What In The World Is Fractional Ownership?

Business

8 minute read

July 21, 2021

My parents have a condo in Florida,” said my first girlfriend, circa 2002.

I didn’t know much about Florida back then.  Still don’t.  But I asked the natural question that just about anybody in my position would ask: “Where in Florida?”

She said, “It depends.”

And then I got really, really confused…

I had never heard of a “timeshare” before.  I think I’d heard the reference in a sitcom, maybe Growing Pains or perhaps Who’s The Boss, but I’d heard it in a cynical way.  Something like, “Next thing you know, he’ll be trying to sell you a timeshare in Arizona,” which would be followed by a classic sitcom laugh-track.

My girlfriend explained that her parents “owned” a condo, but that condo could be anywhere in a series of Floridian cities, in any number of hotels.

How do you own a hotel, I wondered.

She tried her best to explain it, but I wasn’t really grasping the concept.

Finally, her father explained, “We own two weeks per year in a chain of hotels,” and flipped a glossy booklet onto the coffee table.

This made sense.

They didn’t own a condo.  They didn’t own a hotel room.  They didn’t really own anything, but rather they had the right to use a condo or a hotel for two weeks per year, subject to restrictions and regulations, and it was available through one company that owned a slew of properties.

We went to Florida in the summer of 2003, which was an odd time to leave a warm-weather location to travel to another warm-weather destination, but such is life.  I actually wrote about this back in………….oh, wow, I just looked it up; 2008!  It was a two-part blog series where I explained one of my biggest regrets in young adulthood was not standing up to the aggressive salespeople who locked us in a room and tried to sell us a timeshare.

April 17, 2008: “Time To Buy A TIME-SHARE!”
April 18, 2008: “Time To Buy A TIME-SHARE (conclusion)”

Geez, Louise, was that really thirteen years ago?  Time flies!

Also, did I really just say “Geez, Louise?”  I don’t know if it’s the thirteen years that’s aged me as much as my choice in vernacular these days…

So what is a timeshare?

Here’s how www.investopedia.com explains it:

 

What Is A Timeshare?

A timeshare is a shared ownership model of vacation real estate in which multiple purchasers own allotments of usage, typically in one-week increments, in the same property. The timeshare model can be applied to many different types of properties, such as vacation resorts, condominiums, apartments, and campgrounds.

Time-sharing is a form of fractional ownership, where buyers purchase the right to occupy a unit of real estate over specified periods. For example, purchasing one week of a timeshare means the buyer owns 1/52 of the unit. Buying one month equates to one-twelfth ownership. Time-sharing is popular within vacation locales. Property types include homes, condominiums and resorts. The model can also apply to recreational vehicles and private jets.

Key Takeaways:

  • A timeshare is a shared ownership model of vacation property whereby multiple owners have exclusive use of a property for a period of time.
  • Timeshares are available for various types of vacation properties such as resorts, condominiums, and apartments.
  • Timeshares are available for a fixed week–a buyer has a set week each year, or a floating week–use of the property is limited to a season.
  • Timeshare benefits include vacationing in a professionally managed resort in a predictable setting.
  • Timeshare drawbacks include a lack of flexibility in making changes, annual maintenance fees, and difficulty reselling one.

 

There’s a lot more if you’re interested in reading further, but I think you get the picture.  Not only that, some of your family or friends might own a timeshare, and some of you might even own one too!  I feel as though they were more common in the 1980’s and 1990’s, but that’s my gut talking.

There are other common forms of fractional ownership.

Buying into a “Co-Op” comes to mind.  As opposed to a condominium, where you purchase your unit (ie. legal title to that real property, plus potentially a locker and/or parking space on a separate deed), a co-op involves you purchasing shares in the building, and living in a particular unit.

I’ve written about this before a few times:

November 15th, 2010: “Condominiums vs. Co-Operatives”

November 5th, 2014: “What’s The Deal With Condo Co-Ops?”

Now, what about “Co-Ownership?”

Eek.  I’ve talked so much about this in the past that just the mere thought of co-owning makes my skin crawl.

I aggressively tackled this topic (to the ground…) a few years ago:

January 30th, 2017: “Co-Ownership Of Your Primary Residence: What Could Possibly Go Wrong?”

