Quick Guide: Right Of First Refusal In Real Estate

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.

What Is Right Of First Refusal?

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.

How Does Right Of First Refusal Work?

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.

ROFO Vs. ROFR: What’s The Difference?

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.

How To Enter A Right Of First Refusal Agreement In Real Estate

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.

General Tips For Right Of Refusal Clauses

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.

ROFR Tips For Buyers

• Understand the terms of the ROFR agreement: Terms and conditions vary widely in ROFR agreements, so it's essential to understand the specific details fully. Carefully review the language and provisions of the clause, including the purchase price, timeline and any other conditions.
• Hire an experienced real estate agent: It’s highly recommended to hire a real estate agent or REALTOR^® who has experience working with ROFR clauses.
• Consider financing options: Use the timeline in the contract to your advantage. Make sure to line up your financing ahead of time to ensure you have the necessary funds to make a purchase.
• Communicate clearly and frequently to avoid delays or misunderstandings: Communication between potential buyers and homeowners in a ROFR agreement is key. Keep the owner informed of your intentions and any progress in securing financing.

ROFR Tips For Sellers

• Specify whether prospective buyers can match an offer from the general public: Wording and language matter in any contract. It’s important to lay out all the terms and details and specify if the potential buyer must offer a predetermined amount or if they can match someone else’s offer.
• Consider adding language requiring the potential buyer to acknowledge if they don’t exercise their right to purchase the property: If the potential buyer has chosen not to purchase the property, the seller can consider other offers once the set amount of time has passed. But if you don’t want to be kept waiting, design the contract so that the buyer is obligated to tell you if they no longer want to buy the property, rather than having to wait out the clock.

ROFR Pros And Cons For Buyers

Entering a ROFR can be advantageous for buyers, but there are potential downsides. Here are several pros and cons for buyers to consider.

ROFR Pros And Cons For Sellers

There are pros and cons for sellers as well. Sellers should keep these advantages and disadvantages in mind before jumping into a ROFR contract.

Right Of First Refusal FAQs

Here are the most frequently asked questions related to the right of first refusal.

How can I avoid ROFR problems?

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.

Is the right of first refusal a good idea?

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.

What does it mean to give someone first refusal?

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.

How long is a right of first refusal good for?

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.

What does first right of refusal mean in a real estate transaction?

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.

The Bottom Line: ROFR Agreements Can Have Benefits, But They Come With Caveats

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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