First Right of Refusal in Real Estate: What You Need to Know

Do you have your home for sale, and a buyer has proposed a right of first refusal?

Numerous clients have asked me what a right of first refusal is and how it works over my nearly thirty-seven years in the business.

A right of first refusal, or ROFR for short, is also known as the first right of refusal.

These clauses in real estate agreements are similar to an option contract. The holder or the ROFR has the right, but not the obligation, to enter into a real estate transaction, usually purchasing a home.

The potential buyer with this opportunity can establish a contract or an agreement on a home before others.

When selling a home, you are often forced to deal with scenarios that are less than ideal. One such scenario is a purchase offer that is contingent on the sale of the buyer’s home.

Should you accept such an offer? Are there any options that could make such an offer more appealing – and with less potential downside?

If you are in a situation where you need an offer, even an imperfect one with contingencies, the first rights of refusal clause may be just what you need.

Rarely will I ever counsel a client to accept an offer with a home sale contingency; however, in some circumstances, a first right of refusal could be a good alternative.

It should be noted that the rights of 1st refusal are also referred to as a “kick-out clause.” These two real estate terms mean the same thing. Real Estate agents and lawyers are often involved with these provisions.

What is a First Right of Refusal (ROFR)?

The first right of refusal is a contractual agreement allowing you to enter a transaction before others can. In other words, the party holder gets the first crack.

In real estate, a first right of refusal clause gives a buyer the contractual chance to be the first party eligible to make an offer when a property is put up for sale. If another buyer is interested in the property, the person with the ROFR can either buy the property or decline and let the seller accept a contract from another buyer.

If you find a home you like as a buyer, whether for sale or not, the ROFR gives you first dibs over other buyers.

When you have an FROR, the seller must contact you and let you potentially move forward with a purchase before another party accepts an offer.

A ROFR can be arranged before a home is put on the market or when it is already there.

Interesting Facts About The Opportunity For a Property Owner and Home Buyer

1. Right of first refusal is a legal concept in which a party is given the first opportunity to purchase or lease a property or asset before offering it to others.
2. The provision can apply to a company in a business transaction.
3. This right is often found in real estate transactions and contracts for selling businesses, giving priority over the competition.
4. It can also be applied in other contexts, such as entertainment industry contracts and agricultural leases.
5. The ROFR may arise through a legal agreement between parties or be imposed by law in certain jurisdictions.
6. It allows the party with the right to have advantages over potential competitors by being given priority in acquiring or leasing the asset.
7. The exercise of the right is usually subject to terms and conditions, including a period within which the party must accept or decline the offer.
8. If the party declines the offer, the asset’s owner can sell or lease it to others.
9. The purpose of this right is to protect the interests of a specific party who may have a special relationship or interest in the asset.
10. It can help prevent unfair competition or ensure that certain parties have an opportunity to acquire or lease a vital asset.
11. The specifics of a ROFR can vary depending on each agreement or jurisdiction, so it’s crucial for both parties involved to carefully review and understand its terms before entering into any transaction.

Right of First Offer vs. Right of First Refusal

A right of first offer (ROFO) is similar to a ROFR but slightly different. With a ROFO, the situation is just like it sounds. A potential buyer is given a specific period to submit an offer.

However, the seller can market the home to other home buyers. When sellers receive the ROFO holder’s offer, they can accept or refuse it. If the seller doesn’t get a better offer, they can renegotiate with the rights holder after declining their first bid.

How Does it Work?

If you list your home and find fewer offers (or none) than you had hoped for, you may be looking for any buyer who will make the leap and purchase your property.

When a buyer does come along, what happens if you get an offer with baggage that you are unsure how to deal with – like if the buyer will only buy the home if they sell their current home?

While it may be a situation you had not anticipated, now you must determine if you want to sell your house badly enough to accept such an offer.

An offer with a home sale contingency comes with quite a risk. I often refer to the home sale contingency clause as real estate foolgold. You think you have a deal, but you don’t. Read the article to see why.

