Guest, Andy Sirkin:  Thank you for having me.

Christine:  Andy joins us from France. He is in Paris. How nice to be in Paris, huh?

Andy:  It is. It's great. It's just becoming spring here and the weather is starting to improve a little bit, trees are blooming and so on, so it's a great time to be here.

Christine:  Thank you so much for joining us. OK, we're just going to go right in. Can you tell me a little bit about yourself and about your practice, and what exactly you do?

Andy:  Sure. I graduated from law school in 1984 and pretty much started immediately getting involved in various types of co‑ownership; but when I say co‑ownership I just mean real estate with more than one owner.

My job in these transactions is to deal with the relationship among the owners, to make sure that their relationship is well thought out and organized, and that they have an agreement that they can rely upon to solve any problems that might come up in the future.

I originally got involved in co‑ownership mostly because of my own interests. It was a way that I could afford to buy my first home, by joining up with other people. And it was a time, at least in San Francisco, when many, many people were in the same position I was. They needed to join up with other people in order to buy their first home, or to buy a second home or what have you, so there was a lot of interest in the topic.

And as I learned about the topic for my own benefit, I started to share that information with others and my law practice grew in that way. So for the last 22 years or so that has been my world. Over those years I have put together roughly 6,000 co‑ownership relationships of various types for people and property all over the world.

Christine:  That is very interesting, and I imagine a lot of what you are doing today is primary residences, but I bet you are doing a fair amount of vacation homes as well. It seems to be very popular with vacation homes going in. The first thing that comes to mind is going in with friends or family, because vacation homes are very expensive. They are in areas where it is sometimes double, triple or quadruple what the average per‑square‑foot is, compared to a primary residence, say, in your hometown.

So can you just briefly kind of go through... The benefit of co‑owning is, it is for affordability, is that correct?

Andy:  Yes, certainly affordability is a big factor. A good way to sort of introduce the topic in general is to talk a little bit about just how much, or really, how little, most people use their vacation homes or their second residences.

I have read statistics that the average person only uses their second home about 17 days a year, so that second home is soaking up a lot of resources in relation to the amount of use that people are actually getting out of it. So from a buyer's perspective, this is a way to bring the costs more in line with the benefits that they are actually getting from the house.

Now of course, as you know, many people who have second homes and don't use it that often turn to vacation rentals as a way to sort of help with the economic burden of the home, but vacation rentals is a business, and it's a tough business. It involves a lot of back‑and‑forth with people who might want to rent it, a lot of upkeep, a lot of management; or if you delegate some or all of those tasks to a management company it cuts pretty deeply into your income stream. It's just a very tough way to make a vacation property work, whereas owning a property with other people is a much easier and more elegant way to bring those costs and benefits in line with each other.

I think that is why more and more people are turning to this as a way of buying; and also, I should mention that many people are turning to it who already have a vacation home. In other words, people who have owned a vacation home for some time and are realizing that it is not worth the economic and management burdens that they are having to confront to keep the home up, so they are selling fractional interest in it and just keeping a fractional share that is commensurate with the amount they use the property.

Christine:  That's a very interesting perspective, selling off a portion of your existing home. What I'm seeing is, especially in markets where it is very, very expensive to purchase or to sell; I am seeing some sellers actually selling the properties as fractionals. Can you talk a little bit about how you would go about doing that?

Andy:  Sure, but before I do let me just echo what you are saying. A huge amount of our business is actually generated from the sales side of the transaction rather than from the buy side, so what you are seeing is definitely representative of the way the market is moving.

More and more people are just realizing, first of all, the economic benefits of fractionalizing homes they already own, as we just mentioned, but also the diversification benefits. In other words, what they can do is they can spread that investment that is all tied up in their second home, they can spread it out so that they are invested in a number of different resort communities rather than just one, which lowers their risk and increases their potential for appreciation‑based profit.