If that wasn’t aggressive enough, I left it all on the table with this blog last year about co-purchasing after the Ontario government put out a “guide” and even seemed to recommend it:

January 31st, 2020: “The Friday Rant: This Is A Terrible Idea”

If you want to read this invitation for disaster, the pieces of which would be picked up for by our tax-dollars, here it is:

“Ontario’s Housing Supply Action Plan: Co-Owning A Home”

So after the preceding, do you believe it’s possible to come up with some sort of platform or vehicle for fractional ownership?

SUre, why not?

On a long enough time horizon, it’ll happen.  And depending on why you’re looking to buy, it might have already taken place…

There are two companies in Canada that offer “fractional ownership” of real estate, that I know of.

One is called Addy and you can check them out by clicking that hyperlink.

According to their website, this is their basic pitch:

 

Step 1:

Addy identifies a real estate opportunity.

Investment decisions are made collectively by our real estate acquisitions team, our investment committee and our Board of Directors which has a track record of investing in and managing real estate. All opportunities go through our very rigorous due diligence process. 

Step 2:

Addy divides the investment opportunity into equal parts.

The real estate investment opportunity is broken out into increments valued at $1. For example, a $500,000 opportunity would be divided up into 500,000 units

Step 3:

Addy sells units for $1.

Units in the investment are listed for sale on our platform. You can decide how much you want to invest ranging from $1 to $1,500 per property.

 

Sounds easy enough, right?

This platform seems to be aimed at investors, and doesn’t really address a problem in the market but rather a need.

There are companies (and I’ll explain in a subsequent blog post this week or next) who’s goal is to help people get into the market who can’t do through the traditional model.  But Addy is really offering people an opportunity to purchase real estate as an investment, more like a Real Estate Investment Trust than a “rent-to-own” or similar structure.

It seems like it was only a matter of time before Addy or a company like it came along, wouldn’t you agree?

Now, is this really the best way to invest in real estate?  Is it legit?  What type of investor is it targetting?

Their “simple steps” speaks volumes to me.  Check it out:

 

Step 1: Become An Addy Member:

Join us as a Charter or Believer member!  A membership gives you an all-access pass to everything that addy offers. Plus, we offer a moneyback guarantee, no questions asked! Our core value is “win-win or no deal” and we mean it ????.  Be ready with a piece of government ID so that you can complete your profile.

Step 2: Fund Your Wallet:

Our Addys sell out quickly! Connect your bank account and fund your wallet so that you’re ready for when a property drops. Take advantage of our Instant Funds feature to get instant access to your money.

Step 3: Choose A Property:

Take a peek at our available investment opportunities. You’ll be able to review due diligence documents on the property as well as the Offering Memorandum.

Step 4: Sign And Invest

After you’ve reviewed the due diligence documents you can invest up to $1,500 into that property.  You simply move funds over and sign on the dotted line! That’s it, you’re a real estate investor ????.

 

It looks gimmicky to me.

They’re selling memberships, first of all.  And when I see “all-access pass,” I feel like I’m lining up to buy a timeshare.

Moneyback guarantee, “no questions asked,” and the “win-win or no deal” don’t make me feel warm and fuzzy like they’re supposed to.

“You’ll be able to review due diligence documents on the property” makes me laugh, since nobody buying $1 shares in a condo knows how to review due diligence documents.

“That’s it, you’re a real estate investor,” followed by that hang-ten hand emoji is the icing on a really suspect cake.

This is real estate crowdfunding, and while I can see some younger folks having fun with this and learning about real estate in the process, I don’t know that this is the way to real estate riches.

Buyers of these shares can make money through the appreciation on the sale of the property or through positive cash flow on the rent, but not mentioned in that space is that properties can go down in value too.

The other fractional real estate platform that I know of is called BuyProperly.

Their model is different since investments don’t start at $1, but rather they start at $2,500:

BuyProperly lets you invest in real estate to grow and diversify your wealth without traditional upfront costs. Starting at $2,500, our AI-powered platform helps you achieve above-human performance earning monthly rental income, as well as capital appreciation.

I don’t love the sound of “achieve above-human performance” and what that means, but I’m a cynic who’s watched I, Robot with Will Smith way too many times.

As with Addy, BuyProperly makes it sound easy.  I mean, what’s easier than using Artificial Intelligence to achieve above-human performances?

