A Luxury Vacation Home Via Fractional Ownership
Fractional ownership offers entrée to million-dollar vacation homes for far less money than buying outright—but financing options may be limited
After doing the math, some homeowners are set on fractions.
On a trip to affluent ski town Steamboat Springs, Colo., in March, Dennis and Pamela Stearns discovered One Steamboat Place, a Timbers Resorts development that offers fractional ownership of luxury vacation properties. The couple, whose primary home is in Greensboro, N.C., were intrigued by the thought of a second home without the maintenance hassles. Fractional ownership with Timbers Resorts also enables the Stearns and their two young daughters to stay in luxury properties elsewhere. "We didn't want to feel like we had to go to the same place all the time to justify having it," says Ms. Stearns.
Fractional real-estate ownership differs somewhat from timeshares. It typically applies to high-end properties, and ownership is split among fewer people. Periods of annual usage are typically three to four weeks rather than one to two, and privileges may extend to more than one luxury property. Another draw is concierge-level services that a guest would receive at a luxury hotel.
Like deeded property owners, fractional owners can sell their stake, leave it in a will or put it in a trust. Fractional owners pay a share of property taxes as part of their annual dues, ranging from $8,100 to $21,000, depending on the property, which also covers their concierge services and utilities. Some borrowers are able to write off mortgage interest on their taxes. On the down side, owners who want to make changes to the property are limited.
A number of other U.S. companies and developers offer fractional ownership, including Four Seasons, Fairmont and Ritz-Carlton, and their terms and requirements vary. Under the Stearns' contract with Timbers Resorts, for example, the family can spend four weeks annually at One Steamboat Place. They can also arrange to spend additional time or trade time to visit any of the company's 14 properties in Arizona, California, Colorado, Florida, Hawaii, as well as Tuscany in Italy, Cabo San Lucas, Mexico, and St. Thomas in the U.S. Virgin Islands. "It's like having multiple second homes," says Dennis Stearns, president of Greensboro, N.C.-based Stearns Financial Services Group. Pamela Stearns is director of financial focus for women at the firm.
A share at a Timbers Resorts property ranges from $310,000 for a one-tenth share of a two-bedroom wine cottage at the Orchard at the Carneros Inn in Napa, to $850,000 for a one-twelfth share of a farmhouse on the grounds of Castello di Casole, a restored castle in Tuscany.
About 80% to 85% of fractional buyers pay cash for shares of Timbers Resorts, says CEO David Burden. Wanting to keep their cash in high-yield investments, the Stearns opted for a mortgage, declining to disclose the amount. They made a 30% down payment and financed 70% with a mortgage through Mountain Valley Bank, a local lender that has a relationship with Timbers Resorts. The Stearns got a five-year balloon mortgage with a 5.75% interest rate, which could change if not paid off in five years. "We plan to have it paid off," Ms. Stearns says.
Like jumbo-mortgage financing, fractional mortgages dried up during the recession and are hard to find, says Dustin Carfield, executive vice president of San Diego, Calif.-based One Trust Home Loans, another Timbers Resort partner. As a result, buyers are generally limited to seller financing or loans through developer relationships with a local bank, he adds. The banks hold these loans on their books, since the mortgages don't conform to Fannie Mae FNMA -3.90% and Freddie Mac FMCC -3.95% guidelines.
More ways to finance a fractional purchase when a mortgage isn't available:
• Seller financing. Timbers Resorts offers short-term, no-interest loans at some of its properties. Its Vail, Colo., development, the Sebastian, has a loan program with either a 24-month or a 36-month term and requires a 40% down payment. Buyers also pay an administrative fee of 2% of the loan amount.
• Primary home equity. Fractional buyers may wish to consider a cash-out refinance or home-equity loan, Mr. Carfield says. Average annual interest rates were 4.16% for a 30-year, fixed-rate jumbo mortgage, and 2.97% annually for a five-year adjustable rate mortgage as of the week ending Aug. 22, according to HSH.com.
• Consumer loans. Some private lenders offer unsecured loans that can be used for vacation ownership. At Lightstream, the online-lending division of SunTrust Bank, STI +0.01% vacation-home loans account for 3% to 5% of its loan volume, says Todd Nelson, Lightstream's business-development officer. Lightstream currently offers these personal loans at an annual percentage rate of 5.99%, with terms up to seven years. The loans have no closing costs or prepayment penalties, but amounts only go up to $100,000.