In “A House Divided” [NY Times April 3, 2009], Amy Gunderson describes the trend toward divided ownership of vacation homes – highlighting a list of benefits (mainly limiting the cost of limited usage) and numerous cautions (legal constraints and mortgage difficulties). But… one key long-term issue was missed: the illiquidity and future market value of the fraction. Such ownership arrangements are initially based on common objectives and mutual agreement (or no one would go into the deal), and the price is usually the interest’s pro rata share of the whole property, or maybe a little more to cover legal and marketing costs. However, once in, the shoe slowly shifts to the other foot. Owner objectives change over time, conflicts may arise, and interests may be further divided (through inheritance, say). Even without that, it would be difficult to find an outside party that shared the original investor’s interest and had the same level of comfort. The price is usually a substantial discount from its pro rata share (unless the whole property is sold and the proceeds divided). Ownership division can take a low-risk, relatively liquid 100% interest in the property, and turn it into a high-risk, illiquid fractional position, not entirely unlike asset-backed derivative securities.
Value can also swing the other way under some circumstances, where fractional interests can sell at a premium over pro rata. This has occurred during periods when affordability of the whole property is a problem, but demand is high. The point is that issues of value need to be addressed, one way or the other. The benefits of fractional interest ownership may be worth it, but such positions should be taken with full understanding of the greatly increased risk and cost of getting out.
