Is Fractional Ownership High Risk?

By: Neil Robertson

When we do anything in life we expose ourselves to risks. Walking down the street, driving your car, even staying in bed for the day all have associated risks. Understanding the risks associated with any decision is important because it enables you to make informed choices.

Buying Expensive Assets Outright Has its Own Risks

When we make any major purchase we expose ourselves to some form of financial risk - we may not be able to afford the upkeep of the asset or a mortgage on it (due to changes in employment etc.), the resale value may be poor, purchasing may have been less cost-effective than renting/leasing etc. But how is the risk equation altered when you decide to buy into a fractional ownership scheme rather than buying an asset outright?

Fractional Ownership Risks

Firstly, one of the major risks is reduced - you should be less financially stretched because you have bough a part of an asset appropriate to your requirements rather than paying the whole cost.

If you buy into a syndicate formed for the purpose of buying a particular asset there are some additional risks associated with your fellow fraction owners - will they be afford to be able to keep paying for their share of the maintenance costs? Can the remaining fraction owners afford to pay extra if anyone can't afford to pay their share? This type of risk needs to be assessed even more carefully if there is any joint borrowing involved.

If you buy into a private residence club or destination club then the risks depend on the ownership structure format of the club in relation to the assets that it controls. Deeded shares limit the extent of risks arising from the operating company failing or performing badly. All schemes would suffer if the management company failed to provide agreed services, however you are insulated from their financial performance if you own a deeded share of a particular home. This is because whatever happens to the overall scheme, if you own a deeded share in a home you have an asset that can be sold to get (a proportion of) your money back.

However if you opt for a non-deeded holiday club (some destination clubs fall into this category) you need to be very concerned with their financial stability and management. A commitment to refund your membership fee may come a long way down the list of creditors if the club gets itself into financial difficulty. This is one reason why schemes that feature some form of direct (deeded) ownership (whether directly or through a company formed for the purpose) are preferable.

Owning a deeded share also gives the possibility of benefiting from increases in real estate value, whereas the best that a lot of destination clubs offer is the refund of a percentage of your membership fee. This is not usually a factor for assets other than real estate (e.g. yachts, cars, planes) as they do not usually increase in value. The points above about the security of your financial contribution still apply.

Conclusion

I firmly believe that overall, buying an asset using a properly structured fractional ownership scheme has lower risk and is a more efficient us of money than buying outright. As with any large purchase you are advised to investigate the details of what you are buying and get as much advice as you can.

Real Estate
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Real Estate