Learn The Truth About Developer’s Right of First Refusal(R.O.F.R)
Timeshare Resale Scams: Right of First Refusal has been quite rampant since the recession began in 2008, due to an ever-increasing number of clients who wanted or even worse needed to get out of their timeshare obligations. In fact, Florida, being the timeshare capital of the U.S.A., has enacted legislature HB-7025 whose aim is to directly curb the amount of timeshare resale scam operations in the state as well as place certain guidelines on any resale company worldwide when dealing with a client who owns a Florida deeded timeshare. Since Mexico is the number one international destination for American tourists it’s understandable why Timeshare Resale Scams have also increased in the Mexico Timeshare Resorts too. One in particular, is the Right of first Refusal Timeshare Resale Scam. First off, what is the Right of First Refusal? How does it truly work? What are the benefits and drawbacks of Right of First Refusal? How can Right of First Refusal be presented where it qualifies to be a scam? All of these questions and hopefully more will be answered for you as this post proceeds to unravel!
What is Right of First Refusal(R.O.F.R)?
The Right of First Refusal(ROFR) is when a Developer has the contractual right to refuse a resale transaction from one of its members who wishes to resell their timeshare to a third party buyer for a certain price. After refusing the resale to the third party buyer, the developer now has the right by exercising ROFR to buy back the timeshare from the member for the same price that the member wished to resell it to the third party buyer. The third party buyer transaction is dissolved and the seller receives the sale price proceeds from the Developer. In short, everyone wins minus the third party buyer since the time spent researching, speaking with and negotiating a deal with the seller ends up being wasted energy upon the developer deciding to exercise their R.O.F.R. clause. That all sounds amazingly great but wait….what’s the catch? The catch is not in the dynamics of how R.O.F.R. actually works! The catch is something else!
How Does Right of First Refusal Actually Work?
In order to best explain ROFR, let’s play it out in a plausible story. Timothy purchased a timeshare for $15,000 in which the developer has placed in writing the ROFR clause. Years later Timothy decides he wishes to sell and advertises the timeshare by various means. Upon Timothy finding a buyer for $5,000 and knowing that he has a ROFR clause in his contract, he informs the third party buyer that he has to present their agreed upon deal to the developer of the timeshare as per the final step in order to get authorization. Timothy presents the deal to the developer and the developer decides to exercise the ROFR clause. Timothy receives notice that the developer refuses the sale to the third party and will be going about buying back the timeshare directly from Timothy. Timothy signs the timeshare back over to the developer and receives his $5,000 check from the developer. As per the third party buyer, he/she has to now go back to the drawing board and start the process anew. If the third party buyer is stuck on buying the same inventory then he/she will have to go through the same process again in hopes that the developer will not exercise ROFR clause in their next attempt to purchase the resale timeshare.
What Are the Benefits and Drawbacks or the Pro’s and Con’s of ROFR for the Timeshare Owner?
The First Benefit off the bat would be that once the Timeshare Owner has a valid purchase agreement and the money in escrow from a third party buyer they are assured of a sale, whether it be from the third party buyer or the developer who decides to exercise ROFR. The drawback being that the actual sale will take much longer since the resort could take up to a few weeks to decide whether they will exercise ROFR clause or not. If they do decide to exercise the clause it could take an additional few weeks to finalize the paperwork in order to disperse the funds. The Second Benefit is if the timeshare resort is actively exercising the R.O.F.R. clause then the third party buyers will feel forced to bid a higher price to acquire the timeshare since they always have to keep in mind that if their offer is too low the developer may exercise the ROFR clause. Keep in mind that simply because a timeshare contract has an R.O.F.R clause does not automatically equate to the developer exercising it.
The potential drawback is that the developer becomes known in the resale market to always exercise the ROFR clause which begins to spoil the enthusiasm of resale broker agents who are out there promoting the timeshare products on the front line of the resale market. This so called lack of enthusiasm from the agents could lead to a lesser number of third party bidders which then serves to hurt the timeshare clients wanting to sell. Why? Because without a valid third party buyer purchase agreement that can be presented to the developer the Timeshare Owner does not meet the necessary requirement for the developer to even consider exercising the R.O.F.R clause.
Key Components of the Timeshare Resale Scam: Right of First Refusal?
So what’s the catch? It all sounds so positive for the timeshare client who wishes to sell their timeshare when having the R.O.F.R clause printed in their contract. The catch lies in the myths being promulgated by timeshare salespeople and the actual money that such seller will receive upon the Timeshare Resort exercising the R.O.F.R. clause!
