A friend on Wall Street asked me yesterday “Is the Fractional Industry Dead? Is anyone buying anything?” My answer was honest, blunt and nebulous… “I don’t know.” Fact is, the mortgage finance money for most (my guess 90%+/-) fractional projects has disappeared - vaporized - GONE.
Fractional is - 1/4 to 1/12 shares - of a home or condo, typically upscale second home or resort housing with a price point of $50,000+ per share. Fractional is a very good idea to move standing inventory at lower and more affordable price points. If you want a $500,000 home, would you buy it for $50,000?
If you are a resort condo developer with say 20 condo units left in your project. The whole ownership was a price point of $500,000, and you are having trouble attracting a buyer for a half million second residence, fractional seems like the perfect solution. Eat the elephant in smaller bites? Sell a 1/10 share product for $59,900 per 1/10th and Wham! You sell your entire project out, and make an extra $99,000 per unit or an extra $2 million to cover your marketing expenses. Plus you have raised the value of the other whole ownership units to $599,000??? Everybody wins!
Easy success formula right?
Here’s the challenges. First, once you sell just one 1/10th share in your condo project, your existing owners will likely have trouble getting financing because the whole condo project will be considered ’shared ownership’ and traditional lenders redline this product type. Your existing owners and their HOA may fight you on the timeshare strategy. The condo docs will need to be changed to allow ‘timeshare’. You may have legal restrictions from your municipality regarding ‘timeshare’. There may be ‘registration requirements’ to sell ‘timeshare’. Undoubtedly, the extra $2MM in profit from the sales will cover this legal and hassle expense?
Here’s the bigger challenges. You would need to sell 20 - 1/10 shares, or find 200 buyers who want specific time at your condo project. Okay, maybe overcome able. There are great marketing firms that can help you.
The challenge we find to be the greatest, once you have found 200 people willing to split time and buy at a $59,900 price point, is getting them to write a $59,900 check today. Not likely. In the past two-thirds of fractional buyers would ‘pay cash’, but most of these people were borrowing the $59,900+ on home equity lines or other refinances. 1 year ago, most of the home equity lines in America were beginning to be frozen. If you have an open HELOC today, you are one of very few.
The financing problem is killing the fractional business. Would-be fractional developers have but one logical choice. Hold their own paper, season it, and then sell it later when the market wakes back up or hold it to term and collect the interest that bank would have.
This seems like an impossible endeavour for a cash strapped condo developer in this market? It is not impossible, but it is not simple either. Doing it right is even harder. We know how to structure seller financing, and help fractional developers create a ‘note portfolio’ that works and will help move product.
Any would-be fractional developer who is not prepared or willing to hold their own paper in 2009 is doomed. Consumers require financing, banks are not willing (or able) to extend fractional financing. They have too many other loan requests, that are simpler and more ‘conforming’, to deviate funds into a ‘new’ arena called fractional. Too many lenders look at fractional as pure timeshare and expect a double digit default rate and will demand a mid-teens interest rate yield to even consider lending to fractional in 2009.
Fractional real estate offerings could help save the resort real estate industry, allow consumers to have their second home at an affordable cost, and fix broken condo projects where sales have stalled - but none of this will happen if the lending challenge is not solved.
The consumer finance solution for 2009 is seller financing, creative structures that divide risk between developers, lenders, consumers and third party investors. Everyone will need to be at the table and get flexible and creative to resolve the challenges.
We can help you get to the table - info@vacation-finance.com
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