It’s likely that most destination club members will eventually cancel their membership, and so it’s important to understand how the process will work for you.

Most clubs will refund at least 80% of the membership deposit you paid on joining, though more and more variations on this theme are appearing over time. Obviously, receiving 100% of a six or seven-figure membership deposit is better than only receiving 80%, so this may be a consideration in your destination club decision - or your negotiations.

That’s certainly not the only thing to consider, however. If we take an imaginary club with 200 members, each of whom has paid an 80% refundable membership deposit of $250 000, then if the club were to be forced to refund all members simultaneously they would need to pay out $50m. This is far beyond the resources of most destination clubs, which, as primarily real estate businesses, tend to be asset-rich and comparatively cash-poor. The more conscientious clubs keep members apprised of their ability to cover the contingent liability created by their refund obligations, but there is a far more expedient tactic used to manage this risk - controlling the timing of refunds. This is done through a policy that ties the payment of membership deposit refunds to the signing up of new members. For example, many clubs have a ‘three in, one out’ rule which means that three new members must be recruited before a departing member’s deposit is refunded. This is how the destination clubs protect themselves from a ‘run on the bank’ like the one faced by Jimmy Stewart in ‘It’s a Wonderful Life’. We’ve seen rules based on one, two or three in to one out.

It’s easy to understand the rationale, and even the necessity, of a policy like this. However, these policies introduce potential risks for members.

Imagine you have joined a destination club and paid over $500 000 for the privilege, with a right to an 80% refund in the event that you wish to leave. You’re underwhelmed with the club, and you want out, so you lodge a request for a refund. Unfortunately, the vast majority of your fellow members feel the same way and have lodged exactly such a request a little before you - the club now has 100 membership deposit refunds to make before getting to you. Fortunately for the club, they have a ‘three in, one out’ policy that prevents them from having to sell up everything or file for bankruptcy. Unfortunately for you, that means that this poorly-performing (and thus probably slow-selling) club has a right to make you wait for your money until they have recruited 300 new members! If that’s not scaring you even a little, then take a moment to consider that most of the emerging clubs would be thrilled to sell 50-100 memberships in a year, without the handicap of negative publicity.

How can you avoid this kind of situation?

We think it’s important to ask these kinds of though questions of the sales team at each destination club you consider. Most will have a reassuring answer based on a sound strategy, but it’s important to ask just in case a club doesn’t have a realistic approach for this or any other situation. Ask lots of ‘what if?’ questions, and don’t accept anything short of a totally reassuring answer.

Ideally, the club you choose will have a ‘zero in, one out’ policy, but you’d better be sure that they have the financial resources to weather a possible ‘run on the bank’ - ask the question, and see how you like their response.

Another thing to look or ask for is something like a ’statute of limitations’ on the ‘three in, one out’ or similar policy - a reassurance that there is a maximum period of time that you may be made to wait for your refund, after which you will receive your refund whether or not the club has recruited as many new members as they hoped.

The bottom line?

Pick a robust club, ask lots of questions, and make sure that you feel completely comfortable with all aspects of the club’s operations and policies. If in doubt, ask!

OTHER ARTICLES THAT MAY BE OF INTEREST

• Quintess has refunds covered
• Try before you buy
• Destination club price increases
• Financing a destination club membership
• Quintess ups referral ante