And perhaps more importantly, it allows them to vacation in multiple places. If you own a second home, say, in Lake Tahoe or in Mexico or what have you, from an economic standpoint you really have to go there for most of your vacations. The beauty of fractionalizing is that by divesting yourself of some of that vacation home, you can then take the proceeds from your fractional sales and perhaps by fractional interest in homes in other places in the world.

So now you can vacation all over the place and still be in your own home, where you know how things work, and you have your stuff there and so on. So there is a lot of benefit.

So turning now to answer the question you actually asked me: how do people go about doing it? The way we approach it is we start with, essentially, a consultation with the client where we talk about the specifics of the property, we talk about how the seller‑‑if we're dealing with the seller‑‑or the buyer if we're dealing with the buyers, are going to use that property: how far away do they live, what kinds of time periods do they go there more typically, and so on.

We take them through a whole series of questions that are designed to get us the information we need to recommend some alternative structures for how the co‑ownership might be structured. Then we'll go through the pros and cons of those various structures, and eventually, through the course of maybe an hour to two‑hour conversation, we will develop the structure for the co‑ownership.

Then based on that we will prepare the co‑ownership documents, and then send them to the client to review and perhaps go through a little bit of a revision process, and eventually we will have a set of documents that puts the property in a position to be fractionalized.

Christine: Is this something that you need to do, like, say I wanted to sell a portion of one of my homes? I also think that this is probably a good way for long‑time owners‑‑people that bought, say, ten years ago, who see massive amounts of appreciation to their property but they don't necessarily want to sell their property‑‑this is probably a decent way to get some cash out of your home as well.

But with regards to doing this, do I have to come to you and settle this up prior to even putting it on the market? It's something that I need to cross all the T's and dot all the I's before I can even market it as a co‑ownership?

Andy:  We strongly recommend that you do the structure and the documents first. The reason that we like that approach is really two‑fold. First of all, if you go on the market without the structure in play, it becomes very difficult to describe to prospective buyers exactly what it is you're offering to sell them, what you're going to get, how much it's going to cost, what they're ongoing obligations are going to be, and so on. Your inability to present a package to people ends up making it very, very hard to get anybody to agree to anything.

You can't get people to commit to buy something when they don't really understand what it is they're buying and how much it's going to cost. So that's the first reason.

The second reason is you want to put yourself in a position where you can enter into a binding contract with a prospective purchaser and you want that contract to be specific and clear enough to avoid any potential disputes between you and the purchaser down the road.

Christine:  That's exactly what I was just thinking when you said that, because I think of buying with family and things getting ugly and everybody ends up not talking to each other after the fact. So I think, probably, that's pretty important to do; make sure all that stuff is figured out, right?

Andy:  Yes. Well, I think you're making two points and both are important enough to be mentioned separately. One point is the ongoing operation of the property and relationship of the co‑owners. In other words, the relationship that exists after the buyer buys and the seller sells and the people are all just using the property and managing it together. So that's the relationship that's got to be managed by your co‑ownership document.

There's also the purchase and sale transaction. In other words, when you're out there selling your fractional interest and people are buying them, you need a contract related to the purchase. What am I going to buy, how much does it cost, how is it going to be financed, and so on.

One of the reasons why we think it's so important to do the documents for the long‑term relationship is to set you up to do a short and clear document for the short‑term relationship. That is the purchase and sale.

If you didn't have your co‑ownership documents set up in the beginning and you just agreed with somebody, 'Well, I'll just sell you half my property or one‑twelfth of my property or one quarter of my property' without having all the things about the future spelled out, it would be a large potential for a dispute in the context of the purchase and sale.

In other words, when it comes time to close the sale and all of a sudden the buyer starts saying, 'Well, I thought I was going to be able to use the property during the summer months when it's beautiful there and you were just going to have the rest of the time.' And you say, 'Wait a minute, that isn't what I thought.'

That's why it's so important to have all the details developed before you go on the market.

Christine:  Face it, buying a home can always get a little disputed and there are always a lot of things that can happen in just a regular purchase. So I imagine when you're buying as a co‑ownership, it could get that much more confusing.

