Arguably the most valuable service provided by any reputable real estate consultant is the ability to prevent costly mistakes for their clients.  Not only does this apply to the fractional consulting industry, it’s magnified.  Our industry is still relatively young compared to its predecessor, the timeshare, and the majority of real estate developers have yet to embark on the development, sales and marketing of any type of fractional ownership real estate.

If I had a nickel for the number of times I’ve heard this: “We’re going to sell this project out through the local real estate community”, I could retire and buy fractional interests around the world!  This brings me to the list of most common mistakes made by new fractional real estate directors.

Mistake #10:  “We’re going to go with Super Duper Advertising Company because they have sold more than $10 Billion in luxury real estate.”

Not so fast.  It might sound logical at first, but selling out a project in 2004 was about as difficult as selling a cheeseburger at McDonalds.  Look for companies that have had some traction this year - yes they do exist.  The ability to defy the odds and sell real estate today indicates that the advertising company has the ability to adapt to different markets and reach out to buyers no matter how difficult.  This quality is very valuable so pursue these companies even if they have never heard of fractional ownership.  The fractional expertise is what you have Pierce Group for!

Mistake #9:  “It didn’t sell wholly so it will sell fractionally.”

Not Really.  Is there a chance that your stalled condo project could sell fractionally?  Of course.  Is it a lock?  Absolutely not.  Often times a traditional real estate development won’t sell because of traditional issues, or traditional errors.  If the project is a mile and a half from the beach and all you have is a tennis court then it probably won’t sell fractionally.  Before you convert it, seek out an expert opinion.

Mistake #8:  “We’ve set aside the traditional 5% for sales and marketing.”

Wrong.  A fractional real estate sale is a different animal.  No longer are we selling marble countertops and hand-crafted cabinetry.  This is a lifestyle message that requires more explanation around the effortless experience and practicality of ownership.  When was the last time you saw the explanation of a reservation system on the web site of a typical whole ownership gated community?  Your costs will be significantly higher for more advanced brochures and web content.  Additionally, more outreach is required.  The MLS (in most cases) won’t even bring 5% of your sales.  The real estate community won’t be your answer either - reference Mistake #2 - so a full on-site sales team is needed and there are plenty of extra costs associated with that.  Don’t worry developers; the difference will be made up in higher sales revenues.  We’ll leave that for a different article.

Mistake #7:  “We’ve decided to leave out the exchange program; it sounds too much like a timeshare.”

Incorrect.  The key difference between timeshare exchange and fractional exchange is that timeshare buyers more often make their purchase decision based on the exchange component.  The reverse is true for fractional buyers - they purchase because they love the location - the exchange is simply a bonus.  Your sales team understands this and never leads a conversation with an explanation of the exchange benefit.  The exchange affiliation is a tool that can add credibility to your project and help get your prospects over the goal line.

Mistake #6:  ”One sales team will be responsible for selling all of our residential products.”

Don’t do it.  One team should sell your fractional product; another should sell your whole ownership product and so on.  Each team should be masters of their own product and be able to handle product specific objections.  A little competition is healthy.  Of course, gun slinging and infighting among sales teams doesn’t do any good so set the ground rules from the start, put together a good internal referral program and it shouldn’t be an issue.

Mistake #5:  ”We are hiring local real estate agents to run the sales office.”

Not so fast.  While some local real estate agents might be well qualified, many are not - I’ve seen both.  The fractional sales position requires skills like… listening.  This is not an easy skill to learn and many sales people will simply never be able to grasp this concept.  Vomiting features and benefits all over prospective fractional buyers is as effective as a two for one special at a super-yacht dealer.  Reach out of the box when hiring your sales team and don’t concern yourself so much with whether or not the candidate has a real estate license.

Mistake #4:  ”We have rock solid legal documents that protect us no matter what!”

