'Fractional’ home co-ownership: How Pacaso works

As some Sonoma residents continue to oppose the “fractional” home-ownership model of startup real-estate company Pacaso, confusion persists as to how the company’s shared-ownership template actually works.

The company closed escrow on its first Sonoma Valley property - 1405 Old Winery Court - on May 17 and quickly relisted the $4 million home on its website for sale to eight potential co-owners who would each invest $606,000 in the purchase.

Old Winery Court homeowners dubious about having a rotating mix of part-time neighbors coming and going on their residential road have decried the real-estate model as a “timeshare.”

Pacaso officials refute the “timeshare” label and described the fractional ownership model as a way to pool the resources of buyers seeking second homes.

“We get second homeowners out of the median price (tier) here and over to the luxury price tier, which creates more opportunity for the local workforce,” Pacaso CEO Austin Allison told the Index-Tribune in May.

Alfred Miller, a Los Angeles-based risk management executive, is the first of eight co-owners to stay at 1405 Old Winery Court and he was finishing up his allotted two weeks at the home on June 28 when he spoke to the Index-Tribune.

“I’m loving the town and starting to meet people here,” said Miller.

The ‘prospects’ of buying a Pacaso house

Pacaso’s practice of listing real estate properties for sale on its website prior to the company acquiring the parcel, has drawn fire locally.

Other Sonoma Valley homes in the company’s sights have made brief appearances on its website, but were taken down after complaints from the homeowners. Called a “prospect” listing, this practice has alarmed several local homeowners who were in the process of selling their home and found it being offered on the Pacaso website without their knowledge or permission.

“We hadn’t heard about them and a friend was talking about the company so we went to check out their website and there was our house,” said David Applebaum, about the home owned by he and his wife just off lower Broadway. “We looked at each other and said, ‘What the hell?’”

Applebaum said he “laid into the representative who had come to tour (the home) without identifying himself” and insisted they remove the home from the Pacaso website. “They took the listing down but they are still listing others that way,” he said.

The house at 1405 Old Winery Court is currently the only Sonoma Valley property listed on the company’s website.

A “prospect” is a home listing that Pacaso officials believe ”will be in demand based on its price, location, style and amenities,” according to the company’s website. If there is enough interest in the listing on its site, the company then makes an offer and creates a limited liability corporation (LLC) to purchases the property.

Prospective buyers are shown Pacaso houses by local real estate agents – or online-only in Miller’s case. Pacaso pays a 3 percent buyers agent commission, and the company describes the closing process as “similar to a standard home purchase.”

For those who don’t have the cash on hand for their fractional ownership stake, the Pacaso website describes the company as offering “integrated financing” and states that buyers may use other sources of capital such as home equity financing.

Local Redwood Credit Union mortgage loan officer Sheila O'Neill said conventional lenders will not provide a mortgage for a portion of a Pacaso second home, as mortgages do not allow for timeshares.

"Also, most lenders will not allow mortgages on a property to be titled in an LLC," she said, referring to Pacaso’s home ownership model. As for home equity loans, O’Neill said "this would be a line of credit on your primary residence. It would not be available for fractional home ownership."

Pack up and move right in

Pacaso houses are move-in ready, all furnishings are typically included in the purchase price.

“Each home is meticulously well-appointed with everything you need to cook, relax and play, so you can just show up and enjoy your time,” reads the description on the Pacaso website.

Miller was drawn to the idea that the Old Winery Court property was turnkey and would have shared ownership. Prior to buying in Sonoma, he owned a second home in Michigan and said the house sat empty “for months on end.”

“I love Sonoma but buying here on my own would have been wasteful,” he said. “I just wouldn’t have been able to get here enough.”

Owning a Pacaso home

The company stresses in all of its materials that Pacaso owners are just like regular home owners, except buyers purchase a share in a property-specific LLC.

Homeowners can’t sell their stake in the property for the first 12 months. After a year, they can sell at any time.

