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NTRODUCTION TO FRACTIONAL OWNERSHIP
The phrase “fractional ownership” is typically used to describe shared ownership of a vacation or resort property by people in an arrangement which allocates usage rights based on time. In other words, only one owner will be allowed to use a particular home, villa or condo at a specified time. The terms, private residence club (or “PRC”), destination club, vacation club, quartershare, timeshare, and vacation home partnership are also used to describe variations of these arrangements, and there are no consistent distinctions in the use of these descriptions.
Fractional ownership sales may pertain to a single home, condo, multi-unit building or resort development.
In multi-unit developments, each co-owner may have ownership rights to all the units, some of the units, or only one unit, and his/her usage rights and cost obligations, may or may not necessarily correspond to his/her ownership rights.
Shared ownership of the property and its Deed or Right-To-Use will also entitle shareholders to certain usage rights, usually in the form of weeks.
Conceptually, fractional ownership is not the same as timeshare. Fractional ownership affords much of the freedom and usage benefits offered in timeshare, however, the fundamental difference with fractional ownership is that the purchaser owns part of the title (as opposed to units of "time"). Therefore, if the property appreciates in value, then so do the shares. As with whole ownership, fractional owners can sell whenever they deem necessary, utilizing any capital growth from their investment.
WHY IS FRACTIONAL OWNERSHIP IN LOS CABOS BECOMING SO POPULAR?
Fractional ownership in Cabo can be a significantly less expensive and more attractive alternative in a new development, giving some buyers an incentive or opportunity to purchase which would otherwise be lacking. The developer can thus open up a new market and access a different group of potential customers by offering fractional ownership, a particularly attractive opportunity to full ownership. Marketing a less costly ownership option may also increase the overall visibility of, and traffic to, the developments, and increase sales volume. Finally, opening a development up to fractional ownership will generally increase overall usage of the property, which can enhance the viability and financial performance of amenities and ancillary services such as a spas, golf courses, and restaurants.
Private Residence Clubs (PRC’s), are the luxury, high end of the fractional property market. They provide the services and amenities of five-star hotels, and some of the luxury hotel groups run their own private residence clubs. Occasionally, membership in a private residence club grants to its member only the right to usage of the club properties and services, without ownership rights in the properties themselves.
In addition to luxury private residence clubs, single "stand-alone" vacation homes and condos can be converted to fractional ownership. This fractional home conversion process can be accomplished by any knowledgeable seller or through a fractional consulting company. The benefit of fractional home conversion includes the ability of the homeowner to keep a portion of the ownership for themselves, pay off debt and reduce expenses.
A key aspect for any fractional owner is to understand their usage rights and the reservation plans. These vary from property to property. Some offer “fixed” usage periods in which an owner uses the same time each year. Others offer flexible "float" periods, in which the usage options may be utilized throughout the year, while some offer a combination of both fixed and floating usage.
The Difference Between Fractional Ownership and Timeshare
The real differences between timeshares and fractional ownership arrangements are:
Fractional ownership typically involves more usage than timeshare for each owner every year
Fractional ownership typically involves fewer owners than timeshare
Fractional ownership is typically more expensive than timeshare as they are generally of a higher caliber accommodation type, offering greater privacy, and more amenities than conventional resorts.
FRACTIONAL OWNERSHIP FAQs:
WHY WOULD A VACATION HOME BUYER CONSIDER SHARED OWNERSHIP OF A VACATION HOME OR RESORT PROPERTY?
Although many people dream of owning vacation property, most either can’t afford the type of property they want, or realize that they would not use the vacation home often enough to justify the expense. Fractional ownership provides a solution to these problems by allowing each co-owner to pay only a fraction of the costs and ongoing expenses of vacation home ownership, and share the risks of unforeseen maintenance problems and value depreciation with others. Of course, in exchange for spreading the costs and risks, the owner gives up some of the usage rights and freedoms of whole ownership. But job and school commitments prevent most people from using a vacation home more than a few weeks or months each year, and some loss of freedom and control is often an acceptable sacrifice for the huge cost savings.
WHY WOULD A DEVELOPER CONSIDER OFFERING FRACTIONAL OWNERSHIP INTERESTS?
