Fractional Real Estate In Costa Rica – Does paying 50-100% more than fair market value make any sense?

We’re seeing more and more fractional real estate being marketed in Costa Rica and to be blunt, I am perplexed.

Supposedly: “Fractional ownership is the fastest growing segment of the real estate industry today. This attractive, and practical form of vacation home ownership, provides virtually all the benefits of real estate ownership, without all of the burdens and responsibilities that go along with whole property ownership.”

The Four Seasons Residence Club explains that: “Fractional ownership gives you the full enjoyment and satisfaction of owning an elegant vacation home — without the high cost of entry and many of the usual responsibilities associated with owning a traditional vacation home. As an owner, you can transfer or sell your interest as you would with real estate ownership. With only 12 interests sold in each villa, each owner at Four Seasons Residence Club Costa Rica has greater flexibility and options when requesting their vacation dates each year…”

As an example for “only US$166,000” you could buy a fraction of a US$2 million luxury condo on the beach. Not too many of us have US$2 million lying around but if a comparable condo of the same size in the same area with the same views can be purchased for US$1 million how does it make financial sense for the buyer?

The whole concept does indeed allow you to buy a luxury condominium for a fraction of it’s market price but for a short time – a very short time – I didn’t quite understand why the overall cost basis has to be about 100% higher than it would be buying 100% of a comparable property…

A home or apartment that is being sold on a fractional basis is not built of different, far more expensive materials so on a square meter/foot basis why should the fractional cost you twice as much?

Simple answer: Because the owners of the real estate and the sales people selling it to you wish to make more money.

According to ‘Fractionalize To Maximize’:”Many owners realize 1.5 to 2 times the Fair Market Value of their home when they sell it in fractions!”

“If you’re a real estate broker, your clients will appreciate being able to explore other avenues of selling, either to maximize profit or offload homes that aren’t moving on the traditional market.”

With fractional real estate, the number of owners depends on what fractions are being purchased, but unlike “timeshares” where you are buying time, with fractionals, you are buying real legal ownership of a property.

“Because each company defines its fractions according to seasonal demand and other factors, pay attention to the number of days, not the fraction. An eighth of the year is 46 days, but at the Ritz-Carlton Club in Jupiter, Fla., an eighth is 35 days.”

Costa Rica Fractional Real Estate Examples:

1. You can download the prices for a Lake Arenal project here where you will see that:

   Casa Sueño is a 2,200 square foot home (204M2) that is on sale for $69,000 for a thirteenth fractional share: $69,000 x 13 = US$897,000 / 204 = US$4,397 per square meter.

   Casa Rio is a 1,800 square foot home (167M2) that is on sale for $49,000 for a thirteenth fractional share: $49,000 x 13 = US$637,000 / 167 = US$3,814 per square meter.

   Casa Amistad is a 1,300 square foot home (120M2) that is on sale for $37,000 for a thirteenth fractional share: $37,000 x 13 = US$481,000 / 120 = US$4,008 per square meter.

2. The Ocotalito Resort & Spa is a fractional resort which offers “36 luxury residences has an ocean view” with floor plans of 2,637.6 (245M2) and 2,337 Sq Ft (217M2) with six week fractions starting at $140,000 to $300,000 so if they sell it based on a 48 week year (we’ll keep four weeks for normal maintenance) that would be 48/6 = 8 fractional ownerships.

   If the minimum six week fractions start at $140,000 (and you know it will cost a lot more than that during the high season) that means the absolute minimum price they would receive for putting this together would be 8 fractionals x $140,000 = US$1,120,000/245 square meters = US$4,571 per square meter.

3. The Villa Teca project by Paradigma offers a 84 square meter home (903 square feet) by the week. Different weeks have different prices which range from a low $8,000 per week to the highest at $25,000 per week around the Christmas period. Now that might sound more reasonable but if you add up all the weeks, you come up with about US$642,000 for a 903 square foot home!

A recent price survey done by the Global Property Guide stated that: “In Costa Rica, one of the most favored locations for American second-home buyers and baby boomers, flats (apartments) in San Jose are relatively cheap at US$1,250 – US$2,440 per sq. m. Properties along Costa Rica’s Pacific coast in the provinces of Puntarenas and Guanacaste are relatively more expensive at US$2,120 – US$2,890 per sq. m.”

So unless we are reading their website incorrectly – and we always welcome clarification on matters – at $7,642 per square meter this mean Paradigma’s project is one of the most expensive pieces of real estate in Costa Rica. One can expect to pay those kinds of prices in Geneva, Switzerland but in Costa Rica?

