Advantages and Disadvantages of Ownership
Some advantages of owning a second or vacation home include:
Fractional Ownership - Many people can't afford an entire second home, particularly if they only intend to spend a small portion of the year occupying it. Fractional ownership allows buyers to leverage the financial power of the group to access a larger, nicer home. The ownership and all expenses are divided according to preset, negotiated terms. So an individual owner gets more house for fraction of the full market cost. Of course the trade-off is that each owner has limited usage rights to the property. Note that California requires regulatory approval if there will be more than 10 co-ownership shares.
Reduce the cost of existing residence - Some people already own a home or even a second home and, due to myriad reasons, may want to continue to have ownership and access to the home but want to offset expenses or tap into their equity. In these situations, owners can sell fractional shares of their homes. They do give up some usage rights in this but the reduced expenses and/or ability to tap into their equity interest free may make this a desirable option.
Some disadvantages of co-owning a second or vacation home include:
Selling can be problematic - Life changes and it is inevitable that at some point a co-owner will want or need to leave the ownership group. When one co-owner decides to sell, the remaining co-owners have a dilemma. The seller will want to maximize their value. To do this, they will want and need to market the property to as many prospective buyers as possible in order to derive a high value for the property. The remaining co-owners however will be sharing this property with the new buyer and will have a vested interest in filtering out buyers who don't meet their desired criteria for a home ownership partner. By filtering out buyers, they reduce the supply of buyers which can deflate the price of the property.
The obvious solution would be for the remaining co-owners to buy the shares of any owner who decides to sell. This too is problematic as this solution assumes each co-owner has the financial means to buy additional ownership shares. Also, without any market pressure from prospective buyers, it will be difficult for the seller to ascertain the true market value for the ownership shares. Thus the seller could unknowingly be forced to sell to the remaining co-owners for less than market value.
Often the solution lies in compromise. The seller needs outside buyers to get value for the property. The co-owners need some assurance the new owner will be a good fit both financially and personally. As such many co-ownership agreements will define some basic but specific parameters that guide the ownership group in situations where each owner's interests aren't exactly aligned. Some suggestions include:
- Have an agreement which all parties mutually agree to in advance and sign.
- Define the financial qualifications a member of the ownership group must meet. Do not set precedents by making exceptions for one co-owner.
- Define what maintenance and management responsibilities each owner assumes.
- Create a reserve fund to which each member pays x months upfront for the mortgage, insurance, and property taxes. Make x a number of months high enough such that the ownership group has sufficient time to act if one owner can not make timely payments.
- Create a group bank account from which all group expenses are paid. Have each co-owner contribute consistent monthly payments to the account so all expenses are budgeted and accrued.
- Specifically define the actions to be taken by the group in the case of payment default by one of the co-owners. Having specific, mutually agreed upon guidelines for how to proceed can offset the emotion of such an issue as the agreement defines the process, not the people.
- Note that California requires regulatory approval if there will be more than 10 co-ownership shares.