Shared ownership can be a significantly less expensive and more attractive option for some prospective purchasers at a new development, giving some buyers an incentive or opportunity to purchase that would otherwise be lacking. The builder or developer can thus open up a new market dedicated to fractional ownership sales and access a different group of potential customers by offering a particularly attractive opportunity when whole ownership sales are slow. Marketing a less costly ownership option may also increase the overall visibility of, and traffic to, the project sales sites, and increase sales volume of whole ownership.
WHY SHOULD A REALTOR CONSIDER SUGGESTING FRACTIONAL OWNERSHIP VS FULL OWNERSHIP TO A POTENTIAL SELLER OR BUYER?
The concept of Fractional Ownership in Los Cabos is now a popular option for many developers, buyers and sellers, allowing them to be aware of its potential advantages. A Cabo Broker Specialist Company, such as Lifestyles of Los Cabos, understands fractional ownership concepts and secures resale listings thereby opening up a new avenue of marketing, while establishing realistic resale prices in the Fractional Resale marketplace. Knowledge and understanding of fractional ownership can be a particularly useful tool in desirable tourist regions such as the Los Cabos area where demand for traditional full ownership sales is limited based on seasonal use. We are specialists in Fractional Ownership resales in Los Cabos and will put our experience, expertise and first-hand knowledge to work for you!
HOW ARE FRACTIONAL OWNERSHIP USAGE RIGHTS DIVIDED?
In analyzing the various fractional ownership usage options, it is important to balance predictability against flexibility, and also to remember that co-owners will exchange usage rights regardless of which system is adopted. The choice of fractional ownership usage allocation structure should be driven by the property location and size, its seasonality, the likely length of visits, and the manner in which people are likely to travel to the shared property.
The most popular model for fractional ownership usage is the “Usage Assignment Approach”. Each co-owner is assigned the exclusive Right-To-Use of their Fractional Ownership for a specified number of days, weeks or months each year. The usage periods can be fixed (such as “the month of February” or “the first two weeks of February and July”), float (meaning they change each year), or a combination of fixed and variable. In multi-unit fractional properties, the usage rights can be for a particular home or unit, a group of homes or units (such as all designated three-bedroom units), or all of the homes or units. Purchase price can be influenced by the amount and/or quality of usage allocated to each co-owner. Usage rights may be restricted to owners only, or extended to family, friends, rental tenants, exchanges, or any combination of these. Usage periods can be assigned through an annual usage system of preset days, weeks or months, an annual selection or a reservation system, or any combination of above.
A less popular model for allocating fractional ownership usage rights is the ’“Pay-To-Use Approach”, often referred to as a “Points System”. In this case, co-owners pay a pre-agreed “usage fee” for each day or week of usage. The usage fees, along with any rental income generated if the property is rented to non-owners, are used to pay the expenses of ownership.
HOW ARE FRACTIONAL OWNERSHIP EXPENSES DIVIDED?
In shared ownership arrangements involving a single home or condo, operating expenses such as insurance, maintenance, repairs, improvements, utilities and management are usually divided in proportion to ownership, so that a 20% owner will pay 20% of each of these expenses.
In fractional ownership arrangements involving multiple units, the developer must first determine whether usage of each co-owner will be restricted to a particular unit or units, or whether all co-owners will share use of all units. In the former case, the developer may opt to have each co-owner contribute only to the costs of operating the unit or units to which he/she has usage rights.
HOW ARE FRACTIONAL VACATION HOMES MANAGED?
It is useful to divide fractional ownership management tasks into four categories: usage allocation, accounting, cleaning, and repair. Any of these jobs can be handled by either co-owners or outside professionals and can be combined as needed for efficiency or convenience.
Usage allocation management is necessary only in relatively complex usage systems, such as those that are based upon reservations or involve a pay-to-use element. Simple usage systems, such as fixed assignments or fixed usage, do not require any management and are therefore less expensive and more reliable.
Accounting management involves collecting maintenance fee payments from co-owners and keeping records. To avoid shared ownership disputes and cash shortfalls which could result in credit blemishes and even loss of the shared property, it is absolutely essential to collect co-owner payments based on a budget. This means that at the end of each year, an owner or manager estimates all of the expenses for the following year, generally incorporated into what is termed as “maintenance fees”; including group mortgage (if any), property tax, insurance, maintenance, repairs, improvements, utilities and management, and determines the amount that will be required from each co-owner to pay these bills. The anticipated expenses usually include some reserves for long-term recurring expenses such as painting, roofing, system upkeep, and furniture and appliance replacement. Each owner is required to contribute his/her payment on schedule. In this way, each co-owner knows with a fairly high degree of precision what will be expected of him/her in the coming year, and it is easy to track whether a co-owner is meeting his/her obligations before a significant problem develops.
