UPDATED: Jul 11, 2023
If you’re a buyer who wants the first pick on a specific property, or a seller who prefers to avoid the hassle of listing a property for sale, a right of first refusal agreement is one option to simplify the transfer of real property.
In real estate, the right of first refusal (ROFR) is most commonly used in a leasing contract between landlord and tenant. ROFR grants a person or party the right to call first dibs (or pass) on making an offer before the seller can negotiate with other buyers.
In this article, we’ll explore the right of first refusal in a real estate transaction – what it means, how it works and what you need to consider to decide if it’s the right option for you.
The right of first refusal is a contractual right that gives a specific party the first opportunity to make an offer on a house before its sale. In the event that the ROFR holder is no longer interested in submitting a bid for the property, the seller can then accept offers from other potential buyers. In other words, if the owner of the property wants to sell, the holder of the right gets first pick and they have the option to either accept or decline.
If the owner receives a higher offer from another interested buyer, the owner can ask the holder of the ROFR to match or renegotiate. If they refuse, the owner can accept offers from other potential buyers.
When a buyer sees a property that interests them but it’s not currently for sale, it may be an opportunity to negotiate with the owner for ROFR. The specific terms and conditions of the ROFR, such as the purchase price, timeline and other details, are outlined in the contract.
There are several reasons a right of first refusal may be initiated.
A real estate agent might contact the owner on behalf of an interested client, or a landlord might offer it as an incentive to their renting tenants, giving them the opportunity to purchase the property should the landlord decide to sell their rental property. A right of first refusal can also allow a property owner to sell to preferred buyers, like friends or family members. Regardless of the reason, negotiating a ROFR can be a process, so we recommend both parties work with a lawyer to protect their best interests.
ROFR can also allow buyers time to arrange financing. The ROFR clause gives the holder a timeframe to secure financing, which could be several weeks or months, depending on the negotiated terms.
When negotiating a contract, the future sale price of the property is calculated in an agreed-upon manner. If it’s not possible to determine a specific purchase price in the agreement, the potential buyer may instead be given the right to match any other offers made by a third party. If the buyer is no longer interested in the property when it is put on the market, they can pass and the seller can accept the third-party offer.
A right of first offer (ROFO) agreement gives the buyer first dibs on making an offer when a home is listed for sale. But while a right of first refusal might require the seller to sell to the predetermined buyer based on the terms of the contract, a right of first offer gives the seller the ability to market the property for sale more broadly with other potential buyers.
In short, a ROFO gives the buyer a chunk of time to construct and make an offer, but the seller ultimately gets to decide if they want to accept or reject it. And as a bonus, this agreement gives the seller the opportunity to go back to the original deal they rejected if they don’t get a better offer.
If you’re interested in entering a ROFR agreement for a specific property, have your real estate agent contact the property owner to introduce you as an interested party. Having a real estate expert in your corner throughout negotiations will help to minimize any stress and uncertainty, but you should also consider the following best practices to make the process as simple and successful as possible.
As a general rule of thumb, it’s a bad idea to sign a contract that hasn’t been reviewed and explained to you by your lawyer. Both sides should involve their real estate attorneys to ensure everyone’s best interest is considered and protected.
Another important consideration is time. The buyer doesn’t have an indefinite amount of time to submit an offer. The buyer and seller must fully understand and agree upon how much time the buyer will have to submit an offer once the home is for sale.
Entering a ROFR can be advantageous for buyers, but there are potential downsides. Here are several pros and cons for buyers to consider.
Pros |
Cons |
No competition to start a bidding war. |
There’s a time limit on the buyer’s ability to purchase the property. |
The purchase price is often pre-negotiated. |
The pre-negotiated price may not be the best deal if the market value shifts. |
You have time on your side to save for a down payment, establish your credit and arrange financing before the home buying process begins. |
If the buyer doesn’t stick to the timeline or declines the offer, the seller may be free to sell the property to other buyers. |
There are pros and cons for sellers as well. Sellers should keep these advantages and disadvantages in mind before jumping into a ROFR contract.
Pros |
Cons |
There’s no need to list the property for sale. |
Adding a ROFR clause narrows the pool of potential buyers. |
It could sell for above market price. |
The property could sell below market value. |
It gives owners an opportunity to favor preferred buyers, like friends, family or tenants. |
Lenders typically prohibit getting a loan when this type of clause is in place, which means you may not be able to refinance. |
Here are the most frequently asked questions related to the right of first refusal.
Many potential problems that occur with ROFR can be avoided by addressing them when both parties are negotiating the contract terms. Clear and open communication can also help avoid any misunderstandings.
The right of first refusal can be a good idea in that it allows a potential buyer to have first dibs on a property, providing a sense of security and control. Sellers don’t have to worry about listing the property and can save it for preferred buyers.
To give someone first refusal means to give a prospective buyer the first opportunity to make an offer on a specific property. The property owner and priority buyer must sign a right of first refusal agreement and negotiate the terms of the contract.
The timeline in a ROFR agreement depends on the terms of the contract. There is no fixed or standard duration for a right of first refusal.
In real estate, the right of first refusal gives a prospective buyer the opportunity to purchase a specific property before it’s offered to other potential buyers. If the property owner decides to sell their property, they are obligated to first offer it to the holder of the right.
Suppose you're willing to wait for your dream home to become available. In that case, a right of first refusal can be a powerful tool – but it's essential to understand all the potential advantages and disadvantages of this type of agreement before entering one.
Under the right circumstances, a ROFR can mean a faster and smoother real estate transaction for everyone involved. Still, the buyer and seller must be confident in their decision before moving forward.
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