Go easy here.  Typically, legal documents are written by attorneys hired by you, the developer.  So it is your attorney’s job to protect you, their client.  This is completely understandable but at the same time it is to your advantage to make sure the documents are sales friendly - i.e. free of sales land mines.  In the case of fractional sales, the documents are lengthy and include things like Public Offering Statements and references to timeshare.  Our industry still falls under timeshare regulation; actually a good thing for the buyer but can look scary nonetheless.  Buyers will have their own attorney’s, accountants and/or financial advisors look through them.  So get those sales land mines out of there by having your trusty fractional consultant review them.

Mistake #3:  ”We already know our ratio is 8:1 and what our price will be, we don’t need a feasibility study.”

Never skip the feasibility.  Why did you choose 8:1 and not 6:1 or 10:1?  What criteria did you use in setting your price?  There are reasons why we come up with the appropriate owner to residence ratio as well as the reservation system.  These reasons come out of research performed during valuable feasibility studies.  Remember, a project cannot be sold by even the most skilled sales people if the product is structured incorrectly or priced incorrectly.  Spend a few bucks up front to ensure that you are starting off on the right foot; it will save you oodles in the long run.  We like to say it this way: “Foresight Costs Less Than Hindsight^SM“

Mistake #2:  “We’re going to sell this project out through the local real estate community.”

No you’re not.  Don’t confuse this with Mistake #5; here we are referring to spending very little on traditional marketing avenues and re-directing those resources towards educating the local real estate community to sell for us.  Sounds decent in theory but never works.  To go this route assumes that the real estate community is willing to spend their valuable time and energy learning a new product with a sale price equivalent to a “fraction” of a traditional whole ownership sale.  Commissions are lower so an agent’s interest and excitement is usually lower as well.  This is not to say that there are not local agents that will understand the product and embrace the opportunity to offer a practical alternative to their trusted client list.  It is simply not a strategy that can be used to sell an entire project.

Mistake #1:  “We’ve read this article, bought a couple fractional books and have now gathered all of the information we need.  We no longer need a professional consultant.”

Not so fast.  First of all, we have just scraped the surface in this article.  You will be faced with hundreds of decisions that can prove costly if not handled correctly.  The majority of what you will face throughout the project development, sales and marketing lifecycles cannot be found on the internet.  Second, selling this product requires extensive training, followed by more training and then additional reinforcement training.  Explaining the fractional concept to buyers is an art and must be done at the right pace as to not confuse them and send them away without completely understanding what you have to offer.  See To Vomit or Not to Vomit.  Third,   every project is different and you should not be expected to understand the intricacies of how each reservation system is designed and why.  Stick with what you do best, find attractive properties and put together the right team that can work interdependently to create something special.

In summary, eliminate mistakes and save money by reducing costly expenses associated with errors that could have been prevented at the start.  Fractional ownership is not only a practical decision for your buyers but for you as well.  Learn it, love it, embrace it; do it right the first time and watch your profits grow!

More information here:  Pierce Group Feasibility Study and Pierce Group Project Development Services

Some intriguing numbers…

Let’s take a look at how the Shared (Fractional) Ownership industry compares to the Whole Ownership industry today and in 2004. We know that both industries grew during 2005 and 2006, started to decline in 2007 and experienced a virtual stand still towards the end of 2008.  However, what we see here is that Shared is holding its own and has actually gained a percentage point in market share from Whole.

Shared Ownership                    Whole Ownership

2004     $1.54 B                                     $165.7 B

2008     $1.52 B                                     $76.8 B

%              -1.3%                                        -53.7%

*Shared Ownership numbers from Ragatz & Associates and includes Fractional, Private Residence Club and Destination Club sales.

**Whole Ownership numbers from National Association of Realtors® annual Investment and Vacation Home Buyers Survey

While the fractional ownership industry has been getting a lot of press lately and many believe (as do we) that it will lead in bringing back the resort real estate market, resort developers should keep in mind that there is still room for whole ownership.  And while whole ownership sales levels are expected to remain lower than in years past, it still has a place.

