Fractional Ownership

There used to be people who hassled you on street corners in tourist towns around the world. They offered you a free video recorder, or something similar, if you would give up an afternoon to come to a presentation. These guys were touts for the time-share brigade.

Time-share has a seriously tarnished image. No-one uses the name any more. But the deals are still being pushed at the unsuspecting public. The name has changed but the idea is the same. Nowadays it’s called Fractional Ownership. Let’s see what the advantages are.

1    You get use of a property for four weeks/three months a year
2    You get to buy your holiday home for a lot less than if you bought the place outright
3    The costs are shared, so running costs are reduced
4    Someone else will be living there or looking after the place while you are away
5    Many of these deals come with swaps into other similar fractional ownership places

Excuse me for having a long memory but aren’t they exactly the same advantages that the time-share mob touted all those years ago?

How about the downsides of time-share?

1    You try selling it. No-one wants to buy.
2    It’s bloody expensive
3    You get a holiday free, but the running costs, plus the purchase costs  and opportunity cost of the money tied up make it a darned site more expensive than paying for the holiday every year.

Let’s have a look at the downsides of fractional ownership.

1    Buying part of a property is difficult. You wont get a mortgage on such a deal. That means there is no leverage. You need cash up front. That means you need to count the opportunity cost of using that cash.
2    Selling part of a property is even more difficult. Any prospective purchaser wont get a mortgage. You need a cash purchaser. There are a lot of those about these days aren’t there?
3    How well will you get on with three, or eleven, other owners? You think the bathroom needs completely renovating in three years time because the kids of one of your fellow purchasers trashed it. Six other owners dont want to spend the money. Fun isn’t it?
4    Have you worked out how expensive it is to buy? I’ve just been sent one which is touting a month share in a one bed apartment in Cyprus. The cost is just under €30,000.

Let’s do some maths. You need to cough up €30,000. If you had that money in some useful investment bringing in, say, 8% a year, you are now not getting that 8%. (Let’s leave aside the question of why you would be getting such a meager return on your money when the smart guys are getting at least twice that.) The opportunity cost therefore of selling the investment and buying the time-share (sorry….. fractional thingy) is £2,400 a year. On top of that you have a twelfth share of the running costs, and replacement costs of your new holiday share. That will no doubt cost you about £100 a week, or £400 a year. That means your rental costs for a four week holiday are the equivalent of £700 a week. (£2,400 + £400 / 4) What would a room in a hotel cost you? It would currently be about a third of that. Excuse me, but that doesn’t make for a cheap deal by my calculations.

Let’s do some more maths. I love maths, dont you?

Go to your favourite search engine and look for 1 bed apartments for sale in the same area. They start at about €50,000, and go up to about €150,000. They are currently over-priced, and sales are seriously down. We also have a Greek crisis on our hands, and a drastically dropping euro. You would be buying into a falling market and a falling currency, something which no sane person should ever do.

Never mind all that bad news let’s keep on with the maths.

How much does this apartment really cost? Twelve times €30,000. That comes to the insane sum of €360,000. Excuse me, but I have a three bed apartment in West London. I cant get anywhere near that money if I sell it. What is there in Cyprus to support that kind of price for a one bed apartment? The only people in Cyprus with that kind of money are the time share salesmen and I dont think they’ll be buying.

I cant think of a single good reason why anyone would want to buy into something priced at €360,000 when something similar can be bought for a third of that price, or even considerably less than that. Good grief, for only twice the money you are paying for one month’s usage you could buy something less fancy, but you’d own it outright, and could buy on a mortgage, thus giving you a year round holiday home for the cost of the mortgage interest. (You can work out that bit of math on your own.)

Your final piece of the puzzle is to look at the annual average wage in Cyprus, multiply that by four at the most, add 10%, and then multiply the final figure by 50% and that should give you the highest price you should expect to pay for a two bed apartment in the locality. If you want to know why that’s the way to value a property in a tourist area then you need to buy my booklet on how to value a house. It’s only £9.97. It could well save you over €100,000.

It’s odd, but no-one I’ve met has the slightest idea how to value a house, yet when you know how, it’s dead easy.

Just for the record, the average annual wage in Cyprus is supposed to be about €13,000. I would therefore expect an average local 2 bed apartment to cost no more than €60,000. Anything above that figure is unaffordable at local rates, and will therefore have to eventually drop in price. For a tourist equivalent I would expect to pay no more than €90,000. That means €360,000 is an astronomical price for a one bed apartment. You could buy four normally priced places for that money.

Despite all the above, there are several people I know and respect who claim fractional ownership is a wonderful idea. Okay, I dont agree, but there may well be some good deals out there. I suspect, however, that the deals that are touted by agencies are going to be the ones that are no good. As with all these deals, do the maths. Who knows, one of them may surprise you. If it does, then go for it, but only after some rigorous mathematical questioning.

The same source sent me a deal in Florida. It was considerably better than the Cyprus deal. If I was into that kind of thing I might well have given that a second look.

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