1)First very important myth is that the Timeshare Resort will automatically exercise the R.O.F.R. clause! Even though many timeshare resorts have the R.O.F.R. clause in their contract, it is not automatic that it will be exercised. In fact, many resorts have placed the clause in the contract so that the salespeople can use it as a “Selling Tool” alluding to the client that the value of the timeshare will always be maintained and most important that if the client ever wishes to sell, “the resort will buy it back at market price” from the client ensuring the client that the timeshare will hold its value and may even increase in value!
Very Important Note: There is a very big difference in meaning between the two following written phrases, 1)”the resort WILL buy back the membership at market price” and 2)”the resort HAS THE OPTION to buy back the membership at market price”.
Very Important Note: An option is always good but it cannot be relied upon as FACT! Even more, Market Price is never the inflated retail showroom price, rather it is generally the average price going on the internet, which can be 40% to 95% less the showroom price! So if a salesperson tries to make you believe that the resort will buy back your membership for at least what you paid for it, know that he/she is greatly stretching the truth!
2)Second very important myth is that the Timeshare Resort will automatically pay the “high supposed” value that the timeshare salesperson tells the client it’s worth on the resale market! This is a huge myth since the Timeshare Resort is only interested in exercising the R.O.F.R clause if it benefits them financially. Here’s an example, a timeshare client owns Christmas week in Hawaii in a top rated resort that has an R.O.F.R. clause and where the retail salesroom price is $40,000usd. If such client wanted to sell the week and had a buyer for $30,000usd it probably would not interest the Timeshare Resort to exercise the R.O.F.R clause. However, on the other hand if the client wanted to sell the week and had a buyer for $9,000usd, now the Timeshare Resort may become interested in exercising the R.O.F.R. since the spread between the buy price and the retail sales price spread is much greater. Buying the week back for $9,000usd and putting the inventory back on the sales floor to sell for $40,000usd is a good business deal for the Timeshare Resort! In the end, the timeshare resort has now generated $80,000usd for the inventory and has only paid $9,000usd plus commissions on the two sales! As you can see from the above example, R.O.F.R. is foremost designed to benefit the developer even though it is generally presented by salespeople that it has been designed foremost in order to benefit the buyer.
3)Third very important myth is that the Timeshare Resort will automatically exercise the R.O.F.R. clause on your particular week because they are actively exercising the clause on other weeks within the same resort! Just because the Timeshare Resort is actively buying back week number 51 (so long as it’s the right price)does not mean that they will be buying back week number 45! If a salesperson “guarantees” that the R.O.F.R. clause will be exercised without having spoken to the administrative office of the timeshare in question, know that he/she is simply not speaking fact! In fact, until you, the buyer, get assurances from the administrative office it is not a fact yet!
4)Fourth very important myth is that the Timeshare Resort will automatically “cut a check” for the inflated Trade-In-Value price printed on the Trade-In Form document(used to initiate process of name change on deed) upon exercising the R.O.F.R. clause. This is simply not true as has been described above. The Timeshare Resort is not interested in buying back inventory at close-to-retail prices. Like any business they want to buy low and sell high in order to maximize profits. If a salesperson presents such as fact, know that they are not being honest! Even more, a Trade-In Form is not a Purchase Agreement.
What Market Factors Lead a Timeshare Resort to Exercise The R.O.F.R. Clause?
There are few resort systems in the global industry who put in place the R.O.F.R. clause and even fewer resorts who actually exercise it. Certain market factors have to be in place for a resort to deem it worthwhile to buy back certain weeks of inventory in which we have listed a number of factors below that could interest a Developer in exercising the R.O.F.R. clause:
1)First off, Fixed Week Deeded timeshares rather than floating week timeshares which are generally sold in Mexico are more apt to place an R.O.F.R. clause in the written contract and be sincere about enacting such clause upon certain favorable market conditions. Floating Week Timeshare intervals can be sold multiple more times than the Deeded Fixed Week. The Deeded Fixed Week can only be sold 51 times maximum compared to the floating week that can be sold hundreds of times per interval. So at the end of the day there is less of a need for the Floating Week Developer to be sincerely interested in R.O.F.R.
2)Secondly, for Fixed Week Developers and their Salespeople, how many sales are missed every day because the resort is Sold Out during their Peak Weeks of travel. In such situations, it’s to the resort’s advantage to be interested in buying back the peak weeks at a low price and resell them at their current retail price so as to overall keep sales flowing making the resort a profit and at the same time keeping their sales team happy and motivated.
3)Thirdly, the Timeshare Resort is no longer building new inventory which creates a great demand on the peak weeks by way of the customer due to the lack of supply by way of the Developer.
4)Fourthly, the Timeshare Resort management has decided to change course and no longer actively participate in weekly timeshare sales. It now wishes to steadily go about converting the units to either Monthly Fractional or Full Ownership Condominiums.
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