How Does a First Right of Refusal Work in Real Estate

Written by Posted On Monday, 18 January 2021 09:14
How does a first right of refusal work? How does a first right of refusal work?

What to Know About The First Right of Refusal

The Right of First Refusal or ROFR for short is also called a first right of refusal as well. You will see it referenced as both in real estate circles. The ROFR gives one party the right to enter into a contract with a company or person before anyone else can.

If the entity with the right of first refusal does not enter into a transaction, the owner can accept other offers of their choosing. Over the years, a first right of refusal has been prevalent for those renting that might entertain purchasing the property they live in.

In my thirty-four years working as a real estate agent, many clients have asked what is a first right of refusal. If you are worth your salt as an agent, you should be able to clearly explain the definition, along with the pros and cons of such a legal agreement.

There was a time when the right of first refusal was pervasive and was negotiated before the homeowner brought the property to the market. This may happen when a client has expressed a strong interest in the property.

Right of first refusal usually has a time limit placed on it, and when the time is up, any potential buyers can make an offer on the property. Quite often, a right of first refusal will last anywhere from 24-72 hours from the time another party presents an acceptable offer.

How Does a Right of First Refusal Work?

Before the seller puts the property onto the market for sale, they must make it available to the person with the right of first refusal. The person may instantly pay the price and take the property.

On the other hand, they may think it's overpriced as stipulated in the contract and wait and see others' offers when the property is marketed. This may mean they purchase it cheaply, or they miss out altogether, depending on the buyers available and interest at the time.

When the rental market is oversupplied, it is hard to get the right tenant. The first right of refusal might be the incentive needed to get a good tenant in for a couple of years until the owner decides to sell, giving the tenant the first right of refusal in writing.

This kind of clause is different from a traditional rent-to-own agreement where the tenant may be locked into making a property purchase.

The Right of First Refusal in Action

You would need to sit down with your real estate agent or attorney and write a legally binding agreement. What the legal team will probably do is agree that when the time comes, a time limit window to enact acceptance of the right of first refusal applies, and after that expires, the home is on the open market.

There also needs to be an agreement about what the future sale price of the property will be. This last point is tricky, so it is a good idea not to make the agreement too long-term, as sometimes prices rise very fast and the owner may be disadvantaged.

Statuses in The Multiple Listing Service

There are many statuses in the MLS that don't confuse consumers at all because they are self-explanatory, like being for sale or sold. There are others, however, that do confuse folks, like being contingent or seeing a home marked as having a right of first refusal.

An outstanding real estate agent should be able to explain these real estate clauses, so there is no confusion on your part.

Advantages of Right of First Refusal For a Buyer

The first right of refusal offers some upsides for a home buyer:

  • As a buyer, it puts you at the head of the cue, and it gives you the first shot!
  • It could mean that you get the property more cheaply, if in a rising market.
  • When you are renting, it gives you time to be 'buyer ready' and save a big deposit.

Disadvantages of Right of First Refusal For a Buyer

There are also downsides as well.

  • When the time comes, the time limit for acceptance will most likely only be a week, be ready or miss out.
  • Pre-negotiated prices can either work for or against you, and if prices have fallen, you may be paying too much.

Advantages of Right of First Refusal For a Home Seller

These are the pros from the seller's standpoint of having this kind of clause.

  • No marketing is required. It keeps the costs down.
  • You may sell above market value.
  • It may be done to help a member of your family secure a property.

Disadvantages of Right of First Refusal For a Home Seller

These are the drawbacks of having a first right of refusal on your property as a homeowner.

  • It limits your potential buyers and could lower the price.
  • If the market is rapidly rising, you could lose the potential for a better price.
  • It may affect your ability to refinance (although rare) should the need arise. Lenders don't like this type of complication.

In some areas of the country, a right of first refusal is commonplace. In others, it is not. If you are a real estate agent, you need to have an excellent understanding of the first right of refusal. The need could arise where the right of first refusal could be part of a homebuyers strategy for landing the home they wish to buy.

Over the years, there have been a handful of occasions where I have used the right of first refusal for a buyer client. While representing sellers, I have seen these clauses numerous times.

Conclusion on The Right of First Refusal

When the contract is written, it may state a price, or the agreement (ROFO) may allow the potential buyer to make the initial bid on a property. Whether you are buying or selling, you should consider all the options before entering into the right of first refusal.

If you love the property and the owner is ultimately selling, it will be a good opportunity to take as it buys time. Hopefully, you now have a better understanding of a right of first refusal and can put it to good use if the need arises.

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Bill Gassett

One of the top RE/MAX agents in New England over the last decade plus. Providing exceptional real estate services to buyers and sellers in the Metrowest Massachusetts area including the following communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

See my real estate website at Maximum Real Estate Exposure - one of the most visited real estate sites in Massachusetts.

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