Everything You Need To Know About The Right Of First Refusal
Imagine you’re browsing garage sales and come across this incredible antique lamp that you just have to have. You talk to the owner, you let her know how much you love the lamp and make it very clear that you want it, but there’s one problem: the lamp is $50 and you only have $45, and the price is firm. You know there is a crisp $5 sitting on your desk at home, and tell the owner you’ll run home to get it and ask if they’ll hold the lamp for you. The owner compromises and says she will leave it out, and if someone comes and inquires about it before you get back, she will check back with you to see if you have the $5 before she sells it to the next guy. If you do get back in time, the lamp is yours. If you can’t get back with the $5 in an agreed upon time frame, the lamp goes to the next person. Everyone wins in this situation because the owner of the lamp has your offer and the backup offer, so she knows she’s going to sell it. And you win because the lamp is promised to you under specific circumstances and won’t be sold as soon as you start driving home.
This is how the right of first refusal works. Usually, this clause is used when the purchase of a home is contingent on when and if the buyer can sell the house they are currently in. A seller whose home has been on the market for a while with little to no activity can include a right of first refusal clause to their contract as an incentive for buyers. The purpose of this clause is to allow sellers to keep their home on the market after they’ve accepted an offer with a specific contingency applied to it. This clause can sometimes be used to instill a sense of urgency into the buyer to quickly and efficiently do what they need to do to sell their own home before someone else shows interest in the house they are interested in buying.
How It Works
As a seller utilizing this clause, you are free to keep your home on the market while the buyer who gave you an offer works to sell their home. A timeframe and details can be worked out between the two of you. If a second buyer comes along and presents an offer, you have to give the first buyer the option to eliminate the contingency of selling their home and complete the purchase of your home within a specific time frame, usually 24-72 hours. If the first buyer cannot commit to purchasing your house within the agreed upon timeframe, you are in the clear to accept the second buyer’s offer.
What To Look For
If you receive a purchasing offer with the first right of refusal clause included, there are a few things you should pay attention to. This clause may work for you, but pay attention to the details to make sure you don’t end up making things messy or inconvenient for you in the long run
- Is the buyer offering the purchase price? If not, how much are they offering?
- How much time are they asking for to complete the sell of their current home?
- What is their closing date?
- Did they specify the amount of time they need to respond if you do get another offer?
- Is there home already on the market? (If not, it’s better to walk away now)
Types of Right of First Refusals (RFR)
Like most things in real estate, there are different variations and types of First Right Refusals (RFR) and it is important for buyers and sellers to know the details of each.
The first type is basically the option to buy a property before it is sold to anyone else but does not bind the seller to a specific terms or timeframes. The seller is not obligated to sell if details (such as price and terms) weren’t established when the Right of First Refusal was introduced. A variation of this type of option involves the buyer and seller agreeing on a price based on an appraisal of the current value and a percentage increase over time. For example, the buyer and seller could agree that 10 acres of land is worth $10,000 right now and that the price will go up 4% each year following.
The second type of Right of First Refusal is the right for the buyer to match any offers the seller receives. The holder usually isn’t required to match an offer, but the clause gives the holder the option.
The Right of First Refusal Vs. Right Of First Offer
The Right of First Refusal gives the holder the option to review all of the offers and the match the highest one. Strategically, the buyer has the upper hand in a Right of First Refusal. Bidders are less likely to make an offer if they know someone else is just waiting to match their bid, and that the property will automatically go to them when they do. A Right of First Refusal tends to bring the price down since it brings down the number of people willing to make an offer. The seller benefits from an RFR as well, because it gives them a chance to test the waters and see what kind of offers he/she will get on the property.
The Right of First Offer allows a party to be the first to submit an offer on a property. The seller can choose to accept or deny the offer, and the seller can always come back to the buyer if he/she can’t get a better offer. Strategically, the Right of First Offer is an advantage because it can bring down the transaction costs significantly. Selling a property takes time, and involves hiring a handful of professionals (and paying them) to help get the job done. With an Right of First Offer, the seller can simply reject or accept the offer and can save time and money in the process. The seller can always hold out and see if he/she gets a better deal, and the buyer can always reduce their bid in order to seal the deal. The main difference between an Right of First Offer and Right of First Refusal is that a Right of First Refusal is a specific agreement with exact terms that both parties must adhere to, while an Right of First Offer is simply an agreement to negotiate with the parties involved before moving forward with a third party.
Buyers Vs. Sellers: Who Wins With An RFR?
It is important for buyers to know that although an RFR clause can be beneficial in many ways, it can also delay the purchasing process. Buyers should ask about if the RFR follows the property and is something that they will need to address in the future when/if they decide to sell the home. If drafted correctly, an RFR can be a compromise for the buyer and seller but is almost always a greater benefit for the buyer. The risk for the seller, however, can outweigh the benefit, as the power is in the buyer’s hand and he/she can change their mind at any time. Agreeing on an RFR is saying, “yes” to a buyer who can’t fully commit, while saying “no” to other more qualified buyers in the process. Adding an RFO clause to a real estate contract can be an elaborate and detailed process that involves many specific rules and specifications, and should always be discussed with a professional real estate agent to ensure it is in the best interest of both parties before moving forward with the purchase. Although it can seem risky, especially for the seller, it could be the thing that turns a house that is for sale into a house that is sold.