Relief Companies - HOAs Need to Play Offense
HOAs can't address their concerns about relief/rescue companies by reacting to a "suspected transfer" that has already occurred. To be successful, HOAs need to actively, clearly and continuously educate their owners as to why working with a relief company may not be in an owner's best interests.
I recently was asked to speak to some owner-directors at their timeshare HOA board meeting. The directors had read my article on relief/rescue companies in The Resort Trades and they agreed that attempting to thwart relief company transactions by relying on the Uniform Fraudulent Transfer Act was fruitless. Putting aside the obvious legal shortcomings of this strategy, the directors immediately understood two very practical points:
- Accusing an owner (who had just paid $5000 or more to be "relieved" of his/her timeshare interest) of engaging in fraud, and then using this accusation as a basis for invoicing that owner for assessments, is surely an usual strategy for an HOA. If anything, it will likely be used in a future relief company sales presentation.
- HOAs don't have the authority to "undo" real estate transactions. At best, HOAs can only withhold some of the benefits of timeshare ownership. But if you presume that relief companies only intend to dump the timeshare into some sort of shell entity and not utilize the ownership benefits, what is the purpose of using administrative procedures to withhold them?
Of course, these directors naturally wanted to know what they could do to protect their owners, both those who would be tempted by pitches from relief companies and those who enjoyed their timeshare but, if relief companies proved successful, were at risk of rising HOA bad debt. While I suggested some legal options, I concluded by saying that no legal approach would be as effective as actually engaging in some fairly pointed owner education.
Let's review the outline of a basic relief company pitch:
- The reason why the owner doesn't fully enjoy the benefits of his/her timeshare anymore is identified.
- The risk of future increased assessment obligations is stressed, often to the point of exaggeration.
- The timeshare resale market is characterized as an option that won't work, limiting the owner's exit possibilities.
After penciling out the relief fee against the estimated long-term assessment liabilities, paying the relief company appears to be the best choice for the owner.
To respond effectively, HOAs need to play offense.
HOAs should start by attacking the relief company's financial conclusion in meetings or correspondence. I have a copy of a relief company invoice in which the owner wanted to be "relieved" of a $600 annual assessment obligation. For this, that owner agreed to pay just over $5,000. It's easy to look at this now and conclude that the owner was financially foolish. However, we also know that even a mediocre salesman can be trained to overcome this type of closing table objection. HOAs should educate their owners to understand that the relief companies may be offering a bad financial deal - paying $5,000 today is almost always worse than paying that same $5,000 over 5 or more years.
To be most effective in driving this point home, the HOA must also offer hope that the timeshare can be sold in the resale market and that the interim assessment risk isn't as great as the owner fears.
While there are a number of ways HOAs could help owners with resales, I have listed three for consideration:
- At a minimum commitment level, HOAs could provide their owners with a general description of their timeshare for use in resale advertising. Take a look at some of the user generated content describing timeshares for sale on a resale website and, more often than not, you will wonder how any purchaser can make sense of what exactly is being offered for sale.
- At the other end of the spectrum, HOAs could actively engage in resales and take steps to encourage their owners to be referral sources. When considering this option, keep in mind that ARDA's 2010 Resale Study found that a majority of recent buyers felt more comfortable purchasing timeshares when they believed the purchase was endorsed by an objective third party (i.e., the HOA).
- An HOA could also serve its owners by screening companies and selecting two or three to be the HOA's "approved" resale providers. Be realistic about the resale providers' fee structures when selecting for screening. Many people argue that advance fee resale providers lose all incentive to actually perform upon receiving the fee. Others say commission-based resellers with a minimum fee have no incentive to maximize sales prices. Ignore these arguments and prioritize documented performance.
Constant communication is the only way to address the relief companies' "liability" argument. If an HOA reasonably believes it is in sound financial condition and has adequate reserves, let the owners know as often as appropriate. If there is a financial weakness, tell the owners how big the problem is and how it will be resolved. Then let them know if the solutions are working. The more the HOA communicates its financial condition to its owners, the less likely a relief company will be able to exaggerate an owner's risk of exposure to increased future assessments.