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What Does "Right of First Refusal" in Real Estate Mean?

What if you could be the first buyer to look at a home before it goes on the market and didn’t have to worry about bidding wars or competition? With a right of first refusal you can have this option. But before you write this clause into your contract, learn both the benefits and issues you could face.
What if you could be the first buyer to look at a home before it goes on the market and didn’t have to worry about bidding wars or competition? With a right of first refusal you can have this option. But before you write this clause into your contract, learn both the benefits and issues you could face.

Looking for a home can be tough. It’s a competitive market out there will a lot of eager buyers aiming to get a good deal. Certainly, in the majority of scenarios, you have to wait for an open house then compete against other buyers, even potentially ending up in a bidding war.

And for sellers, it can be just as discouraging. If the market isn’t in your favor you may not see a ton of interested buyers and be forced to sell your home well under value to avoid having your home sit on the market for ages.

But what if you could avoid all that? This is where a right of first refusal comes into play.

What Is a Right of First Refusal?

A right of first refusal is an arrangement written into a lease or other housing agreement that gives the individual with contract the option to purchase a property before anyone else.

Meaning, whenever the owner of the property decides to sell, they first have to give the person with a right of first refusal the opportunity to buy before they put the home on the market or consider other offers.

What This Means for Buyers and Sellers

Buyers

For a buyer with this clause in their contract, this can be a great deal. They have the advantage of making an offer on the property without any other competition or lower the chance of a bidding war.

On the other hand, short notice can be a huge disadvantage to those with a right of first refusal, as it can be difficult to summon up a large chunk of change so quickly.

As in most cases, there is a time limit on how long before the holder of a right of first refusal must purchase the property before the seller is able to move on and consider other offers — this puts the buyer at an enormous disadvantage.

If you have a right of first refusal and are truly interested in the property, you may want to have a game plan ready in the case that the seller decides to sell on short notice.

Sellers

For sellers, a right of first refusal can work to their benefit by making the entire selling process go faster, saving them time and money.

For instance, if the holder of a right of first refusal wants to purchase the property, the sale goes through quickly and the seller can avoid commission fees — typically a buyer’s agent can’t receive a commission through a right of first refusal sale.

Additionally, depending on the specific terms of the agreement, if the seller receives a great outside offer on their property above market value, it forces the holder of the right of first refusal to either match the bid or pass on the opportunity to buy first.

This assuredly benefits the sellers as if the holder passes, the seller then has the opportunity to negotiate with other interested buyers for potentially better prices.

However, it’s not all good news for the seller.

More times than not, a seller is actually wary of a right of first refusal as it limits their ability to work with other potential buyers and receive multiple offers right off the bat.

Truly, depending how long the holder has to make an offer, the seller could miss out on other interested parties who have moved on knowing they’re not the priority or first in line.

When Do You Use a Right of First Refusal?

While there’s certainly benefits and drawbacks of a right of first refusal for both sellers and buyers, you won’t typically run into the option too often. There are only a few scenarios when you might have a right of first refusal in your agreement.

Renting from a Landlord

A right of first refusal is most common in agreements between a tenant and landlord. If you’re renting a property with a right of first refusal in the contract, your landlord must first give you the chance to buy whenever they decide to sell.

This can be especially great if you really love the home you’re renting and want to eventually buy it someday, and it can also help prevent your landlord from outright evicting you if they receive an outside offer and want to sell.

Homeowners Association

If you own a condo or townhome, you most likely have to deal with a homeowners association or board. In this situation, it’s common for homeowners associations to have a right of first refusal and will have the first opportunity to buy your unit if you decide to sell.

Many homeowners associations will have terms in the agreement that allow them to match any outside offer before you sell or even reject the buyer’s offer entirely. More often than not, this is to prevent any sales that may lower the value of the community.

Family and Neighbors

If you want to keep your home in the family, a right of first refusal can be indispensable. This will ensure your family member has the first chance to purchase the home — this can make inheriting or passing along property much simpler.

A right of first refusal can also benefit neighbors. For example, if you have a large piece of land and write up a right of first refusal into a contract with neighbors, whenever you decide to sell, your neighbors will have the first shot at acquiring your fields and property.

Consult a Professional

Every right of first refusal is different and contains a multitude of different requirements and clauses that can get overly complicated and confusing. So before you sign a contract with a right of first refusal, you’ll want a professional to go over the document with a fine tooth comb.

This is where Clever can help. Whether you’re a seller or buyer, a Clever Partner Agent can help you navigate the right of first refusal details so you understand the deal thoroughly and no one faces legal consequences down the road.

If you do take advantage of a right of first refusal and decide to buy or sell, you’ll also find cost savings with Clever, as Partner Agents work for a lower commission rate and you may also be eligible for a home buyer rebate of $1,000 for homes over $150,000.

 

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Jamie Ayers

Jamie is the Director of Content at Clever Real Estate, the free online service that connects you with top real estate agents and helps you save thousands on commission. In the past, Jamie has managed columns for clients in a variety of leading business publications, including Forbes, Inc., CEO World, Entrepreneur, and more. At Clever, Jamie's primary goal is to provide home sellers, buyers, and investors with the information they need to successfully navigate the ins and outs of the real estate industry.

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