DCs work when real estate prices are climbing. When prices were inching higher through 2007 club backers didn't mind taking a hit on operating costs exceeding dues because they coudl make it up in property appreciation.
In theory one would think this, but I disagree. I base this on the facts, documented facts, from the TH bankruptcy. It was proven that had the "then model" actually been followed, ie buying a home for every 6 that join, taking members out on a 3-1, etc. that they still would have failed. True, dues are a component of the process, but if they're unaffordable, no one will join. The alternate bidder to UR had a different concept in mind, which likely would have worked (meaning "cash flowed") but the dues needed to be in the range then where ERs are now. The fact remains, UE dues are too low. Some members pay less than they even did at TH. To the appreciation side, that was a neat sales gimmick, but also unsustainable, even if prices had risen. As prices rise, so do the taxes and carry costs. And, if people leave, the "model" would dictate that you could alleviate inventory by selling it. So, you pay say 2.5MM in XXX year for a home that becomes worth say 4MM. In theory, you've made money, but only if you sell it. If you do, you lose availability. Say you do sell it, and go to replace it - say you even sell it for 5.0MM. You should be able to then replace with two 2.5's, right? Wrong. You won't find a couple "suitable" (to member standards) homes for 2.5MM each in the same place, or lets say not as close to the beach, mountain or whatever. So to "realize" that appreciation and then reinvest it almost becomes an impossibility. As a member, would you want them to dump a home that you love for 2 crappier homes, likely further away from the activities or main attraction? Now, say you're an equity club - as a member, YOU own the ups's, right? What would you do with it then, apply it to reduced opco costs? Distribute back to original investors? Are the investors unique to the specific properties (like Everlands attempted)? So the original members of AK, as an example, own their 18 homes worth XX. They appreciate to YY over say 5 years. Do the late joining members get the same percentage of equity as those who rode it out over time? In theory, the later joiners paid more, so they should also realize something, right?
Bottom line, unsustainable no matter how you look at it, IMHO, and further, unlikely to get traction as a "no refund." Anything built on ongoing sales is going to pop when the sales bubble busts. I don't think that is specific to just this industry. Just in most, you might lose sales and margins drop, but your initial capital isn't also carried as a forward going liability on the balance sheet. Now you have no cash flow, increased costs and large debt. When sales slump, people want out. 3-1 doesn't work, and as the market has proven, shedding assets doesn't always either (especially if you're in reality short on them anyway and subsidizing availability with rentals or hotel collections) because they're not quick sales, the prices are too inconsistent and as an example, in the case if UR, would only go towards reducing the secured debt balance, not towards refund of membership deposits.
