UNDERSTANDING FRACTIONAL REAL ESTATE
By Mark Chesney
According to a CNN Money report, “Los Angeles will fizzle. Miami will sizzle.” This mid-decade pronouncement was music to the ears of those in the Miami real estate community. However, recent strains of news that Miami, at times, has shown an almost 35 percent increase in stagnant real estate inventory has been decidedly less soulful.
It appears this market has gone from sizzle to glut. How can Miami agents embrace the silver lining? Miami’s agent community needs to be sales-forward minded instead of always conducting business as usual.
Enter the new trend of fractional real estate, deeded titles for single-family dwellings. Fractional real estate offers agents an attractive, more value-oriented product appealing to Boomers, who still, amid economic difficulty and mortgage meltdowns, hunger for ownership of second properties.
Basis for Independent Fractional Real Estate
At the start of the decade, the resort market was transformed by groups such as Ritz-Carlton, Marriott, Disney and so on, by successfully converting transient hotel-goers to fractional purchasers of large-scale condominium projects. By 2017, experts agree that more than 30 percent of all resort real estate will emulate this successful model, where price per square foot fetches 50 or even 100 percent more than the market value. Until now, agent opportunities were limited or non-existent in fractional real estate. In this “dependen” model, the owners keep profits close to the vest, managing contracts themselves.
Instead of “fractionalizing” hotel-scale mega-properties, imagine fractionalized sales of homes (think second homes) being sold in two, three or even four shares. Essentially, fractionals are properties where several, not necessarily affiliated, parties share ownership and use of a second home or vacation property. Technically, a fractional-deed co-ownership interest is a tenant-in-common deal on a property. Fast-forward thinking, instead of business-as-usual tactics, is how savvy agents can take advantage of the emerging independent fractional real estate opportunity.
Home away from Home
Practically any home can be fractionalized, subject to a few criteria. An individual owner obtains his or her own title, representing fractional interest. For example, if four people fractionally own a property, each would own a quarter interest. As opposed to a “buy-into club,” this is a real estate transaction, entitling fractional owners to assume a mortgage, pay in cash or sell upon attractive appreciation, just as they would with any other investment property.
A person that owns second-home or vacation property that they don’t use for more than a few weeks out of the year is still responsible for the upkeep and management of the place year round. It makes sense to fractionalize the property, not only to recoup financially, but also to relieve the burden of sole ownership by shuffling off maintenance and management to others.
Since all owners have a common interest, they need to know how to share the use of the property in a way that is fair and friendly. The owner must know how the multitudes of operating expenses are going to be made and what the enforcements are among them. A formal fractional operating agreement answers these questions. This back-end management is the “key” that my company, GrandShare, has taken the past six years to develop, making independent fractional real estate a win-win for all involved.
Share and Share Alike
Fractional ownership allows buyers to purchase larger, or more upscale, properties than they could swing through sole ownership. It also removes the albatross of day-to-day home maintenance.
The win-win relationship extends to the sales infrastructure. Realizing greater per-deal profitability through fractional opportunities, agents can ease off the temptation to engage in high-pressure up-selling and know that their customers are ending up with right-sized properties.
With independent fractional sales, handsome profit is available for real estate agents. In fact, more proceeds are available on a fractional deal than on a single-family property. With independent fractionals, agents can earn up to 15 percent on a single deal.
Imagine selling a $1 million Coconut Grove bungalow and walking away with $150,000 in commissions.
Financing the Dream
In the past, funding options have been limited for fractional deals, and anyone wanting to purchase a fractional interest in a property was stuck paying cash. Now, more and more lenders are warming up to the concept, and with recently developed financing products built specifically for the fractional marketplace, buyers and sellers alike have a number of financing possibilities.
As with any transaction, the real estate professional is at the center of the action. With resources from lenders and operating agreement providers, the fractional real estate industry has evolved to a point where everyone can walk away with a great deal.
Mark Chesney is the founder of GrandShare, which assists real estate professionals by providing a comprehensive, all encompassing system for buying and selling fractional real estate. For more information, visit www.grandshare.com or contact him at mark@grandshare.com.