3 Questions for Equity Estates Destination Club

Equity Estates is one of the more compelling destination clubs on the market. It follows an equity model, where 80% of all initial deposits are earmarked for property purchases -- and members are financially vested in the owned portfolio.

Members pay for 15 or 30 nights of annual usage, with plans starting at an initial investment of $197,500 and annual dues of $9.250 for the 15-night executive plan.

The homes appear stunning, averaging $3 million apiece. Members can stay at a property for as little as a single night, whereas some clubs have a two or three night minimum. Come November, 2021 -- 15 years after the club was founded -- the club will begin liquidating its properties and pay back its member investors. The members will get 100% of their initial deposits (if the homes appreciate enough to make that possible -- and remember that they have to appreciate by 25% in the first place to make up the gap between 80% and 100% initially). After that, members receive 80% of the sales proceeds. The club takes a modest 20% cut.

It's a great model on many different levels. In fact, it may be the best.

However, after attending a webinar presentation, I'm left with three problematic questions that I think any prospective member should make sure are addressed.

1. If real estate prices have generall fallen over the past few years, why are the initial deposits inching higher every year?

This is important. The club claims that just 5 members have resigned, and all were cashed out at higher prices than their initial deposits (since they receive 100% of what a new member is paying at the time and that has increase over any rolling 24-month period).

See the problem? As an investment, new members should be paying based on Net Asset Value. The club has purchased 10 of the homes available (the rest are leases or exchanges) and it would be a shock if they haven't fallen in price -- on average -- from the initial outlay. If real estate prices soared, new members would expect initial deposit rates to escalate. Why haven't the initial deposit requirements dropped as real estate prices -- particularly for high-end vacation properties -- have taken a hit?

Existing members may be overjoyed, but new members are getting diluted -- making it that much harder for them to come out of this with a profit in 11 years.

2. Won't it get harder to get out in the future?

Right now, cashing out is pretty easy. The club has great homes, friendly management, and pose a great high-end value proposition. However, resigning won't be so easy in a few years. Let's say you want to get out in five years. Who wants to pay for a club that will liquidate in 5 years, especially if real estate prices don't recover and they are deep in the hole with their initial investment deposits?

Yes, the club isn't going to fold come 2021. It has five years to liquidate its portfolio, and members may also vote to keep the club going in a new form. That still creates uncertainty. Unless luxury vacation real estate takes off by the latter half of this decade, getting out won't be easy.

3. How messy will the cashing out process be?

As noted earlier, the club doesn't have to sell off its owned homes come November of 2021. It can elect to delay the process if the property resale climate is unfavorable.

Further compounding matters is that many of its homes are in eclectic locations. Anguilla and Costa Rica aren't exactly booming markets. I don't know if those properties are purchased or leased, but if they are among the 10 owned homes it may make the selling process hairier.

Now, these are just the three questions that I feel need to be answered with convincing responses. You may have some of your own, and obviously you're going to want to ask them if you are about to make a serious six-figure investment in a destination club.