By Penny Doherty
It seemed like a good idea at the time. The ranch-style home near the Vermont ski area of Mt. Snow would double as an investment and a family-gathering place. The house had the obligatory wood stove, three bedrooms, one-and-a-half baths and an unfinished basement for storage or renovation.
So in 1988, Ellen Feldman and her husband decided to buy the house with her sister and brother-in-law. Ms. Feldman's parents, who weren't skiers but liked the idea of an investment their family could enjoy, also contributed to the purchase.
But within a few years, it was clear their agendas conflicted. Ms. Feldman and her husband wanted to use the home as a family getaway, supplementing mortgage payments with the occasional rental to vacationers. Her sister and brother-in-law wanted to make renting out the house a higher priority to achieve positive cash flow. Meanwhile, Ms. Feldman's parents hoped the property could be sold quickly for a profit.
After four years of tension, Ms. Feldman and her husband bought out the rest of the family. Everyone is still talking, but the conflict taught her fundamental lessons about owning a second home: Buyers, she says, should clearly understand whether the goal is a retreat, a vacation spot or an investment.
Retreat, Investment or Both?
The conflicting ideas about the role of a second home in Ms. Feldman's family reflect the shifting reasons why Americans are flocking to buy such properties. And buyers are definitely flocking to them.
Second homes make up seven million, or 9%, of the nation's 75 million homes, according to a 2002 study from the National Association of Realtors. "We think 2003 was a record year," says Walt Molony, NAR spokesman. "Second-home purchases now account for 5% to 6% of all transactions." Most buyers go into the purchase viewing the home as a family retreat -- and possibly a place that can be passed from one generation to the next. But increasingly, purchasers regard second homes as an investment -- 37% of buyers in 2002, up from 20% in 1999.
'Fractional Ownership'
For those interested in a second home, other purchase options exist besides outright ownership or sharing with family and friends. Companies offering "fractional ownership" in vacation getaways model their transactions on the time-share industry. In some markets, developers and savvy real-estate buyers are partnering on second-home purchases with strangers rather than family, creating "co-op" vacation homes where partners share the title to one property.
Alan Heoney, a partner at Prudential California Realty in the Lake Tahoe area, has sold second homes for 25 years. He's seen families jointly invest in the homes -- only to experience conflicts similar to the Feldman family's. "We run into problems with sellers because we'll see a home owned by three siblings -- and two want to sell, but one doesn't," he says.
With second-home prices rising in the Lake Tahoe area, some developers or property owners are creating "boutique fractional ownership" in single properties -- a form of time-sharing sold by some real-estate agents. "This is for people who want to live a wealthy lifestyle, but within their means," Mr. Heoney says. "It's been a niche part of the marketplace."
Buyers in this model typically hire a property manager who assigns them visiting time and oversees maintenance. The arrangement works best, he says, for people who want to have more ownership of their vacation space but know that they'll use it less than 30 to 60 days per year.
A key difference between time shares and fractional-ownership arrangements is that time shares are typically sold directly by developers or vacation-marketing companies, whereas a second-home purchase is a real-estate transaction, says Howard Glassroth, a spokesman for the American Resort Development Association (ARDA), an industry group based in Washington, D.C.
For the very wealthy, resort "clubs" offer another twist on time-share arrangements. Exclusive Resorts, a year-old company that charges members $350,000 to join, caters to high-net-worth families -- with a typical net worth of $5 million -- and charges annual dues starting at $16,000. The company builds high-end properties -- usually at $2.5 million and outfitted with luxurious amenities and entertainment systems -- but maintains 50% vacancy so club members don't have the problems that can plague some time-share members when scheduling their stays.
Mr. Glassroth says in general time-share buyers should think about their purchase the way they think about an automobile that depreciates: "You buy it to use it," he says. "The benefit is that you don't have to worry about what happens when you're not there."
ARDA reports that the average cost to join a time-share organization is $14,500, plus an average fee of $385 for each week of use. Eva Rosenberg, a certified public accountant in Southern California, says that with fees this high, buyers could afford to purchase a home outright, while receiving the benefit of tax deductions and total access. However, a second home entails more work and responsibility for owners.
"It's important to look at the reality of your own time usage," she says, noting that people considering buying second homes versus time shares should write down their average annual vacation spending -- and habits -- then see which model best fits their plans. Others may choose second homes in middle age with an eye toward using the property as a retirement home -- often paid off in full -- later in life.
Hilary Becker, a 43-year-old Long Island real-estate executive with a wife and four children, says his family plans to buy a second home in the near future -- preferably on a lake. Time shares, for his family, are out of the question. "I've never heard anyone say, 'Gee, my time share just went up,' " he says. "If I buy a home on a lake in the Berkshires, [its value is] going to go up over time."
He wants a home less than three hours away -- but not too close, or it won't seem like a vacation retreat. He also wants a home in a market where buyers have an appetite for homes -- a factor that reduces his risk should the family need to dispose of the property relatively quickly.
Rethinking Family-and-Friends Ownership
Of course, the reason for buying a second property can change over time. After Ms. Feldman and her husband bought out their relatives in the Mt. Snow property, they began to view it more as an investment. They even bought a second Vermont property -- a condo near the Okemo Mountain Resort ski area -- and are managing it solely as an investment, using it only when they can't book renters.
Ms. Feldman says her sister-in-law has even asked about sharing property with the couple again in the near future. At times, they don't always cover their ownership costs but are pleased overall with the investment experience. "Some years it's just going to cost you money," she says. "But there are a lot more buyers than sellers in Vermont [resort areas] for now."
