The New Tahoe Trend: Shared Ownership Vacation Homes
By now you’ve probably heard about it from a friend or neighbor, or seen it in the paper. Increasingly, people are talking about buying into a shared ownership vacation home at Lake Tahoe or other mountain and waterfront vacation communities.
These are not the timeshares in low-budget developments of the past. Here in Tahoe fully-managed shared ownership luxury packages are being offered by Old Greenwood, Northstar’s new village, and Tonapalo; and shared ownership deals in private residences are being offered as well in both single homes and in residence club formats. There is even a recently founded real estate brokerage (DreamSlice International) focused entirely on the shared ownership opportunities. The number of shares can range from 2 to 17, and owner changeover can be seasonal, weekly, or by reservation. Since the local board of realtors began tracking shared ownership sales in mid 2003, 80% of these deals have occurred in condominium type developments such as Sweetbriar, Northstar Village and Tonopalo. Private single- family residences account for 20% of the shared ownership market. The market share of shared ownership has crept up steadily since then, so that it now accounts for about 5% of total transactions.
What is the reason for all this new interest? And how might it affect Tahoe locals, vacationers, and resort area investors?
Right now the answers to these questions are a bit nebulous. One reason for the new interest is clearly that the rising cost of purchasing and maintaining a second home in Tahoe has forced some people to think about more economical options. Another is the increasing awareness amongst vacation homeowners of how seldom they actually use their properties. For instance, recent research indicated that average vacation homeowners only use those homes 17-20 days per year.
Meanwhile, interest in investing in Tahoe real estate is still high. Record high summer temperatures in the inland valleys and deserts have flushed a bumper crop of eager investors seeking the relatively cool mountain temperatures. Recently released statistics showed that appreciation rates in Tahoe continued to far outpace the national and statewide averages last year as they have for the past several years. And though there is a real estate slowdown in California generally, the experts seem to agree that Tahoe’s recent price increases reflect a catching up of the North Tahoe market to its feeder areas rather than an inflating bubble market in need of a correction.
As far as the effects this emerging market will have on those of us that love Tahoe and are either locals or vacation here, there may be a mixture of results.
For those Tahoe residents who do not own a home, an increase in co-ownership of homes may make entry into the housing market more difficult because it may prevent prices from deflating as much as they otherwise would in a soft market. While the data available is limited, it does indicate that some sellers of luxuriously furnished fractional properties have recouped double the price per square foot than an individually sold unfurnished home. Additionally there is the outside chance that the available inventory of non-fractionalized homes will decrease significantly if the trend continues to grow for many years. There is agreement among real estate pundits that the aging baby boomers will increase the demand for both traditional and creative vacation home opportunities. However, in the unlikely event that the total number of vacation home buyers were to remain static, shared ownership might have the effect of concentrating vacation home buyers in fewer units, thus increasing the inventory of affordable homes for full-time residents in resort communities.
For current Tahoe homeowners or potential vacation home buyers, the new emergence of a shared ownership buyers’ market may actually prove to be a beneficial trend in many ways.
- Many local owners have been so tempted recently by the increase in value of their homes that they have decided to take a profit by selling and moving to Reno or other less expensive areas. These people may not only find a new way to sell their home (in shares which shifts the price point to the part of the market that is in highest demand), but additionally they would have the option of retaining a small share of their current home for their own continued use and investment appreciation.
- Shared vacation homes are used more often. Many Tahoe business owners, seasonal employees and local residents have already noticed that the slow “shoulder seasons” in the spring and fall are growing shorter. Increased shared ownership will put even more vacationers in Tahoe during the traditionally slow times of year, without increasing the peak season population.
- Shared ownership allows vacationers, who might otherwise rent, to pay their vacation dollars towards an investment, complete with appreciation and tax benefits.
- Most shared ownership properties with more than two owners are managed professionally. Shared ownership situations will increase demand for comprehensive estate management services and provide more steady employment opportunities.
- Long – time vacation homeowners who are cash poor but equity rich may sell a share of their home to fund maintenance, upgrades and modernization which are long overdue in much of Tahoe’s vacation home inventory.
- Other local owners have 2nd and 3rd properties in Tahoe as investments that have also greatly appreciated in value. These owners may wish to invest in other communities thus diversifying their real estate portfolios and vacation options. Shared ownership can be used as the vehicle to protect themselves from potential market slowdowns or corrections without completely disinvesting: they can keep a share of their Tahoe homes while selling other shares to fund investments elsewhere.
- Vacation homeowners who have purchased recently may find a shared ownership sale to be an opportunity to reduce their debt load and other carrying costs in a property while retaining enough use and control to have it still feel like a personal vacation home.
- Long-time vacation homeowners who have seen decreased use of their properties over time and who have been contemplating selling may see selling a share and keeping a share as a perfect compromise allowing them to avoid parting with a long-cherished family retreat.
- A change in tax laws regarding 1031 exchanges allows shared ownership properties to qualify. Shared ownership properties create more tax-deferred rollover options, especially at the lower end of the market.
These are only a few reasons why the emerging trend of shared ownership of real estate is creating such a buzz. As with any new trend, there are potential downsides, as well as other benefits, that could come into play. The complexities in partial share purchase transactions make it unlikely to be a market that need be feared as an emerging giant.
For instance, most shared ownership transactions rely on additional legal agreements such as sharing agreements and management contracts. It is imperative that both buyers and sellers seek professional legal counsel to ensure that these agreements suit their best interests. Additionally, many shared ownership deals take time and money to put together properly since they are highly regulated under subdivision, timeshare, and securities laws.
Another hurdle for the non-cash and non-owner-financed buyer are loans. While more lenders are jumping into this emerging market, currently there are only a handful of local lenders willing to make loans on fractional property purchases. As more lenders embrace shared ownership loans, the interest rates are likely to become more competitive.
The effects of the emerging market interest in shared ownership of Tahoe properties in all likelihood will not be fully understood for some time to come. Since many trends start in California and spread throughout the country, the savvy real estate investors as well as local Tahoe homeowners may want to keep their eyes and ears open for developments in this rapidly evolving sub-section of the real estate market.
(Jeff Cutler is an attorney and realtor in North Lake Tahoe. He is the founder of the DreamSlice International real estate brokerage and the DreamSlice.com website.)