Most co-owners enjoy using their vacation home much more when they arrive to find it clean and orderly, and cleanliness is essential for successful rental to non-owners. Unless an unusually consistent and high standard of cleanliness and order prevails among all of the co-owners in the group (and their families and friends), it is likely that resentment and even anger will develop over the condition of the property when certain users leave. The vast majority of Fractional Ownership developments employ a professional cleaning staff to maintain the property on a daily basis. The cleaning person also monitors the condition of the property, and informs the management if any damage is incurred by each occupant during their stay.
Repair management is important because without it, no one person is responsible for keeping the fractional property in good repair, and small inexpensive problems can develop into large expensive ones. The repair manager is responsible for periodically inspecting the property, fielding comments and complaints from co-owners, and arranging for and supervising repairs.
HOW DO VACATION HOME FRACTIONAL OWNERS MAKE DECISIONS?
In fractional ownership projects organized by a developer or property seller, the developer/seller must determine how much power to give the owners, how various types of owner decisions will be made (managing board versus owner vote, majority vote versus super majority versus unanimous), and how the transition between developer control and owner control will be handled. Where the fractional project involves multiple units, the seller/developer whether certain decisions should be made by subgroups of owners (or governing board elected by subgroups) based on divisions of usage rights and/or maintenance obligations. In other words, should decisions about a particular unit or units be made by all owners, or only those owners whose usage and/or payment obligations will be affected?
Regardless of how many owners and properties will be in the fractional ownership group, and whether the shared ownership arrangement has been created by a seller/developer or by the fractional owners themselves, it is useful to establish certain mandatory duties, things the group will be required to do unless all owners otherwise agree. These mandatory duties should include paying the recurring operating expenses and maintaining the building in good condition. Establishing mandatory duties prevents an individual owner (in a group of only two owners), or a majority of owners (in a group of three or more owners), from taking actions that endanger the group investment.
Groups of three or more co-owners typically have tiered voting systems where certain decisions are made by a majority or a subgroup such as a board of directors, and certain decisions require unanimity (or alternatively, a larger majority). Decisions requiring a higher level of approval are typically those involving major physical changes to the property, large expenditures, changing usage rights allocations, selling the entire property, and borrowing money against the property, and could also include anything else the group thinks is particularly important.
SHOULD VACATION FRACTIONAL OWNERSHIP AGREEMENTS BE KEPT SHORT AND SIMPLE?
No one reads co-ownership documents for pleasure. The only time one is likely to read the documents is if there is a conflict that can’t be resolved informally. In that situation, one wants the shared ownership agreement to provide a specific and clear resolution. The advantage of document length is that it allows the co-ownership agreement to cover more specific issues, and makes it more likely to be helpful. Simplicity is desirable, as long as it doesn’t come at the expense of breadth.
ARE THERE RISKS THAT ARISE IF THE FRACTIONAL OWNERSHIP IS LOCATED IN LOS CABOS MEXICO?
If the fractional ownership property is located abroad, such as Los Cabos, prospective co-owners are less likely to be familiar with either this market or the ownership transaction system. This lack of familiarity creates risk of overpayment for the property or its improvement and furnishing, or of wasting money and time in connection with the transaction formalities. In addition, the laws of many foreign countries do not offer the same level of consumer protection as U.S. laws. Hence, ongoing management, enforcement of the co-ownership agreement, and resale transactions can also be problematic. All of these difficulties can be compounded by a language barrier.
It is therefore of utmost importance to utilize the services of an established, reputable broker such as Lifestyles of Los Cabos, who perform ALL Los Cabos Fractional Ownership transactions directly through their office in the U.S. only.
Rest assured, we at Lifestyles of Los Cabos provide a one-stop solution relating to all Fractional Ownership Resales in Los Cabos, from initial complimentary consultation to providing complete Closing Services, assuring the Transfer & Recording of new ownership is completed by the Resort on your behalf!
We invite you to visit our Fractional Ownership listings page offering our latest listings at all of Cabos newest and finest Fractional Ownership Properties!
Russ Vestri ~ Owner
62 Shun Pike North Scituate, RI 02857
Phone: (401) 837-6870