Second Homes: Full vs. Partial Ownership

It's common to think of acquiring a second home as a full owner. In its purest form, full ownership of a second home means only one person's name on the title and the mortgage. However, it is not unusual for couples to have both names on the home's legal documents and still consider it a full ownership situation.
 
Nevertheless, there are also types of partial ownership where more than one person has rights to the real estate asset.
 
"Partial" or "multiple" ownership means more than one person owns a home together. These people could be siblings, parents and their children, other family members, friends, business partners, and even people who have no relationship to each other except as co-owners.
 
Partial ownership arrangements often arise when individuals cannot afford a second home independently. While a co-ownership deal might help you achieve an otherwise unreachable goal, it is usually more complex than full ownership.
 
There are three primary ways second home partial ownership can be handled:

• Joint Tenancy
• Tenancy in Common
• Fractional Ownership

Joint Tenancy

In joint tenancy, ownership shares are divided equally, no matter how much each owner has invested. As a result, owners are equally entitled to enjoy the property's benefits. Still, they are equally responsible for mortgage payments and property taxes. If an owner fails to pay, the others must fill in the gap.
 
One distinctive feature of joint tenancy is that shares cannot be inherited upon an owner's death. Instead, those shares are divided equally among the other owners. However, an owner can sell their interest in the property without approval by the others.
 
Finally, all owners must agree if the property is to be sold. If an owner disagrees, the other can offer to buy that owner's shares, or the dissenting owner can buy the other owners' shares. If neither option is available, the owners who want to sell can seek a court order to force the sale. However, they need to convince the court that there is a good reason for selling.

Tenancy in Common

Under tenancy in common, shares in the property are divided according to how much each owner has invested. Even so, each owner has full rights to use the property. In addition, unlike joint tenancy, tenancy in common allows shares to be inherited, and sales of shares must be approved by the other owners.
 
When the home is sold, all parties must agree to do so, and proceeds are divided based on what percent of the purchase price each owner paid.

Fractional Ownership

Fractional ownership (FO) is an emerging partial ownership model. Sometimes the term is used to describe more conventional partial ownership arrangements where multiple individuals own a property together.
 
However, companies like Pacaso and SecondShare have packaged and popularized the concept. These organizations purchase properties, create an LLC, and sell shares. Buying one or more shares means the purchaser owns a percentage of the real estate asset and is entitled to use the property annually for a time equivalent to that percentage. So, for example, owning one-sixth of the property gives that owner the right to stay for sixty days per year.
 
Sometimes fractional ownership is mistakenly thought to be another form of a timeshare. The defining difference is an FO property is collectively owned by its shareholders. The shares can be bought and sold as real estate assets. Buying a timeshare only entitles the purchaser to a prescribed time to stay at the property. 

Click here to learn more about the pros and cons of fractional ownership! 

Pros and Cons of Partial Ownership

Like full ownership, partial ownership has its pluses and minuses. 

Advantages of Partial Ownership

The advantages are:

Affordability

By pooling their resources, multiple owners can purchase a bigger and better property than each individual could ever afford. Also, maintenance and other ongoing costs are shared by the owners.

Ownership of a Real Estate Asset

Whether fully or partially owned, buyers have title to a valuable asset that can be bought and sold.

Efficient Utilization

By definition, a fully owned second home must be either vacant or rented out when the owner lives in the main home. In contrast, a partial ownership arrangement can be managed to minimize the amount of time the property remains unused. Also, partial owners can adjust the amount of their investment to line up with the amount of time they plan to use it. For example, a partial owner who only wants to stay in a second home for three months annually would purchase a 25% stake in the property.

Disadvantages of Partial Ownership 

While these advantages are compelling, there are significant disadvantages to partial ownership:

Legal Complexities

The legal setup for partial ownership can be complicated. Is Joint Tenancy or Tenancy in Common better? The ownership group needs to retain an experienced attorney to advise on and implement the most appropriate legal structure.

Mortgage Issues

Lenders commonly finance multiple ownership arrangements. However, as the number of owners increases for a property, the number of lenders willing to enter into complicated mortgage deals decreases. It can be even more difficult if an individual partial owner tries to find a standalone mortgage just for their share.

Multiple Owner Management

Managing the property can be complicated and time-consuming. Owners must cooperate in decision-making on everything from finances to rules governing use of the second home. The owners must agree on governing principles at the time of purchase. In addition, hiring a reputable property management company will considerably reduce the headaches for the owners.  

Allocating Time

While each owner is entitled to a set amount of time at the property, scheduling that time can be complicated. The simplest scenario is when each owner has the same weeks every year. Yet, some people considering partial ownership might find this too inflexible. However, more flexibility in scheduling can lead to conflicts between owners competing for the same dates. Therefore, agreeing at the outset on a scheduling protocol is essential. In this regard, automated solutions can greatly alleviate problems.

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Related Content: 

• Should I Invest in a Second Home?
• What Are the Different Types of Second Homes?
• Second Homes: Buy or Rent?
• Second Homes: What Is Fractional Ownership?
• Is a Second Home a Good Investment or Income Opportunity?
• What Does a Second Home Really Cost?

Looking for other related content? Check out our Housing Resources page!