To put this more into perspective, in December 2007 one of my consulting clients invested in a brand new 208M2 very luxurious penthouse apartment and paid only US$2,050 per square meter so $7,642 for 84M2 seems astro-bloody-nomical to me…

If we were in a fully developed real estate market here in Costa Rica where the real estate inventory was in short supply then the fractional idea could make a little sense to me however, in Costa Rica’s emerging real estate market where we see new developments announced on a weekly basis and new areas rapidly emerging it doesn’t add up in my little brain…

It is understood that the developers themselves must spend more time and money on marketing because instead of one buyer they are selling to multiple buyers but they also pay far bigger commissions to sell fractionals so not only are they getting “1.5 to 2 times the Fair Market Value”, the real estate salespeople are typically making 8-10% on a property that’s twice as expensive than making a mere 5% in sales commissions on a lower prices property.

How To Legally Own Fractional Real Estate in Costa Rica:

On 1st February 2008 I spoke with attorney Rick Philps who is a licensed attorney here in Costa Rica with Petersen & Philps, attorney Philps confirmed that there are normally two ways to own fractional real estate in Costa Rica:

• Through the use of a corporation where you own a certain number of shares in the corporation that owns the real estate which would corresponded to the fraction you own or…
• You can get a legally registered and transferable interest in a titled property, by dividing the registered property title into derechos (rights), each of which can be owned and registered in the name of a separate person, or corporate entity. Each such derecho would equal the fractional interest owned by any particular named party, or corporate entity.

Fractional Real Estate Advantages:

1. You get to own a fraction of a luxury condominium at a fraction of the price.
2. You get to own a more desirable property in a better location than you could have afforded alone.
3. Fractionals are normally fully equipped and fully furnished so you have no headaches furnishing it.
4. Some fractionals even include the use of a vehicle.
5. You get to enjoy any appreciation in the value of that real estate should you decide to sell your fraction.
6. You pay only a fraction of the costs and regular expenses of a home.
7. You would share the expenses of any emergencies that cropped up.
8. A professional property management company would manage the property.
9. The property management company would rent out your property for you.
10. Some fractionals offer the use of a car and a boat and other amenities.

Disadvantages of Fractional Real Estate:

1. You own a fraction of a condominium not the whole property.
2. If you own shares in the corporation that owns the fractional real estate, you could be held partially liable for the actions of the other shareholders in that corporation and there could be many.
3. Are you going to like the appliance and funiture that everyone else likes?
4. Where can you store all your personal, private belongings that make a home your home?
5. If you want to make any changes whatsoever to the decor you will have to get permission from all the other owners.
6. You would be sharing your home and your private space with other people whom you don’t know. Many people do not like letting ‘strangers’ into their home.
7. Other people who may not have the same standards of cleanliness as you. They will sleeping in your bed, touching your stuff and using the same bathroom when you are not there.
8. How professional, reliable and trustworthy is the property management company that would manage the property? Historically this has not been easy to find in Costa Rica.
9. How long would a car survive being shared by dozens of different people each year on roads that are not good?
10. According to CNN: “The fractional industry discourages people from buying fractionals as an investment, which is a good idea, since their performance in the real estate market is less certain than that of traditional properties”
11. At this time, there are no banks in Costa Rica that will offer mortgages for fractional real estate.
12. How easy is it to re-sell your fractional real estate in Costa Rica? How liquid an investment is a fractional real estate in a young, vibrant emerging real estate market?

Different Potential Fractional Real Estate Buyers:

• Real estate investors want to invest their money now with the hope that they will be able to sell at some point in the future for a profit – But how does a sophisticated real estate investor justify an investment in something that can be bought for half the price next door?
• There are real estate buyers that buy now with a view to retiring in Costa Rica in the future but will they only want to retire here for a month each year?
• There are younger buyers that believe that they will only ever spend a short time here every year? This makes up a small percentage of buyers but how do we know how our lives will change? And …

There may be some exceptional fractional real estate deals available in Costa Rica, it’s early days yet, we certainly cannot say we have investigated all of them in detail and there are other opinions about fractional real estate in Jaco on this site.

What’s The Verdict? And this is my personal opinion only… If you are planning on making a real estate investment in Costa Rica, instead of buying a fractional where you are typically paying “1.5 to 2 times the Fair Market Value” for the property, why not use the same money as a deposit to buy 100% of a property with the help of mortgage financing?

Then, whenever you want, you have the freedom to do whatever you want with your property.

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Written by Scott Oliver, author of How To Buy Costa Rica Real Estate Without Losing Your Camisa and Costa Rica’s Guide To Making Money Offshore.