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The New Breed of Vacation Homes

Last update on: Nov 03 2017

A vacation home is passé for some people. While vacation and second home owner-ship are on the rise, and more Boomers plan to buy second homes, a number of people are moving on to what they consider the next level of second home ownership.

This innovation is known generically as the destination club. There now are at least 23 of these clubs. They are growing rapidly, and more are being created.

While there are variations, the clubs have key features in common. The club owns a number of luxury homes around the country or the world. Members either make a deposit with or buy an equity interest in the club, and they also pay annual dues. Then, they are entitled to use of the vacation homes during the year.

A destination club is not like a time share. In a time share, the owner is entitled to use a specific location for a specific time period every year. The right to use can be traded or sold, but the owner must arrange all the transactions. A destination club member is purchases the right to use any of the club’s homes for up to a certain number of days during the year. The days and location are of the member’s choosing.

Joining a destination club is more like joining a country club. At the country club, you can use the golf course or tennis court whenever you can schedule a time, usually on a first-to-ask basis. With the destination club you are entitled to use any of the homes the club owns at any time during the year, provided it isn’t already booked.

The destination club gives members a choice of using many luxury homes around the world, and the opportunity to see the world from the comforts of a luxury homes. Usually a club owns multiple homes in popular areas. A member needs only money and the time for and interest in travel.

Club memberships are priced so that the deposit or equity cost is less than the down payment that would be required to buy one of the club’s homes. The annual dues are less than the annual costs of carrying and maintaining one home. For these costs you get the use of luxury homes in many areas.

There are two general types of clubs. In an equity or fractional share club, the club owns the properties. The members own the homes indirectly through club membership. The equity club member has the potential to benefit from appreciation in the value of the homes as property values rise.

In the deposit clubs, members have no equity in the homes. When members resign membership, they usually are entitled to the return of 80% to 100% of their deposits, with restrictions we will discuss shortly.

The equity clubs and those that return 100% of the deposits often charge daily fees for use of the properties. These are in addition to annual membership fees. The amount of the fees varies with the property used but usually is far less than the cost of staying at a top resort hotel.

Some clubs specialize in certain interests or activities. A club might specialize in homes near golfing, fishing, or other recreational activities. Some are international, while other focus on U.S. homes. One club has a luxury recreational vehicle, with a driver and cook, that takes members on tours of the golf courses in Arkansas.

Some clubs have different levels of membership with different levels of fees and different rights. For example, a higher level membership might cost more but entitle the member to more days using the homes each year or access to some homes not available to members of the lower club level.

The homes generally are luxury homes with at least four bedrooms, in prime locations, well furnished, often with private pools and outdoor living areas. One differentiator of the clubs is the size, price, and quality of the homes. Some clubs have average home values of $1 million. Others say their homes are worth $5 million or more. When a location is popular with members, a club usually buys a number of homes in the location. Some clubs will buy the homes in the same subdivision or community if it can.

Furnishings and features of the homes also are different between the clubs. Some clubs have homes that offer extras such as wine cellars, wireless high speed internet, antiques, and other amenities.

Each club has concierge services to help with booking tickets and reservations, getting discounts, and other services. Sometimes the concierge is available year round, even when a member is not staying at one of the club properties. At other clubs, the concierge helps only with trips involving use of the club’s homes.

The big problem with destination clubs is that the oldest clubs are only about five years old. We don’t really know which clubs have the financial backing to keep their promises for the long term. If you are considering a destination club, here are some issues to examine.

Financial strength is the key issue. All the clubs still are young, developing, and still buying properties. A club needs the resources to buy the properties and operate them while building membership. There is a risk that a club might buy too many properties too soon or pay too much for its properties. In addition to examining financial statements, determine who are the equity investors in the club and their strength and commitment.

The ratio of homes to members also is key. This determines how much trouble you will have booking the vacation you want. The average ratio is about seven to one, so a club with a lower ratio gives you better odds of getting the vacation you want.

Related to this, ask how priority use of a home is determined. You want to be sure of a fair shot at the vacation of your choice. Most clubs have some sort of rotating priority list, so everyone gets a shot at the top of the list. Some won’t let a member use a location a second time if others are asking for it and have not used it yet.

Determine the club’s definition of luxury home. Ask about the market values of the homes and square footage. These vary greatly among the clubs.

Ask about the number of homes that are in the pipeline and the expected rate of membership growth. This will tell you if the homes to members ratio will be stable or if the club plans to maximize membership first and focus on acquiring homes second.

A review of the club’s long-term marketing plan is helpful, especially if it is an equity club. If a club stops marketing for new members, the value of an equity club membership could decline. That has been the pattern for time shares. Also, it can be difficult for existing members to resign and get their refunds if new members are not joining. Without a steady stream of new members, a club must sustain itself on annual dues.

Check the details of the refund policy. While most deposit clubs will refund 80% to 100% of deposits, they will do so only after new members join. Typically, two or three new members must join after the refund request is received before the refund will be made. For equity clubs, the club might buy interests or arrange for buyers. Others leave it to the owner to find a buyer.

Ask about house rules. Does the club permit smoking or pets? Most also have some kind of behavior code and will prohibit property use to members who break the code.

Most clubs have maximum annual days of use. There also might be a time limit on the length of a stay. Usually two weeks or less in one location is the maximum.

Some clubs will allow unaccompanied guests to use a property on your membership, others won’t. If you hope to use the club as an incentive or gift to others, this would be important to you.

Destination clubs are an exciting but untested innovation in vacation property ownership. A club might enhance your lifestyle, if you investigate the club. April 2006. RW


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