Guest, Andy Sirkin:  Well, it depends. It depends on what the group documents say. I would say that the majority of the documents we prepare do permit rentals. Now, when I'm talking about rentals in a context, I am, in general, not talking about the group renting out the house when the owners aren't there. I'm talking about individual owners renting out their time separately.

They may be going through a shared rental agency, but the money from the rental is just going to the one owner who had that time assigned to them, it's not going into a pool system where the group pools the rent. Again, there are some exceptions to what I'm saying, but that's the general way most people set it up, is the individuals can rent their own time.

But there are some groups that simply don't want tenants in the house at all, they just decide as a policy decision that they feel tenants have too much wear and tear on the property, or they are concerned that there will be too many people there or what have you, and they just decide that they don't allow rentals at all.

Before we go on, can I go back to something you mentioned in your last question?

Christine:  Sure.

Andy:  There are, actually, two things that I wanted to comment on that I think you touched on briefly. The first is this issue of entering into a co‑ownership arrangement with family or friends, versus entering into it with strangers. I just wanted to mention, after all these years of experience, one of the things that I have concluded is that groups of strangers actually work better. They have less problems, the relationship is smoother, and there is less risk compared with groups of family or friends.

Christine:  It goes back to that old saying: "Don't do business with family. Keep family and business separate."

Andy:  Yeah. There are, of course, exceptions to every generalization, but I think that if you have a prejudice, let's say, in favor of doing a fractional or co‑ownership arrangement with family and friends, if you're the kind of person who's saying, "God, I would never do this with strangers, " you might want to re‑examine the assumptions that are driving that, because actually, if you look at it statistically, much less risk if you do it with strangers.


The other thing I wanted to touch on was, you mentioned a little bit about the costs, you know, the million dollars and dividing it four ways. A really important change in the last few years that is driving what I will call sort of the stand‑alone fractional market, you know, fractionals involving a single home or a single condo, is the advent of individual financing.

It used to be that if you were going to do a co‑ownership arrangement like this, and you needed to do financing, the only way to do it was in a group loan. In other words, you get a loan on the house or a loan on the condo and everyone would share in the loan. But today that model is being supplanted by individual fractional loans, so that now if you had four owners buying that house on Cape Cod separately, four fractional owners, they could each have their own loan, secured by their own one‑quarter of the property.

That obviously takes quite a lot of the risk associated with fractional ownership‑‑specifically the risks of defaulting on a group loan‑‑out of the equation, and that makes it more attractive to a lot of people.

Christine:  And it probably‑‑this is just an assumption, you can correct me if I'm wrong‑‑but when you're talking about a single loan as opposed to a group loan, I would imagine that the rates would probably be better, because the risks are less.

Andy:  Well, so far it's largely a matter of just competition. In the case of a group loan, you're talking about just your garden‑variety home or condo loan, and there are a lot of lenders providing that, so they are all competing with each other, which pushes rates down. Whereas the fractional loan is a relatively new product, you don't have a lot of sources for that, so the costs of those are somewhat higher than the cost of just a house or a condo loan; but the benefits are also there to justify those increased costs.

So, my sense is that most people in this market, given the choice of having a slightly riskier but less expensive group loan versus having a more expensive but less risky set of individual loans will go with the second option.

Christine:  Very interesting, because I would have thought it was the opposite. Now, can you just probably, in 30‑second‑or‑less, give me some of the points that people need to consider, either in selling their property as a fractional or buying a fractional portion of a property?

Andy:  Well, I mean, I think there is of course the cost‑benefit question that we have already touched on: why do this? How does it compare to, say, renting? How does it compare to, say, owning the whole property yourself? I think we have covered those issues pretty well.

Then, having gone beyond the question of should I do this or not, you then get into the question of, what type of fractional arrangement am I looking for? The main thing that distinguishes one type of fractional or one fractional arrangement from another is the way the usage is structured.

There are a large variety of different ways that the usage can be structured, and let's face it, ultimately, how you use the property, when you get to use it, how usage decisions are made, is probably the most important issue. So, let me just sort of lay out some of the common usage models.

At one extreme there is fixed usage, which means that every year, you as a particular fractional owner have use of the property during a particular time. So, for example, you might have, let's say, two months, January and February, or March and April, and every year you get to use the property during January and February. That never changes.

At the other extreme is floating usage, under which you have the right to use the property for a particular amount of time each year, but when your time is varies from year to year.

Then, of course, you have a combination. You have arrangements under which each owner has some fixed time and some floating time, or where some owners have only fixed time, some owners have only floating time, and some owners have a combination of fixed and floating time. If you are not confused yet, you will be as I keep going.

Another question related to the floating time is: OK, if we are going to have a floating arrangement of usage assignments from year to year, how exactly does the floating work? How do we determine from one year to the next when an owner is going to be able to use the property? There also, there are sort of two extremes and then mixtures of the two extremes.

At one extreme you have a fixed system of rotation. So, in other words, let's say that each owner gets to use the property eight weeks a year, and maybe there are six owners. You have six eight‑week packages that are sort of pre‑constructed. One package might consist of Week 1, Week 9, Week 17 and so on. The next package might be Week 2, Week 10, or whatever, they could be in two‑week blocks.

