The current market provides a rare combination of circumstances that create a potential profit opportunity for developers and astute investors in the vacation home market.

By reason of the current economic climate, developers are able to purchase single-family residences at favorable prices and on favorable terms. They then can fractionalize and sell these residences, thus realizing increased sales revenues.

Developers and vacation home owners who wish to sell currently face significant challenges. These sellers have endured months and sometimes years of low offers or no offers at all. Understandably, prices have declined.

This creates an opportunity to buy properties at favorable prices and terms from homeowners and developers and from homeowners willing to sell a portion of their property and retain one or more fractional interests for their own personal use.

Favorable terms to be negotiated may include: seller financing; extended escrow periods; obtaining marketing and sales control prior to closing; and, in some cases, obviating down payment requirements.

Fractionals offer potential for greater profit from a particular property than would otherwise be realized if it were sold as whole ownership. This is due to the growing public acceptance of fractional vacation home ownership. This is reflected by the rapid growth of the industry segment and the fact that fractionals have outperformed other segments of the vacation real estate market, even in times of economic downturn

Since the inception of fractionals and the more luxurious Private Residence Club (PRC) offerings in the early and mid-nineties, the industry has grown to $2 billion in 2007 sales and to $1.5 billion in 2008 sales.

According to Ragatz Associates (Ragatz), a leading industry feasibility analyst, existing fractional and PRC owners represent only about one and a half percent of income-qualified households. Significant further expansion of the industry can therefore be anticipated.

Vacationers respond favorably to fractional vacation home ownership because they believe there is little reason to pay one hundred percent of the cost of a vacation home used only a fraction of the year.

Vacation home industry experience is that revenues from vacation homes sold as fractionals generate one and a half to two times the proceeds of the home were it sold as whole ownership. The following examples illustrate why fractional sales can generate additional revenues.

• Whole ownership price $5,000,000
• Fractional revenues at a projected fractional multiplier of 1.5 $7,500,000
• Average price of a 1/10 fractional $750,000 or 15% of whole ownership

• Whole ownership price $5,000,000
• Fractional revenues at a projected fractional multiplier of l.75 $8,750,000
• Average price of a 1/10 fractional $875,000 or 17.5% of whole ownership cost

• Whole ownership price $5,000,000
• Fractional revenues at a projected fractional multiplier of 2.0 $10,000,000
• Average price of a 1/10 fractional $1,000,000 or 20% of whole ownership cost

The lower price point of fractionals widens the pool of potential owners. Stated simply, there are far more potential purchasers willing and able to invest $750,000 in their vacation property than there are potential purchasers willing and able to invest $5 million in their vacation property.

Many industry professionals believe that fractionals are the strongest segment of the vacation home ownership industry and will be the first to recover when the economy inevitably turns around. Today's buyers realize that actual vacation home use is rarely more than a few weeks a year. For these buyers, fractional ownership makes good sense. This recognition is borne out by fractional sales statistics in 2007 and 2008.

Ragatz has reported that 2007 Fractional and PRC sales increased 12.4% in sales volume and 8%n the average price per fraction over 2006. Another industry analyst, NorthCourse Leisure Real Estate Solutions, reported that 2007 fractional sales in the U.S., Canada and the Caribbean increased 20% over sales in 2006.

This is notably better than the performance of whole ownership real estate in 2007. The National Association of Realtors reported that sales of vacation homes in 2007 fell approximately 31% from 2006.

Fractional sales did experience some decline in 2008. However, Ragatz reports that:

• North American fractional and PRC industry sales reached $1.52 billion in 2008.
• While this represented a drop of approximately 30% from 2007 sales, in contrast, sales of wholly owned second or vacation homes dropped by about 40%
• Moreover, the luxury fractional segment, PRCs, dropped only 24%

Another industry professional, Sherman D. Potvin, founder of the recognized website, Luxury Fractional Guide, has commented :

"Even in the economic downturn of 2008, the fractional market was still the fastest growing real estate product."

"Despite the economy, fractional real estate is steadily selling, and... [though it] might not be selling as quickly...people are still buying."

"Over the next year, we are going to see a substantial growth in the fractional industry. The good news is that people are not going to give up their lifestyle. They are still going to vacation in nice places. Because of the current economy, many of those people who would have otherwise purchased a wholly owned vacation home will turn to the alternative vacation home market and fractional real estate will be there waiting."

Though relatively simple in concept and potentially very profitable, implementing an offering of fractionalized vacation real estate is not for the uninitiated. A wide variety of skill sets is required for a successful development.

Prior to embarking on this endeavor, one needs to consult, as needed, with legal and financial advisers. Potential acquisition properties need to be identified. These properties must have prime locations in prime resorts. Zoning ordinances must be checked to see if fractional ownership is permitted. Financing sources need to be found and sometimes educated in fractionals.

The developer's business plan needs to set forth the rate or return of, as well as return on, the investment. It should also include cash flow pro formas for best, worst and likely cases. Favorable acquisition price and terms must be negotiated. Backup properties should be identified, if needed.

Properties need to be carefully inspected and any necessary repairs or improvements made. Furniture, furnishings and technology need to be complete and up to date.

Purchaser mortgage financing is currently very limited and may pose a challenge. A highly effective and experienced marketing and sales team needs to be assembled. Property management and concierge or reception services must be in place. A fair, computerized reservation system needs to be installed. Automated bookkeeping and auditing procedures need to be instituted. Ownership and other legal documents have to be drawn up.

In other words, do not attempt this alone.

Now is a good time for commencing the process of offering fractionalized vacation homes. As the economy recovers, it can be anticipated that this increasingly popular form of vacation home ownership will once again experience significant growth and will be the first market segment to rebound.

As the market turns around, there will be pent up demand from people who have delayed their vacation purchases due to economic uncertainties. Developers who are prepared to offer what vacation home owners want will be in an excellent position to profit from the resurging demand for fractional vacation home ownership.