Under their “What Is BuyProperly” page, they explain further:

BuyProperly is an online exchange for fractional investments in real estate which allows investors to invest with limited money and get hassle-free property ownership. Through our online platform, investors can own a slice of a property by investing as low as $2,500. These are high-growth buy-to-let properties, which are sourced and managed through BuyProperly. This makes the investment process hassle-free for investors and they can earn potential monthly rental dividends and potential capital appreciation on exit. Investing in real estate has a reasonably long lock-in period for generating good returns. Our platform solves this by providing a secondary marketplace to our customers to enable them to re-sell their shares in the property.

We are backed by well-known Canadian investors such as the Ryerson Futures, High Park Angels and several experienced angel investors, and an advisor group of renowned experts in real estate, finance, and data science. We are also accredited by Better Business Bureau and have Fasken as our legal advisor.

Despite the use of “hassle-free” twice, I will credit them for noting that “investing in real estate has a reasonably long lock-in period,” since there’s potential for people to feel they can day-trade shares of real property, and I don’t know that this would be any easier than throwing darts at a list of the Dow Jones equities and trying to beat the market.

Noting that they are backed by the BBB and detailing who their lawyer is, I find a little odd.  But that’s just me.

When you click on their “View Properties” page, it provides you with a link to “Book A Meeting.”  There are only two active properties, since most are marked “Sold Out” like this opportunity:

They’re not the best at “selling” these spaces.

Here’s their specs:

  • Gorgeous, large & bright 1 bed condo suite in a desirable building in a great area.
  • Large living-dining room with walk out to balcony. Spacious bedroom, upgraded bathroom. Has strip laminate floor throughout, modern kitchen with granite counter, and stainless steel appliances.
  • Extras included are a stainless steel fridge, stove, built-in microwave, dishwasher, washer-dryer and all light fixtures. Also includes venetian blinds window covering.
  • Size of 500-599 sq ft and a spacious balcony of 84 sq ft.
  • Includes 1 parking and 1 locker in a upgraded building with all modern facilities such as gym, sauna, swimming pool, movie theatre, party room.

I mean, “size of 500-599” is like trying to price a share of stock while saying, “P/E Ratio between 8.5 – 19.5.”

But marketing isn’t their forte, I get that.

They’re experts at reinventing the wheel, which is essentially what these two forms of fractional real estate ownership are.

Like I said, it was only a matter of time before somebody tried this, and if these two websites are any indication, this isn’t a beta-project, but rather these investment vehicles are active.

Would you invest in something like this?

Why?  Or why not?

More to the point, if somebody didn’t want to buy ‘shares’ in a condo as an investment, but rather wanted to buy shares, pieces, or fractions of a condo and be able to live in the unit, would that be possible?

I’ll come back to this next week, but for now, I encourage the finance guys (you know who you are…) to weigh in on Addy and BuyProperly…

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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15 Comments

  1. Appraiser

    at 7:45 am

    Unfortunately it appears that high real estate prices have ushered in the scammers.

    Fractional ownership schemes always put me in mind of an old Mel Brooks movie “The Producers” wherein Gene Wilder and Zero Mostel massively oversell the shares in the production of a Broadway play (“Springtime for Hitler”) to a bunch of dupes and rubes (I mean investors).

    Who says you can’t learn anything from Hollywood.

  2. Pingback: Best Real Estate Agent In GTA – What In The World Is Fractional Ownership? – Toronto Realty Blog
  3. Chris

    at 10:23 am

    I’m struggling to understand why anyone would opt for Addy or BuyProperly over just purchasing shares of a REIT, like RioCan?

    Last I checked, RioCan’s management fee worked out to ~0.4%. I believe many REITs are around this general ballpark as well.

    BuyProperly states:

    “BuyProperly Fees: BuyProperly charges an annual management fee of 2.5% + GST/HST on the asset under management value.

    Recurring costs: There will be recurring costs for advertising, letting, managing, and maintaining the property on an on-going basis. This will be adjusted from the monthly rental dividends on actuals.”

    Addy says they don’t charge any fees, at least not yet:

    “Note that addy does not currently charge any fees. There are no transaction fees, no property acquisition fees, no withdrawal fees, no promotion fees, no lifts on the properties of any kind, nothing.

