In selling a house, have you ever had a buyer offer an amount that was contingent upon the sale of their home? If you have, your real estate agent might have offered the buyer the first right of refusal. What is the first right of refusal? What other situations might the first right of refusal be important? And as a seller, are first rights of refusal beneficial? We’ll cover all of that and more in this guide.
What is First Right of Refusal in Real Estate?
Let’s talk definitions first. The Right of First Refusal in real estate means that the designated individual or group holds the right to match any offer on a property, whether that offer is for renting or purchasing the property. The contract of first right of refusal needs to indicate the terms of the negotiation as well as an expiration date (if any) for the transaction.
When It's Used:
The right of first refusal in real estate is used in a few different instances and can be beneficial or detrimental, depending on the purpose.
If you are the tenant of a piece of property that changes hands, typically you will have been given the first right of refusal if the new landlord decides to change the rates. For example: say you were renting a home from Ted for five years. Ted decides to get out of the rental business and sells the home you’re living into Steve. Steve fixes up the property a bit and notes that rent in the area has increased in the last five years. He decides to increase the rent on the house to match the market but gives you first right of refusal. You now have the option to a) Rent the house for the increased rate, or b) Exercise your right of refusal and leave the property, allowing for another tenant to move in and pay the increased rate.
An instance of this happened in California, where a new investor bought an apartment building. The investor fixed up the building and decided that instead of attracting tenants with families living at or below the poverty level, they wanted to attract students of the local college. The investor raised their rates and offered the tenants right of first refusal. Because the tenants would not -- or could not-- pay those rates, they left, allowing students to move in.
Purchasing a Home
There are a couple of situations in which buying and selling a house would warrant a first right of refusal. The first is if the buyer wants to purchase a house, but they need to sell their own home to afford the new home. What the right of first refusal means in this instance is that the seller is accepting backup offers. Once the seller makes an offer, the buyer with the right of first refusal can then go in and match that offer or forfeit their offer. If they forfeit, it means the seller is now in a position to accept the new offer.
The second situation is if the property that you are selling is part of a Homeowner’s Association or condominium community. The HOA or community leaders might require you to grant the right of first refusal to them for review. They do this to prevent you from selling your home with a discount or other similar transactions.
What is the difference between First Right of Refusal and Right of First Offer?
Many get the first right of refusal confused with the right of the first offer. The right of the first offer is the right granted to an individual or group to be able to place the first offer on the property. There are a few instances where the right of the first offer is applicable.
You are looking for investment properties and notice there is a property that fits all of your criteria but is not listed for sale. You contact the owner and find out they are considering listing the home for sale, and offer you the right of the first offer. Since you have the right of the first offer, once the property arrives on the market, you have the option of making the first offer.
Another instance is if you have a family member or friend who wants to buy or rent the property you own. Before listing it, you can grant them the right of the first offer, and they can now make the first offer on the property. You do not have to accept their offer, but you cannot accept another offer until you do.
Just a recap, the first right of refusal means if another offer presents itself, you can match it or get out of the game. The right of the first offer also means once the seller lists the property, you have the first chance at offering a price.
Is the first right of refusal beneficial for both buyers and sellers?
If you are a buyer, the first right of refusal is great to have. It gives you time to sell your home while placing a hold on your dream house. If you’re renting, it means you have a choice to pay up or move out.
If you’re the one selling or renting out the property, speak to your real estate agent before accepting an offer contingent upon the sale of the buyer’s property. Depending on how the wording of the contract, you may need to offer the first right of refusal to the first buyer each time you get a new offer. This adds unnecessary time and roadblocks into the process.
With any transactions utilizing the right of first refusal, make sure you work with a local agent who has experience in these types of transactions. Having someone by your side who understands the ins and outs of first rights of refusal means there is a lower chance of something going wrong throughout the process.
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