic budget that will make it easy to operate the property?
How many owners will there be per house? What is the quality of the property? What kind of control do owners have over the property? Talk to your real estate agent to get detailed answers to these questions. One common mistake people make is rushing to invest in fractional properties without going into details of the arrangement. Avoid doing so lest you sink your money in a terrible project!
Conclusion
Before deciding to invest in a vacation home, you should review the differences and similarities between fractional ownership and timeshare. While one type of ownership might look better than the other, you should find one that suits your needs and intentions.