Let’s review the most common objections that fractional sales teams hear:

1. I’m looking for my own place
2. I don’t like to share
3. We want to be able to come for several months
4. We want to be able to send anybody we want
5. We want to be able to rent out to cover some of our costs

For those prospective buyers that continue to harp on these needs and insist that fractional ownership is not for them, why not have offer something else?  Many developers are either purpose-building or converting 100% of their units to sell fractionally and therefore risk losing prospective buyers to whole ownership competition.

There are several safeguards that must be in place to pull off a multi-use residential sales plan so let’s review them here.

1. One sales team for each product offering - no exceptions
2. Separate the residences - Physically and legally
   • A whole ownership buyer will not be paying fractional dues multiplied by 8 - two separate HOA’s will be needed
   • By no means should the opposing sales teams be selling the same product.  This gets ugly… very ugly, no exceptions here either.
3. Cost per night must make sense - The price points should be structured so that fractional ownership on a cost per night basis is still a better alternative than whole ownership with rental revenue.
4. Structure the legal documents - allow for flexibility in the contracts for altering the product (residence) mix if need be.
5. Create a strong referral program - a little competition between sales teams isn’t bad, as long as it’s a little.  An internal referral fee between sales teams is a good idea.

If the fractional and whole ownership products are structured properly, there are benefits to multi-use residential sales.

1. Fewer contracts to sign - if a project has 20 residences and they are all sold at 8:1 then there are 160 contracts that need to be signed.  If 10 of those however are sold wholly, then only 90 contracts would need to be signed.
2. Faster sell out - in the example above, the sales teams have 44% less sales to make which should translate to a sell out period that is at least 44% shorter.
3. Lower carrying costs - Real Estate 101, sell faster and watch expenses disappear.
4. Higher closing percentage - it only seems logical that if a buyer is firing away with those common objections they will likely go to nearby whole ownership competition.  Be that competition.
5. Larger target audience - Let’s face it there are those who choose not to buy fractionally.  In their minds they have earned the right to have a home sit vacant for 11 months every year.  Provide something for them as well.

Of course, proceed with caution when putting together co-existing fractional and whole ownership programs.  Common mistakes can be made up front that can extend the sales cycle thus shooting expenses into orbit.

The Bottom line:  the market will recover, be ready.

The first step in being ready is a proper feasibility analysis.  Discover Pierce Group’s comprehensive and affordable feasibility study here.

FORESIGHT COSTS LESS THAN HINDSIGHT^SM

I recently wrote a pretty in depth article on our Feasibility Analysis for FractionalReport.com.  I cleverly called it: “The Fractional Feasibility Study - What Is It and Why Is It Important?

Here is the start…

A feasibility study is an extensive and detailed review of all aspects related to the development and financial feasibility of a fractional project.  All facets of the project are weighed, analyzed and provided in an easy to understand format for developers, owners, lenders or private equity investors.

It’s pretty safe to say that the reduction of costly expenses and the realization of stronger profits is the ultimate goal of any real estate developer.  So what is the number one killer of the ultimate goal?  Mistakes.  Based on this logic, the top priority for real estate developers should be the elimination of as many mistakes as possible.

Of course, not all mistakes are preventable.  Some things just happen that no one can predict; take credit swaps and sub-prime lending for example.  Those mistakes were made by others and were completely out of our control.

That being said many mistakes are of our own doing and can be prevented with up front planning, i.e. foresight.  In the fractional real estate business, foresight is a bit more complex, as most land owners and developers simply are not familiar with what it takes to properly structure, market and sell a Private Residence Club (PRC).  While their goals of minimizing mistakes are the same, the importance of mistake-minimizing tools is much greater.

Here I will provide a more detailed review of a crucial mistake-minimizing tool:  the fractional feasibility study.  I will review the logistics involved and list some of the important elements included in the study.

Get the rest of the article here:

http://www.piercegroupllc.com/core-services/fractional-services-in-focus/fractional-feasibility-study.html