Now I think, probably one of the points we need to make here is can you tell me the difference between this and a time share? I think that probably a lot of listeners are going, 'Well, wait a minute, I have no interest in timeshares whatsoever.' Can you tell us a little bit about how this would be different than what we know in the United States as timeshares?

Andy:  Yes. I think that there's sort of a distinction between what I might characterize as the legal definition of a timeshare and the actual meaning of the timeshare that most people have in their minds.

From a legal definition standpoint, a timeshare is simply any arrangement, regardless of type, under which there is multiple owners and they agree to divide up the use of the property according to time. In other words, some people use it sometimes and some people use it at the other times. Now you can see how that legal definition would be broad enough to encompass all types of different arrangements, both the old fashioned timeshares and what now becomes the new fashion fractional.

Which brings us to the practical difference. When you and most people think about timeshares, they think about the way timeshares used to be organized. The way they used to be organized was you'd have a property that was owned by some organization and then you'd have people essentially buy usage right to the property for some period of time without actually acquiring any ownership in that property, and without having any control at all of how that property was managed, how it was maintained, how decisions were made, and so on.

You were essentially joining a club and the only sense in which you were a member of the club was that you got to use the property. You weren't a member in any sort of management or control sense.

The difference between that and what I'm calling modern timeshare, or a fractional, is that in today's fractionals, people have both ownership and control, typically. Meaning that they own the property and also that they have decision‑making power over how the property is managed, what their costs are, what the maintenance standards are, and all of the various operational decisions that go into that property.

And even in cases where there isn't direct ownership. Because there are some modern fractionals where the people don't actually own the title to the property. They may, for example, own a company that owns the property. Those still distinct from the old fashioned timeshares because there is no other organization involved in ownership.

In other words, the people who are using it own the entirety of the company that owns the property. And they have control completely over how that property is managed and maintained, what their costs are, and so on.

Everything I just said is really a generalization. It applies most of the time, but not all the time and it's still important for people to examine the particular fractional arrangement they are considering from the standpoint of ownership, and particularly from the standpoint of control.

I think that a lot of people who are looking at fractional ownership, particularly fractional ownership in a big complex, as opposed to kind of standalone home or apartments that we've been talking about so far. Let's say you're looking at fractional ownership in a property operated by Ritz, or Marriott, or Four Seasons, or something like that. You may be getting ownership, you may be getting a title to something, but you may not be getting that critical element of control.

And it was the lack of control that ultimately was the problem in sort of the first generation of timeshares. I mean, yes, people didn't have ownership, but more importantly, they didn't have control. And what worries me about some of these current large timeshare developments is that even though people do have ownership, they've essentially given up all their control to these large operating companies. And it worries me about what that's going to mean to these people going forward, in terms of, 'What is the quality going to be like in the future, what are the costs going to be like in the future,' and so on.

I have a strong preference for the kind of smaller standalone single homes, single condominiums, fractional ownership arrangements where the people do maintain that control.

Christine:  It's funny, that's exactly what I was going to interject with. That it's more so, talking about the difference with regards to owning a whole building, such as Marriott, or one of those kind of fractional ownerships. I think they sort of changed the name from timeshare to fractional. They changed a little bit of the structure, but the overall idea is still the same that you're just buying into one week, you have no control, and all of those sorts of things.

But what you're talking about is maybe just buying one property in a building. Like, if I were to go and I wanted to buy a second home, say in Cape Cod, we're talking about saying, 'OK, that property might be a million dollars, but I can't afford a million dollars, so I can either buy that property with friends or even strangers.' Or maybe even the seller, because they know that there are very few buyers that can afford a million dollars, or they might split it up into quarter ownership and each person would only have to pay $250,000 and have use of it a quarter of the time. So, I think that it's definitely a really interesting concept of selling your home or buying just a portion of it.

Christine:  Well, that wraps up this episode of the 'How to Rent Vacation Properties by Owner' podcast.