Real estate practitioners in vacation spots across the country say the market for second homes is picking up steam as buyers grow more confident given signs of growth in small businesses.

The National Association of REALTORS® reports a 7 percent jump in vacation sales to 502,000 last year, accounting for 11 percent of all volume. The median vacation home price was $121,000 last year, down from a peak of $204,100 in 2005, but agents in some locales say prices are beginning to creep up as the distressed inventory is moved out.

Vacation-home buyers are snapping up higher-priced properties, although Jennifer Calenda of Michael Saunders & Co. in Southwest Florida says prices are not necessarily on the rise. With inventory hitting a seven-year low of 4.7 months in Sarasota, Manatee, and Charlotte counties, she says buyers "are saying 'we better hurry up.'"

Inventory is so scarce in some markets that some real estate professionals report multiple offers; and with prices probably at the bottom, Trulia economist Jed Kolko says people ready to make a cash purchase or who can qualify for low mortgage rates should strongly consider buying now.

Source: "Vacation Home Buyers Return, Pick Pricier Properties," Investor's Business Daily

A new breed of vacation home ownership is gaining steam that allows individuals to share ownership of a property.

Think of it like this: A whole pie may look delicious, but it doesn’t make financial sense to buy the entire dessert if you are just having a few bites.

However, if you split the cost among several buyers and ensure that everyone gets a slice, then the purchase makes sense.

That’s the theory behind fractional real estate ownership, in which second homes are purchased under a multi-owner structure and cost and access to the home is shared.

“It allows you to create a connection between the time you spend in the home and the amount of money you pay for it,” says Andy Sirkin, a fractional homeowner and attorney who specializes in real estate co-ownership at Sirkin & Associates [www.andysirkin.com]. “It causes fewer headaches, costs less money and I still get everything I want.”

The concept of fractional ownership may sound similar to a timeshare, however fractionals have fewer buyers which increases the amount of time available to each buyer and tend to be an option at more upscale destinations.

According to Sirkin, “the meaningful differences between most old-fashioned timeshares and most modern fractional ownership arrangements are the extent to which each participant’s rights and responsibilities are limited to a particular home or group of homes, and the extent of each participant’s ownership and control.

The concept is reserved for expensive homes in vacation destinations, and offered by both multi-unit developers and high-end resorts. Single-family homes make up a small, but up and coming, part of the market.

Elite Destination Homes [elitedestinationhomes.com] has been buying resort properties and single-family units and selling them as fractionals for the last seven years. Its offerings range from a three-bedroom in Paris’ St. Germain neighborhood to a five-bedroom chalet in Steamboat Springs, Colo. As the sponsor, the compny handles putting together the buyer partnerships, which can range from four to 12 buyers, as well as the purchase agreements.

Bill Bisanz, founder and CEO of Elite Destination Homes, recommends that buyers research the sponsor’s track record before completing a purchase. “Check to see if the sponsor’s other properties are sold out and be careful of how much the sponsor is marking the deal up,” warns Bisanz, who typically charges at 25% premium. Other considerations include analyzing the sponsor’s resale program, if a buyer wants to sell his or her fraction, and evaluating on-going carrying costs.

Once potential fractional buyers select a property they should verify that the contract includes usage terms, expense sharing, conflict resolution and exit strategies.

“Make sure the contract clearly spells out how usage is going to work among owners,” recommends Sirkin. This is especially important in seasonal properties where multiple owners will be vying for the best times of the year.

He also suggests that contracts include details of how the budget will be created each year. “When bills come in, you don’t want to have to figure out last minute how you are going to pay them.”

Buyers also need to protect themselves against what the industry calls “rule-breakers.”

“Buyers should ask, ‘what happens if someone is in the property when they shouldn’t be or doesn’t pay when they need to? Do we have a system that doesn’t cost a lot of money and take a lot of time?’” advises Sirkin.

For foreign property owners, if a conflict escalates and requires judicial intervention, defining where conflicts will be handled is a must.

The fractional ownership structure is not ideal for every vacation homebuyer. Debra Savage, a real estate agent at Railey Realty [http://realty.railey.com] in Maryland says this type of ownership only makes sense with certain vacation and lifestyle goals.

“The biggest thing is how they plan to use the home. If they are only popping down on weekends once in a while then fractional residence makes sense. If you want to spend a whole summer here, it won’t work,” she says.

When buyers approach Elite Destination Homes, management begins the courting process with a “fit” conversation to see if the concept will meet the buyer’s goals. “We tell people, ‘don’t do this if you are not in it for a seven-year hold,” says Bisanz.

Just like in primary residential real estate, the main roadblock to fractional ownership is mortgage funding. “During the financial meltdown the market experienced a financing freeze,” says Sirkin. “Potential buyers got hesitant about buying anything. Now buyer confidence has returned, but financing is still a problem.”

Vacation homes are offering plenty of good deals at the moment. In many second-home hot spots, prices are still close to five-year lows. For example, single-home prices in second-home hotspot Napa, Calif., are down 47 percent from their peak in 2006, according to Fiserv.

If you have a buyer looking to cash in on vacation- or second-home values, an article at CNNMoney.com recently offered the following tips:

1. Is it rentable? Even for buyers who aren't planning to rent it out, they may still want to consider the rental aspects of the property, particularly since a home's rental potential can affect its resale value, says Catherine Jeffrey, a real estate professional in Fredericksburg, Texas. Buyers will want to check with the homeowners association or township to ensure that short-term rentals are allowed.

2. How do you plan to use the home? Your loan rate will depend on how you use the property. For example, if buyers intend to use the property primarily as a second home, they’ll pay about the same mortgage rate as a primary residence, says HSH Associates vice president Keith Gumbinger. However, if they plan to get rental income from the property, the property will be treated as an investment, which means they may need to pay as much as 25 percent for the down payment and pay up to one percentage point more in interest, Gumbinger says.

3. Are you eligible for the tax benefits? If the owners rent the house out for two weeks or less, they won't have to report income to the IRS, and they'll still be able to deduct property taxes and mortgage interest, experts say. If the owners stay in the home for less than two weeks or has 10 percent rental days, whichever is greater, they'll be able to deduct operating costs, such as cleaning and maintenance fees, as well as the interest and property tax, says Rick Shapiro, a CPA in West Hartford, Conn. He suggests home owners talk with a tax expert to find out what tax benefits they are eligible for.

Source: “5 Things to Know About Buying a Vacation Home,” CNNMoney.com (April 5, 2011)

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