    In the future, addy will charge a small annual fee to members. When that fee starts, a member’s existing investments will be grandfathered in.”

    https://www.addyinvest.com/2021/01/26/the-hidden-fees-behind-reits/

    However, in most of their Offering Memorandums, they state “In addition, any profit will be split 50% to the Manager and 50% to holders of Shares of the Corporation”.

    Seems like a pretty substantial carry to me.

    1. cyber

      at 5:37 pm

      This.

      Like, why? I don’t get it. There’s so much benefit to diversification, why spend your personal portfolio’s RE allocation to a very specific 1-bed condo unit in North York?

      Wealthsimple now offers fractional stock ownership, if a whole REIT unit is too much of an outlay for the likely entry-level investors both these companies seem to be targeting.

      Only hypothesis is it’s capturing the ‘meme stock’ moment where there are many new retail investors in the market who are effectively blindly and randomly betting, and a feeling of a tie to a specific asset is part of the legal gambling experience.

    2. Daniel

      at 7:03 pm

      Why? Because retail investors are stupid.

      Also because Gen-Z’ers know best and love doing it themselves. They love anything that’s different from their predecessors so they’ll jump at the opportunity to re invent the wheel.

      1. David

        at 11:21 am

        “Whatever the problem, we’ll design an app to fix it” – says every under 30er, looking for a buck rather than a real job.

    3. Condodweller

      at 12:48 am

      Without any research, I was going to say the key here is going to be all the fees. 2.5% was a typical mutual fund fee that everybody hates so why would one want to pay it for RE?

      “In addition, any profit will be split 50% to the Manager and 50% to holders of Shares of the Corporation”. Wow, that’s insane.

      The other aspect is what’s the tax treatment of these things?

      With these types of deals you probably want to invest in the companies themselves peddling the deal but I’m sure they are private companies and don’t want to share the windfall with people.

      If you read the “prospectus” for these I’m sure all expenses/losses come out from the pot first and anything that remains they have first right to, and if anything is left will be distributed among the investors.

      Yeah, I’m a cynic. Prove me wrong…

      1. Jim

        at 7:14 pm

        Lol
        50/50 split in profits
        Highway robbery
        A fool and their money are soon parted

  4. Andrei

    at 10:50 am

    Couple of thoughts from a finance guy: the offering is like a derivative . The site does not seem to mention the fees, the leverage used, the taxes, and the counterparty risk in the Q&A. As always a direct investment is better than a derivative, in the same way as actual cheese is infinitely better than a “cheese product”.

    1. Mark

      at 2:56 pm

      I think what’s interesting if there is a way to translate these sort of models to securitize home equity. If I can package and securitize the right to portions of my home equity (and accompanying gains), that seems like an interesting asset, especially if I can somehow turn my investment in my undiversified home equity into an investment into a broader portfolio of other people’s home equity.

      1. Condodweller

        at 12:57 am

        There is nothing stopping you from setting up a corp like these and sell shares of your home to people who are willing to pay.

        With all the discussions of is it better to own or rent I was brainstorming on an idea of finding an investor who’d be willing to buy my place and sign a long term lease with predetermined increases so that I can benefit from the equity but wouldn’t have to worry about being kicked out of a rental, and having the bonus of staying in my own place. If the investor pays market price and keeps future gains I wonder if anyone would take me up on that.

        But hey, perhaps I can do a 50/50 on the future growth if there are people out there dumb enough to do it :-).

        1. David

          at 11:19 am

          What would be better if some how the investor could realize tax free capital gains (personal residence exception). I’m not creative enough to figure out a way for this to happen, but that would really make it an attractive investment

  5. Damian

    at 11:35 am

    I feel terrible for anybody investing through either of these apps.

    Just set up a trading account through your bank and go buy REITs. It’s not hard.

    Look at RioCan. REI.UT.

    It’s up from $18 in January to over $23 last month, an increase of 28%. The TSX is up from 17,000 to over 20,000 in the same time period, an increase of 18%. So RioCan REIT is beating the market.

    Just go buy a friggin REIT. Anybody who invests in $1 shares of houses is going to get rinsed.

    1. Appraiser

      at 1:09 pm

      Rinsed and hung out to dry.

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