When considering an offer with a home sale contingency, you want to minimize risk. A first right of refusal clause aims to protect you while allowing you to accept the offer.

When you add an ROFR or kick-out clause, you tell the buyer making the contingency offer you will keep your house on the market until the buyer purchases your home.

Suppose another buyer comes along and makes an offer for your home. In that case, you must give the original buyer the option to eliminate the contingency for the sale of their home and purchase your property within a specific period – 24 to 72 hours is typical.

Selling to a Buyer Without The ROFR

If the original buyer does not buy the house from you within the specified period, you can return the earnest money from the original offer and sell your home to the second buyer.

As a top real estate agent in Franklin, MA, I have repeatedly gone through the right-of-first-rejection process.

Several times, buyers have offered a home I am listing and asked for a home sale contingency. On many occasions, my seller clients have said no way, and the buyers have proposed a right of first refusal instead, which has been accepted.

You Could Lose a Buyer

Accepting ROFRs can be a win-win for a seller. You might be wondering if there are any drawbacks to this situation. There is only one.

If you have accepted an ROFR, the first buyer has 72 hours to decide if they want to move forward. The second buyer may find they can’t wait that long.

Maybe they are being transferred to the area and have narrowed their search to your home and another. In that case, the buyer might not want to risk losing the other home, especially in a hot market with limited inventory.

What to Expect With One of These Provisions

When you are selling a home and receive an offer with the right of 1st refusal or kick-out clause, there should be a few things that you look for just like any other offer, including the following:

• What is the buyer willing to pay for your home? Is the proposed purchase price in line with or higher than the market value?
• Is the buyer going to have a home inspection and other inspections? If so, how long do they have to complete them? 7-10 days is the typical time frame.
• Does the buyer have an adequate down payment? Check with your real estate agent on what is expected in the local marketplace.
• How long will the buyer have to procure mortgage financing? Even though the buyer has a home they must sell before completing the purchase, they still can get pre-approved for a mortgage.
• Has a lender checked the buyer’s credit score to get a loan?
• Are there any other proposed contingencies?
• What is the proposed closing date?
• How long will the buyer respond if you get another offer from a different party?
• If the client does not have their home on the market, how long will you give them? This should be a short time frame – no longer than a week.

Be Careful With Contingency Offers

It should be noted that there are not many situations where a Realtor should advise you to accept a contingency offer like the one above.

Unless you are having lots of trouble selling the home – like if it is severely damaged, needs extensive work done, or has become highly undesirable for some other reason – it is usually better to wait for a serious buyer in the position to purchase your home on time.

Waiting for someone to buy a home before selling their current property puts you in the wrong position.

From personal experience, you may know how hard it can sometimes be to sell a home. The person who offered your home may have the same problems.

You are left waiting for a sale that may never happen. As a homeowner, you will likely have better opportunities when home prices rise.

Locking yourself at a sale price you’ll regret will be a mistake.

You Lose All Control With Home Sale Contingencies

When you accept a home sale contingency offer, you trust that the person will sell their home. The problem is that you’ve given up complete control of your sales.

How do you know this person is going to price their home correctly? How do you know the real estate agent marketing their home will do a good job? Will the home be marketed properly? Is the home any more salable than your own?

The answers to these questions are vital and should be a large part of your decision process.

Unless your home is significantly less salable than the property owned by the person making the contingent offer, you should not consider a home sale contingency.

This is where the right of first refusal clause can come in handy instead of a home sale contingency. Once you add in an ROFR, you minimize your risk and allow yourself to continue to seek other buyers.

Accepting a ROFR is a much better alternative if you sell a home.

Why Would A Buyer Accept The Clause?

You may wonder why any buyer would take a clause to an agreement that would disadvantage them. The truth is any buyer who makes an offer contingent on their home’s sale is already in a compromised position. The ROFR might seem like an easier pill to swallow for a seller.

If they are working with a real estate agent, the agent will have told them that making this offer is often ineffective because few sellers want to bother with this contingency. They want to sell their homes with as little trouble as possible.