The group members rotate through the packages. So, in the first year you may get eight‑week Package Number One, and then the next year you get eight‑week Package Number Two, and so forth until you have completed all eight packages, and then you start at (Package) One again.

One of the reasons people like this approach is that there is no chance in it at all. You know exactly when your weeks are going to be, every year until the end of time. If you want to figure out when you are going to get to use the property in 2038, you could sit down and actually figure that out.

Christine:  I would imagine that the first thing that comes to mind is Spring Break or Christmas or Fourth of July Week‑‑you know, the popular weeks that everybody wants. I guess this would be a way to make it fair so that one year one person might have Christmas week, and then next year the next person, and so on and so forth.

Andy:  Right. Well you know under this system that you are always going to have every week at one time or another. You can't possibly miss out, so that's nice. Now the disadvantage of this approach is its rigidity. In other words, it doesn't allow you, from year to year, to sort of have any say in when your weeks will be. But I should interject here that you can always trade with other owners; and in fact, these groups trade all the time. It's very common for owners to trade days or weeks in this arrangement.

This brings me sort of to the second extreme of floating systems, and that is the system wherein there is a rotating system of priority. So, in other words, you might have first priority this year, last priority next year, second priority the year after that, or what have you.

So, you do rotate through the full priority, so you will have the same number of first priorities as everybody else, but then in any particular year, owners select their weeks or months or days based on their priority. If you happen to have first priority in a particular year, you are going to be able to pick exactly the weeks you want, or at least some of the weeks you want. The next year you may have last priority, which makes it less likely.

Now, within that sort of priority system you can inject all sorts of protections to make sure that everyone has at least a reasonably good year every year. For example, you can break the year up by seasons, or according to holidays, or so on, so that the person, for example, with first priority, they have first choice in a particular season but last choice in another season. So, I guess, my point is that there are all sorts of different ways that these arrangements can be set up, and that's why we spend the time up front discussing with the client...

Christine:  To figure it out, right.

Andy:  ... how is the property going to be used? What do you value as far as advance notice? Some properties really only have a few good months a year in terms of quality usage, whereas other properties are really year‑round properties.

Christine:  Like that Cape Cod, for instance. I mean, if you end up with your months being December, January, February, it might not be the best arrangement for you.

Andy:  Exactly, yeah. Exactly. And another type of fractional that we haven't really talked about too much is where people live full‑time in a resort community‑‑Laguna Beach comes to mind because I have had several like this in Laguna Beach‑‑but they always go away during the best months. So, you live in Laguna Beach, but you always go somewhere else in the summer; and yet there are all sorts of other people who really want to go to Laguna Beach for the summer.

So, people will sell just, maybe, two months, and keep the property the rest of the year. I recently did one of these in Bainbridge Island, Washington, somebody who lived there all year round but doesn't want to be there during the tourist season, and wanted to sell just the right to use the property during those months, and was able to generate almost the full value of their house just by selling the two months.

Christine:  Wow! That's pretty good.

Andy:  Well, when you think about it, you can see how that might happen. If you have got a market that is basically being driven by the resort industry, where people, by and large, are buying whole houses knowing they are only going to use them for two months, it is not particularly surprising that somebody might pay almost the full value of a house just for those two months' usage, because they don't have to worry about the house the rest of the year.

They are dramatically cutting their carrying costs and maintenance costs of the house by sharing it, and it is a great deal for them even though they are only getting those two months of usage.

Christine:  Very interesting. Well, we are running out of time here, but what this all comes down to is, first of all, buying or selling as a fractional is very complex. It sounds like there are no generalizations you can make, as with most transactions there are always going to be idiosyncrasies and specific things that happen within the transaction that need to be addressed, and I think probably the bottom line is, you need to hire a professional that could assist you in either purchasing or selling. And of course, Andy, you are probably one of the top attorneys that does the fractionals. Can you tell us how people would contact you or your firm?

Andy:  Sure. We have a web site, which I think you are already aware of, which is www.AndySirkin.com, and people can read up on a lot of the things that we've talked about on this call, on our site. They can contact us by email or by phone if they would like to speak with us. We don't do free consultations.

Christine:  No.

Andy:  But we are happy to answer one or two questions on the phone, if people just have a couple of questions. I think most of the common questions that people have are actually answered on our web site.

Christine:  Excellent.

Andy:  We sort of do the web site in a very thorough and detailed manner in order to avoid doing the free consultations; but as I say, we start the process by setting up a one‑to‑two‑hour telephone or personal consultation to discuss the pros and cons, and then hopefully the structure of a particular transaction, and then we sort of go from there.

Christine:  OK, and just to reiterate, it's www.AndySirkin.com, and we'll also have a link to it on our web site, the Owner Community. Thank you so much for joining, there's just so much, and I think the other thing that needs to be said is, Andy, you wrote a chapter for my second edition of 'How to Rent Vacation Properties by Owner.' There is a lot of information about buying fractionals and selling as fractionals, and all the things that you need to think about, a lot of cursory information that you could read about in the book as well.

But, thank you so much for joining, and enjoy Paris.

Andy:  Thank you very much. Thanks for having me, and I've enjoyed the conversation, and if you feel like I can come back on and give your listeners any more information I would be happy to do that.

Christine:  Oh, we'll definitely do that. Thanks so much.