Fractional or Interval Ownership – Hot Deals in Hawaii for Second or Vacation Homes

Fractional ownership, also known as interval ownership, is becoming an increasingly popular form of property ownership in Hawaii as well as other mainland communities where resort living is in high demand and the cost of property continues to rise. There is much interest in fractional sales of condominiums, condotels and luxury homes by investors and second home buyers who want to only use the property for a portion of the year.  For the price of a condo that is small with few amenities you can get 60 days of a luxury condominium with all the bells and whistles.  For second home buyers, fractional ownership allows them to pay for only the time they would use the property, gives clear title, and splits the upkeep costs with the other interest holders.

Fractional ownership is an arrangement in which two to six individuals or entities hold shared legal title to a single parcel of real estate or a condominium unit. Each owner owns a fraction of the total ownership. This arrangement allows those who might not otherwise be able to afford the resort lifestyle to do so by sharing the expense of ownership with others without worrying about the upkeep and repairs.

How does a fractional interest work? Fractional ownership interests are similar to tenancies in common in that the owners receive a deed for a specific undivided interest in the property. Some states, like Hawaii, allow only a limited number of fractional owners. Specifically, Hawaii restricts the number of fractional owners for a single property from two to six with each owner having a minimum of 60 days usage a year.  There are more rules and regulations on renting out a portion of your share if you are unable to use it all. (see Hawaii Revised Statute 514A). Each state has its own specific rules. 

Make sure you are getting interval ownership – this is NOT timeshares.  Timeshares receive usage for less than 60 days per year, can receive a deed or a membership certificate whereas with fractional interest the buyer always receives a deed and clear title to the property, as well as detailed documentation which outlines the responsibilities of owners, management companies, property condition, inventory of home contents, and any terms for reselling the interest.

Each owner is entitled to exclusive use of the property for only a designated period of time proportional to their ownership interest. For example, if there are six owners, each one is entitled to 1/6 of the total number of days in the year or 60 days a year. The fractional owner receives a deed reflecting their fraction of the total ownership.

The developer (or the seller or buyer of an existing property “develops” the home as a fractional interest property) provides a Fractional Declaration or “Plan” which is a written document outlining the rules governing use and operation of the property by the fractional owners. Fractional owners pay a proportionate share of all expenses according to their ownership. If an owner has a 1/6 share of the property, that owner typically pays 1/6 of the taxes, insurance, repairs and remodeling. Fractional owners also share in the management of the property (and share the annual costs of management – estimates for a $3million ). The documents are best drawn up by a lawyer familiar with Hawaii’s Real Estate laws and regulations.

In Hawaii, the biggest challenge is that this type of ownership is new.  Just like Timeshares and Condotels before it, lenders and appraisers are wary of the risk until such time there are a few more sales to provide comparable figures.  If the property is new and being developed as a fractional, many developers will provide financing to purchasers of fractional interests, but there are also [mostly mainland] conventional lenders who are now providing loans on fractional ownership interests as this type of ownership is commonplace on the mainland – Tahoe is over 40% fractionally owned.  Some properties are currently undergoing bylaw changes to allow fractional ownership while continuing to exclude timeshares.  The wording in the bylaws and original condominium documents should be carefully reviewed.

The other problem is that not many properties are online yet for a fractional purchase.  There are quite a few in the works however, and more will be coming online soon.  If you are interested in a vacation home or  investment property that you personally want to use part of the year – give me a call at 808-265-6803 or email me at homes@bestoahurealestate.com and I’ll be happy to send you further details-there is a lot to know! 

Ask to be on my mailing list and I’ll let you know when these types of properties come online.  Our team has title companies, Real Estate lawyers, and knowledgeable agents who only focus on fractional ownership projects. 

If you have a property you are thinking about selling – give me a call and let me help you assess if this might be a way to get more from your sale than a conventional resale.

If you are interested in a particular property and want help to buy a fractional portion as a part of a group of buyers, I’d be happy to work with you to find lawyers to develop the correct paperwork and process to buy your luxury resort home in Hawaii!