Understanding The Legal Side Of Fractional Ownership Of Real Estate
Posted on: 23 March 2020
Share
Purchasing a property carries with it a number of pitfalls, not the least of which are acquisition and maintenance costs. One way to address these concerns is to pursue fractional ownership. As the term suggests, this means that you would end up owning a portion of the piece of real estate rather than the whole enchilada.
Setting up such an arrangement can get pretty involved, and you'll probably be interested in real estate attorney services while you deal with the situation. Let's take a look at 4 issues folks considering fractional ownership should keep in mind.
Apportioning Responsibilities
It's easy to assume an honor system will do the job when it comes to dealing with problems like who'll pay to have the lawn mowed or the pipes repaired. Even if everything is going along swimmingly, though, conditions change. Someone might sell their stake or pass away. A new party can come into the equation, and a perfectly functional unspoken agreement on maintenance can collapse. Talk with a real estate attorney about including maintenance in the ownership contract.
Structure
With a contract on the table, there's a pretty good argument that you and the other owners should consider a more formal structure for the fractional setup you'll be using. This may include setting up a trust or some form of LLC. There are also potential tax-advantages configurations worth considering, such as a Delaware Statutory Trust, a financial vehicle designed to roll proceeds from the sale of one property into the purchase of another without incurring significant taxes.
Decision-Making
At this point, though, there have to be trustees or officers appointed. That means someone is going to have to have the final say. Some folks prefer to set things up with voting shares. This allows everyone to maintain a say at all times. If someone in the group is especially financially savvy and trustworthy, though, it may be better to transfer the bulk of decision-making to them. It's wise, however, to assign fiduciary responsibilities to this individual in order to hold them liable if they violate this trust.
Tenants
It's not uncommon for fractionally owned properties to be used as rentals. Someone should be assigned the job of screening and meeting tenants. If none of the owners live in the area, you may want to hire a property manager. Likewise, you should ask a real estate attorney to help you draw up a rental agreement.