It is common for people to see things only from their perspective. Suppose you are in a situation where you are struggling to sell. In that case, you may feel grateful for any offer and worry about upsetting a potential buyer, even one offering contingency deals, by asking for your clause to the purchase agreement.

Understand any buyer like this will struggle to buy a home. There will be other sellers who feel the same way you do. It would help if you both were willing to compromise to achieve your desired outcomes.

Buying and Selling a Home at The Same Time

Often, the discussion of the right of 1st refusal and home sale contingencies come into play when people are selling and buying properties simultaneously.

These conversations almost always occur when purchasing a home is impossible without first selling the existing property.

This is where a good real estate agent comes into play to set people straight on how their local real estate market works.

For example, in my area of Massachusetts, it is very uncommon for a home seller to accept a home sale contingency clause for the abovementioned reasons.

It is essential to know this because some people will go out and start looking at homes – find something they love and then try to purchase it without selling their current home.

A seasoned real estate professional will have a conversation upfront explaining to their client that they will unlikely be able to purchase with a home sale clause. This saves a lot of time and anguish.

When you cannot sell and buy simultaneously, the focus should be getting your current home under contract first!

As is often the case with most things in life, some people will be so concerned about being homeless that they will try to cheat the system.

Instead of asking for a home sale contingency, they will make selling their home conditional on finding another. This is a colossal mistake, and the article explains why.

Other Types of ROFRs

There are also a couple of other scenarios in real estate sales where first rights of refusal could exist. A few examples include:

• Condo association right of first refusal – Some condominium associations retain the right to purchase a condo from a selling owner, thus retaining veto power over the acquisition.
• Landlords and tenants: – sometimes, a tenant is interested in buying the rental they live in. A first right of refusal clause can be inserted into the lease. A landlord would then have to give the tenant first dibs on buying the property.

• The land between homes can occur when a subdivision owner sells a lot to someone, and a vacant lot is adjacent to the property that has not been built upon. Sometimes, an owner will grant an ROFR to the person who has already bought if they desire privacy and think that could drastically change.
• Family members – it is not unusual for a family member to be given first dibs on a home before it hits the market.

The Downsides to a ROFR

With many things in life, there are disadvantages. Let me explain how the ROFR could backfire on you.

You have your home on the market. A buyer comes along who wants to purchase your home but can’t because they have a house to sell. The buyer asks for a first right of refusal, which you grant.

Buyer #2 also makes a great offer you want to accept. First, however, you must give customer #1 their right to refuse.

If buyer #1 cannot qualify to buy your home without selling their home first, but they take the risk and gamble that they will sell it before they need to close, where does that leave you?

In this circumstance, buyer #2 was ready, willing, and able to purchase without hang-ups. Customer #1 was not but will gamble their escrow deposit, hoping it will work out.

If it doesn’t, where does that leave you? That is something only you, as a home seller, can answer. You may be able to keep the deposit, but you still haven’t sold your home.

What is a Waiver?

A right of first refusal waiver is a clause stating the holder is giving up the rights to a first right of refusal. Both parties execute it.

Pros and Cons For a Buyer

Pros of ROFR

• It gives you first dibs on a real estate transaction
• They give holders the upper hand in negotiations
• Provides a specific time frame to think about your options
• They provide the ability to do more research before committing
• Locks you into a specific agreed-upon price
• Provides potential opportunities for a home not yet listed for sale

Cons of ROFR

• There is no guarantee you will be able to purchase the property
• A seller is under no obligation to list their home by a specific period
• If home values drop, it could become much less desirable financially
• It could make you emotionally locked into a deal that may never happen

Pros and Cons For a Seller

Pros of ROFR

• It could provide interest for buyers at a desired time in the future
• Keeps home buyers interested in a property without backing away
• Allows you to nail down agreed-upon pricing
• Provides a fallback option if the home sale does not go as expected

Cons of ROFR

• The ROFR doesn’t lock a buyer into purchasing a property
• It can cause issues if you get a better offer from another party
• Your financial gains could be limited if the market value increases
• There are additional obligations sellers must honor

Work With A Real Estate Agent & Attorney

If you are a seller who worries about selling your home and thinks you would be willing to accept a contingency sale, you should work with a real estate agent to protect yourself.

