The Hawaiian Islands have been and forever will be a preeminent destination for vacation-home buyers. With the wonderful diversity of choices that each island presents, it's no surprise that the long-term demand for resort properties remains strong regardless of the current economic cycle. Fractional ownership opportunities in Hawaii, while still relatively few in number, are opening up a world of new options for second-home buyers-primarily retiring baby boomers.
Because fractional ownership is an "alternative" real estate product, you need to be well informed before considering a fractional purchase. This brief article will give you an overview of some important things to think about. I raise these questions not to create undue concern or dampen anyone's enthusiasm, but to make you a more informed consumer.
This is not a comprehensive "Everything You Need to Know about Fractional Ownership" discussion, and you will still need to seek the expertise of qualified professionals. Also, in the spirit of full disclosure, you should be aware that I'm biased-I am both a fractional real estate consultant and a Hawaii-based fractional developer. I'm also a fractional owner myself, so I naturally share the enthusiasm of thousands of happy fractional owners around the world.
This very basic checklist, though only a beginning, will give you a sense of the questions to be asking as you consider buying a fractional ownership in a vacation property:
1. Is the fractional offering fundamentally sound, and are provisions in place to ensure its long-term viability?
a. Are all the fractional documents in place and ready for review? Do these documents address these essential questions: How is each owner protected? What happens if another owner (or an owner's guest or renter) causes damage? Who is responsible for managing the property? How are decisions reached among the owners? How are disputes resolved? Importantly, are there any zoning or home-owners' association issues outstanding?
b. Who is the developer, and what assurances does the buyer have that the project will be completed/sold out? Does the developer have the financial wherewithal to sustain the project in a slow market? Is the quality of the project's marketing collateral and its Web site and other promotional tools representative of a professional offering?
c. If this is a one-off (not part of a larger project) single-family home, will professional property management be in place? Will the seller/developer remain involved after all the fractional shares are sold?
2. Is the overall value of the offering fair and reasonable?
a. Financial Value: What is the price of the fractional interest compared to the fair market value of the property if it were sold as whole ownership? Developers must add what is known as a multiple to pay themselves for the risk, capital, and time and effort they invest in creating an attractive fractional property. In Hawaii, this multiple generally ranges between 1.4 and 1.7, depending on the specific location, number of fractional interests, quality of construction and furnishings, amenities, and services included. To figure the multiple on a property, all you need are a little basic research on home sale prices and a few seconds with a calculator.
b. Annual Ownership Costs: Are the annual ownership costs within the range of industry averages? Has a fully disclosed budget of all expenses, including a reserve fund for replacements, been provided?
c. Buyer Incentives: What incentives are provided as part of the offering (e.g., first year's fees paid by developer, transportation allowance or vehicle included, exchange opportunities)? Is fractional financing available?
3. Does this vacation home opportunity provide for your family's long-term enjoyment and use?
a. Usage: Does the usage plan meet your family's vacation interests and needs? Given Hawaii's minimum sixty-day fractional ownership requirement, do you envision returning each year for at least a few weeks to enjoy your home away from home? Can your unused weeks be vacation-rented or used by a family member?
b. Exchange: Can you exchange some of your unused time with owners of other luxury properties, perhaps closer to your primary residence or somewhere else that your family would like to vacation?
c. Pride of Ownership: Do the property, furnishings and appointments, and amenities meet your standards and expectations? Will this property fulfill your family's dream of vacation-home ownership?
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