After closing on the house, owners book time using the Pacaso owner app, and the amount of time available depends on the owner’s share – which is typically one-eighth - although buyers can purchase more than one share.

Each share includes 44 stay nights a year, either advanced or short-notice. Advanced stays are scheduled eight days to 24 months in advance and short-notice stays are booked two to seven days in advance. Each can last from two to 14 nights, and back-to-back stays are not allowed.

Miller, who is in his early 50s, said he looks forward to inviting his adult children to join him at the house during his next two-week stay in August or when he comes back again later in the year.

As for who Miller’s co-owners might be, he doesn’t know. Pacaso conducts and controls the owner vetting. “Our sales process is private,” a Pacaso spokersperson told the Index-Tribune. “Owners are vetted by Pacaso, but remain anonymous to fellow co-owners in the LLC.”

Each owner has a designated storage space for personal items. Homes are inspected and cleaned after each visit. Any damages beyond regular wear and tear are charged to the owner who was using the house at the time.

If an owner defaults on payments, Pacaso promises to assume financial responsibility. The company says it will step in to service the loan and, if necessary, foreclose on that specific share and manage the resale.

Additional fees

Like purchasing a house within a homeowner’s association, Pacaso owners pay additional fees.

Property management, maintenance, repairs and property taxes are passed along to owners with no markup split evenly per share. Owners pay an additional $99 monthly fee to Pacaso for “LLC oversight, ongoing owner support and the technology that enhances your owner experience.”

Reserve funds are managed by Pacaso and used for the home’s repairs and maintenance. When the need for a major repair arises, Pacaso allocates funds after a competitive bidding process.

Pacaso chooses and manages the local property management company which arranges or provides cleaning, post-stay inspections, landscaping, tree trimming, gutter cleaning and pool maintenance. A Pacaso spokesperson said the company has selected its Sonoma manager, but declined to disclose it.

The owner group can vote to remove the company as the program manager of the home and self-manage the property, according to company materials.

Rules of Conduct

There is a detailed Code of Conduct on the Pacaso website covering a wide range of topics. How Pacaso enforces its rules is not clear from the company literature.

Owners can’t rent out the house but they can lend it to anyone they choose. Pacaso says it requires guests to be registered and to install the Pacaso owner app on their phone to access the house. They are also not allowed “to host events that would be disruptive to the neighborhood” and no part of the house can be used for commercial purposes.

Dogs are allowed – two, under 80 pounds each, and no other pets.

Residents are asked to maintain quiet hours from 9 p.m. to 7 a.m.

Owners are “strongly encouraged to avoid parking on the street unless absolutely necessary.”

So what if conflicts arise between owners? Pacaso materials stress that the company will resolve disputes between owners or between owners and the city or county in which the house is located. Any legal expenses may be passed through to the owners and each home has a homeowners liability insurance policy of up to $2 million.

Every share owned holds a vote. Owners can bring major issues about their home to a vote of the group (e.g., a decision to upgrade the sound system). To call for a vote, owners notify their Pacaso representative.

Selling a Pacaso home

When a Pacaso owner wants to sell, they set the sale price. They work with a real estate agent who markets the house “just like they would a whole home real estate listing,” according to the company website. If their share has appreciated in value, any equity gains realized (or losses) are theirs.

Pacaso’s first foray into Sonoma - Miller’s house at 1405 Old Winery Court - is on a small residential cul de sac, a point of some contention among the neighbors, and others in the community, who have launched the STOP (Sonomans Together Opposing Pacaso) website and a change.org petition to oppose the company, which had gathered 2,350 signatures as of June 30.

The 1405 Old Winery Court listing is still up and seeking additional owners; the property is labeled as “hot” on the company’s website - or “attracting increased engagement (e.g. sales, website page views, leads, etc.)” according to the Pacaso team.

"I was aware of some of the Pacaso controversy as I considered purchasing the house,“ said Miller. ”But so far everyone I have met has been friendly and I look forward to meeting my neighbors.”

Contact Lorna at lorna.sheridan@sonomanews.com.