Pacaso, which is a relatively new (2020) co-ownership vacation home company, has been making the rounds online lately. That’s because the founders are accomplished, they’ve reserved their Nasdaq ticker, and they’re raising money from retail investors through their website.
Fractional ownership is a topic we’ve discussed a number of times on the blog. And as I’ve said before, I think it’s an answer to this real estate problem: “I have a desire to own a home, or multiple homes, around the world. However, I don’t know how often I’d actually use it/them, and this desire is both expensive and a pain in the ass.”
So it’s not surprising that the market invented timeshares, membership clubs, and fractional ownership models. Timeshares, however, have a bad rap and generally don’t involve the direct ownership of real estate. Instead, what you’re buying is the right to use a property during a certain period of time.
Fractional ownership, on the other hand, typically does involve direct ownership of the asset. In the case of Pacaso, my understanding is that each property is acquired through a single-purpose entity (usually a US LLC). Buyers then acquire a membership interest in that SPE.
This is obviously better. It’s how most real estate projects are structured legally. But there remain a number of important questions about this model: Are fractional shares in a vacation home liquid? How big is the market? And should owners expect appreciation over time?
I haven’t seen great data on this ownership model. There are lots of fractional opportunities and, in theory, a 100% sale of the home could always be offered — which should appreciate like any other property in the market. But selling fractional shares is always going to be less liquid and more challenging.
Maybe that’s okay. Maybe it’s best to think of it more like a consumer good than a real estate investment. But then, why not just spend your money on hotels when you vacation?
This could be my developer GP bias at work — where I’d rather not own an asset with a bunch of strangers and have no control — but I have a hard time getting my head around the fractional ownership model. I think it serves a very clear desire in the market. But is it a good business, and is it the optimal way to buy a vacation home?
Note: None of this is financial advice.
