When you're buying or selling a timeshare, the "Right of First Refusal" (ROFR) clause in many timeshare contracts could affect you. What is this, how does it work, and what does it mean for you? (Spoiler alert - it's probably not good...)
What is "Right of First Refusal"?
ROFR is a clause in your timeshare contract that states that the company that sold you the timeshare has the right to get it back under certain conditions.And you, and you...
If you enter into an agreement to sell that timeshare to a third party (Buyer X), then the company has the "right of first refusal" on that contract. That means they get to accept or refuse that agreement first, before the deal with Buyer X can go through.
- If the company wants your timeshare, then they exercise their Right of First Refusal, and they become the buyer. You still end up selling at the agreed price, except that you're selling it back to the company. The deal with Buyer X is dissolved, and they get back whatever they've paid.
- If the company doesn't want your timeshare at the price you agreed with Buyer X, then they refuse it. Your sale to Buyer X passes the Right of First Refusal, and that deal goes through.
How ROFR can benefit the company
Let's say you own a timeshare at a resort where the company still has an active sales department. Here's an example of how the Right of First Refusal scenario plays out in their favor.
- They're selling timeshares at full retail prices. Let's use $30,000 as an example.
- You're selling your timeshare as a resale, and resale prices are typically quite far below the original retail. Let's say the going resale price for yours is $3,000.
- When you find a buyer for your resale at $3,000, the company can step in and purchase it for that price.
- They can then resell that $3,000 timeshare for the $30,000 retail price. Nice profit, right? In theory, they could do this over and over again as consumers buy and sell the same timeshare.
Buying up resale timeshares gives the company a cheap way to boost their available inventory of timeshares to sell. Why go through the lengthy and expensive process of getting property, designs, permits, and building new resorts, when you can pick up inventory to sell so much easier using ROFR?
Remember, it's not like a used car that's fundamentally different once a prior owner has used it for awhile. There's really no difference between the resale and retail timeshares at that same resort. There may be certain side benefits you get with retail, but the actual units and resorts are still the same. (See Timeshare Resale Limitations).It's not like cars, where a used car will never be new again
How ROFR affects you as a timeshare buyer
Just like many things in the world, this rule is created to benefit the company, not you. If you're buying a timeshare, this can cause you some issues.
- Uncertainty. Even if you win a bid on a timeshare on eBay, or agree to purchase a resale timeshare via another channel, you still don't know whether you'll actually get it or not. After you agree on the price, the contract has to go to the company for their Right of First Refusal. Will you get it or not? Wait and see.
- Slower process. The extra step of ROFR in a timeshare sale slows down a process that was already pretty lengthy to start with. There's no fixed amount of time, but it's common for the ROFR review to take a month, sometimes more.
- Ties up your funds. Let's say you find a timeshare you want, and agree on a price with the seller. You put money into escrow to move forward with the buying process. If you find out three months down the road that the deal was killed due to the company exercising ROFR, then you get your money back, but it's been tied up in the meantime.
- May take multiple deals. If your deal to buy a timeshare falls through due to ROFR, then you're back to square one. You need to go through the process of finding and researching another deal, and reaching agreement on price. Once you do, then you're back to the uncertainty... will the deal go through or not?
- Wasted time and opportunities. Losing a deal to Right of First Refusal means that the time you invested in that deal is lost, as well as other opportunities you could have pursued instead.
How ROFR affects you as a timeshare seller
- Keeps prices up? Salespeople sometimes tout this as an advantage, claiming that the ROFR will protect your investment by keeping the market value of your timeshare high. Does it really? That's a bit iffy.
- ... Market forces determine the prices - there's nothing in this that guarantees you any selling price. If people in the marketplace aren't willing to pay more than $1 for your timeshare, having an ROFR clause in the contract isn't going to change that. You won't get a dime more than the market will pay.
- ... Knowledgeable buyers may figure out that only bids of $5,000 or higher will pass ROFR, and bid that high in order to buy your timeshare. In this case, the ROFR may live up to its claim, but only to the extent that buyers in the marketplace see that much value in it.
- Slower process. Once you have the agreement to sell your timeshare for a certain price, you will get your money eventually (from either the company or Buyer X), but the ROFR step slows down the overall process.
- Wary buyers. Any buyer who's already been burned once by the ROFR process may be more reluctant to go through that again, tying up their funds for months of uncertainty. This decreases your pool of potential buyers because some will avoid going through that process.
How often is this right exercised?
When the economy tanked during the great recession, there was a glut of timeshares on the market, as people struggled with unemployment and foreclosures. ROFR was not much of a factor then, since companies had seen their sales plummet. They had little motivation to increase their inventory by buying back timeshares.
As the economy has improved, some companies have been ramping up their buybacks using the Right of First Refusal clause. Examples include both Marriott and Hilton, who have been quite active in this recently.
In fact, Marriott Vacations Worldwide in their 2013 Second Quarter Financial Results, cited "lower cost of vacation ownership products" as one of the factors in the dramatic increase in their margins. As one of the more active companies using ROFR, it's easy to see how active buybacks could lower their costs.
In general, the greater demand for your timeshare, the more likely it is that the company will use ROFR. For instance, a company may be actively buying Platinum season resales with ROFR, but not Silver season.
Other companies rarely exercise this ability, even though they do have that right included in contracts. Why not? Surely they've run the numbers, and determined it's more beneficial for consumers to continue owning those timeshares and paying the fees, than for the company to get the inventory back to resell.
Have you ever bought or sold a timeshare that involved a Right of First Refusal? What was your experience with the process? Did it work out well for you or not? I'd love to hear from you in the Reply section below.