When buying your first home, you might hear terms like the Right of First Refusal. Hearing all real estate jargon when searching for a home can be confusing and overwhelming. The right of refusal refers to a legal clause that gives an interested party the right to be the first person to buy a home when the seller first decides that they are going to sell the house.
This can be a confusing definition, although it’s the one most commonly found online. This guide will put it in simpler terms and go into detail about the pros and cons of ROFR so you can be sure you know exactly what you are getting into.
What Is The Right Of First Refusal In Real Estate?
The right of first refusal is a provision that will be written into a lease. It gives an interested party the right to buy a property before the seller can show it or negotiate with other offers.
This provision is usually put into a lease a long time before the property is sold. Remember that the seller can still put the property up for sale and put a price tag on it, but they are not allowed to accept an offer from anyone before talking to you.
Once the person has notified you about the property being for sale, you have to decide whether you want to buy the property or not. If you want to buy the property, you need to make sure you are mentally and financially ready. You will need to be able to get a mortgage.
You can make an offer if you are ready; otherwise, the seller can begin showing the home and accepting offers from other buyers.
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How Does ROFR Work?
ROFR is a legally binding obligation between a homeowner and a seller, and it can be used for a variety of different properties, including condos and single-family residences. Keep in mind, though, that it only gives you the option to be the first to buy a property; you are not obligated to buy it if you do not want to.
If you find a property that you like, you can put a ROFR into the lease agreement to give you a kind of insurance so that you can buy the property when the seller is ready to put it on the market.
The ROFR allows you to be the first to decide whether you want to make a real estate purchase before others can. The ROFR will also have a predetermined price as the purchase price needs to be communicated before the property is put onto the market.
The ROFR must be negotiated before the homeowner is ready to sell the property. This means they need to notify the other person of the home being for sale before they look at and accept other offers for the home.
Most of the time, the ROFR will also have a time limit. Once the homeowner notifies you that they are going to sell the property, you will only have a short amount of time to decide whether you want to buy the property or not.
If you do not let the homeowner know your decision before the time limit, the seller will be able to talk to other buyers and begin to accept other offers.
When Is A Right Of First Refusal Used?
A right of refusal might be used in a few different situations. Here are the most common ways it’s used:
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Between family members. This might be used when a relative owns a property and wants to give other family members a chance to buy the home before accepting outside offers. If no one in the family is open to buying the home, the seller can begin to take offers from third parties.
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Between a tenant and a landlord. This is when someone is renting a property and already living in the home, and they are given a chance to buy the home before the landlord begins to take other offers. When you first begin renting the home, this might be written in your lease agreement.
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Homeowner’s association and condos boards. This allows a board or an HOA to vet potential buyers before allowing someone new to move into the neighborhood. It also allows them to prevent discount sales and reject offers.
ROFR Vs. ROFO
ROFO stands for Right Of First Offer. If you have heard of ROFO, you might confuse it with ROFR since the acronyms are similar. Both of these allow the buyer to make the first move, but it doesn’t require the seller to negotiate with the potential buyer.
With ROFO, the seller can begin to market the home to other buyers while the rights holder is deciding whether they want to buy the home or not.
Pros & Cons For Buyers
It’s important to know the pros and cons of the buyer before agreeing or disagreeing to a ROFR. Here are some of the pros and cons to keep in mind. The right to be able to buy the property before anyone else has the chance has many benefits, and there are also financial incentives to think about.
Pros
Here are the most valuable pros to think about:
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Gives you the first opportunity if you’re waiting to buy a home at a good price.
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Allows you to make a predetermined purchase price.
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Gives you time to think over your options and look at other properties if you want.
Cons
You also need to consider the drawbacks when considering a ROFR. Here are the ones to keep in mind:
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You might become over-attached to the property and then be disappointed if you cannot buy it.
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Could be a disadvantage financially if the home value drops.
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Sellers are not forced to list the property in a set timeframe.
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It does not guarantee a purchase.
Pros & Cons For Sellers
Sellers can potentially be hampered by the ROFR. It’s important to know the pros and cons if you are the seller. It means you might not be able to work with other buyers, and you might get a lower price for the home than what you think it’s worth.
It could potentially make it easier for you to find a buyer for the home if the person with the ROFR is interested. Then, you don’t need to look for other buyers.
Pros
As the seller of a property with an ROFR, here are the pros to keep in mind:
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Easily allows you to agree on the proposed purchase price.
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Provides peace of mind when you list the property.
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Keeps potential buyers that are on the fence from walking away.
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Potentially could entice interest from future buyers or renters.
Cons
Before including a ROFR for relatives or to renters for your property, make sure to be aware of these cons:
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Makes an added obligation and burden for the sellers.
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Keeps you from taking better offers that might come up later.
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Limits you financially if the home value increases and you have to sell for a lower price.
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The buyer does not have to buy the property if they don’t want to.
Who Is Eligible To Negotiate A ROFR?
If you are considering including a ROFR in a lease, whether you are the buyer or the seller, you need to see if you can get a real estate attorney involved in drafting the document. The clauses are not usually complex, but you might want to talk to an attorney anyway to make sure you understand the wording and the time limit for making an offer.
How Can I Avoid ROFR Problems?
Avoiding ROFR problems is easy when you make sure to follow these steps. You need to think through future scenarios and ensure you know what to do if something does not happen according to plan.
If you are the seller, ensure the ROFR will not create issues if you need to refinance the mortgage. You also need to think about loans if you have them and if you are using the home as collateral.
If you are the buyer, make sure you know the time limits of the ROFR and how a down payment might affect it. Your attorney should be able to explain all these things to you.
Summary
Right of first refusal can typically give both the buyer and the seller peace of mind. However, there is no 100% guarantee that the home will be bought. Whether you’re planning to buy or sell a house, you should still consider all of your alternatives before signing a right of first refusal agreement. This clause is a useful negotiating tool, but it may or may not be worth the risk depending on the circumstance and the state of the property market. Seeking legal advice before entering an ROFR is always a good plan.
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