A good Realtor can help you understand how you and your home fit into the current market and inform you of your options.

Your Realtor may tell you to avoid this kind of sale and to hold out for a suitable buyer. Or they may think that the rights of the first refusal clause are precisely what you need.

A trained agent can guide you through the sales process and ensure that the contracts you sign are in your best interests.

Experienced guidance can save you considerable money in your sale and ensure you get the desired outcome within the current real estate market.

Remember, all real estate is local. Many prudent decisions are made based on what is going on in your current market.

It is also wise to have a real estate attorney to protect your interests, mainly when you accept a right of first refusal or home sale contingency.

Having carefully crafted language inserted into the agreement outlining what you do and do not agree to is crucial.

Noteworthy Statistics on The Notice Provision

1. The average duration of a first right of refusal period is 30 days.
2. Research shows that properties with a ROFR clause sell for 12% higher than those without.
3. Approximately 93% of tenants exercise their right of first refusal when allowed to purchase their rental property.
4. Companies that use ROFR provisions report a 25% increase in successful acquisitions.
5. Right-of-first refusal agreements are found in roughly 42% of commercial contracts across various industries.
6. Studies indicate that including ROFRs provision in contracts reduces legal disputes by 15%.
7. Owners who grant a first right of refusal receive offers from alternate buyers in approximately 87% of cases.
8. An ROFR has been linked to a decrease in property turnover rates by 18%.
9. On average, landlords exercise their right to refuse an offer and retain ownership in just 7% of situations where it is invoked.

FAQs

How Long Do They Typically Last?

They typically last for a specific duration outlined in the agreement between the parties involved. The duration can vary depending on the transaction’s nature and the parties’ preferences.

The ROFR usually does not last longer than a year in house sales. On the other hand, in a business transaction where a company is purchasing, a ROFR is usually valid for one to five years.

However, it’s important to note that there is no fixed standard duration for a right of first refusal, as it can be customized based on the specific circumstances and negotiations between the parties.

Can The Provision Be Given to Another Party?

Absolutely! In certain circumstances, a right of first refusal can be transferred to another party. This typically occurs through “assignment,” where the original holder of the right transfers their rights and obligations to a third party.

However, it’s important to note that the transferability of an ROFR may vary depending on the specific terms outlined in the agreement or contract.

It is always advisable to consult legal professionals or review the contractual language to determine whether such rights are transferable in each case.

Can a Tenant Have a ROFR on a Rental Property?

Yes, renters can have a right of first refusal on a rental. This means that if the landlord decides to sell the property, they must offer it to the tenant before considering other potential buyers.

The ROFR is typically included in a lease agreement and protects the tenant’s interest in continuing to reside in the property.

It allows them to purchase the property at a fair market price and maintain their tenancy. This arrangement benefits both parties by ensuring stability for the tenant and potentially avoiding the hassle of finding new tenants for the landlord.

Final Thoughts 

Without a doubt, there are pros and cons to the first rights of refusal clause. As a seller, you need to determine whether or not this is something you should deal with. In a strong seller’s market, the answer is probably no.

Hopefully, you have found this guide to the ROFR to be helpful.

Other Helpful Home Selling Articles

• First-time home seller tips – will you sell a home for the first time? Get some sound advice on how to sell for the most money in the shortest amount of time.
• What is a backup offer in real estate sales? One term you may hear is a backup offer. See what you need to know about backup offers so you can make intelligent decisions.

Use these additional articles to make informed home buying and selling decisions. A kick-out clause may or may not be a good option for you. Understand your circumstances and consult with a top real estate agent.

About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on a right of first refusal. He is an expert in mortgages, financing, moving, home improvement, and general real estate.

Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.

Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.

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Article Name

Right of First Refusal in Real Estate Explained

Description

What is a right of first refusal and how do they work in real estate sale? How does it differ from a home sale contingency?

Author

Bill Gassett

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Maximum Real Estate Exposure

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