What to Know About a Right of First Refusal Clause in Real Estate Sales
Do you have your home for sale, and a buyer has proposed a right of first refusal? Over my nearly thirty-four years in the business, numerous clients have asked me what is a right of first refusal and how do they work.
A right of first refusal or ROFR for short is also known as the first right of refusal.
Rights of first refusal clauses in real estate are similar to an option contract. The holder or the ROFR has the right, but not the obligation, to enter into a real estate transaction that is usually the purchase of a home.
The potential buyer with this right has the opportunity to establish a contract or an agreement on a home before others can.
When selling a home, you are often forced to deal with scenarios that are less than ideal. One such scenario is a purchase offer that is contingent on the sale of the buyer’s home.
Should you accept such an offer? Are there any options that could make such an offer more appealing – and with less potential downside?
If you are in a situation where you are really in need of an offer, even an imperfect one with contingencies, the first rights of refusal clause may be just what you need.
Rarely I will ever counsel a client to accept an offer with a home sale contingency; however, a first right of refusal in some circumstances could be a good alternative.
It should be noted that rights of 1st refusal are also referred to as a “kick-out clause.” These two real estate terms mean the same thing.
What is a First Right of Refusal?
As it pertains to real estate a first right of refusal clause gives a buyer the contractual right to be the first party eligible to make an offer when a property is put up for sale.
If another buyer has interest in the property, the person with the ROFR has the option to either buy the property or decline and let the seller accept a contract from another buyer.
As a buyer, if you find a home you like whether it is for sale or not the ROFR gives you first dibs over other buyers. When you have a first right of refusal the seller must contact you and let you potentially move forward with a purchase before an offer can be accepted from another party.
The first right of refusal can be put together either before a home is listed for sale or during the time it is on the market.
How The Right of First Refusal Often Works in Real Estate
If you list your home and find yourself with fewer offers (or none at all) than you had hoped for, you may be looking for any buyer that will make the leap and purchase your home.
When a buyer does come along, what happens if you get an offer that comes with baggage that you are unsure how to deal with – like if the buyer will only buy the home if they sell their current home?
While it may be a situation that you had not anticipated, now you must determine if you want to sell your home badly enough to accept such an offer.
An offer with a home sale contingency comes with quite a bit of risk. I often refer to the home sale contingency clause as real estate fools gold. You think you have a deal, but in reality, you don’t. Read the article to see why.
When you consider an offer with a home sale contingency, you want to minimize the risk you put yourself in. A first right of refusal clause accomplishes the goal of protecting you while still allowing you to accept the offer.
When you add a ROFR or kick-out clause, you tell the buyer making the contingency offer; you will still keep your house on the market until the buyer purchases your home.
If another buyer comes along and makes an offer for your home, you must give the original buyer the option to eliminate the contingency for the sale of their home and purchase your home within a specific period – 24 to 72 hours is typical.
Selling to a Buyer Without The ROFR
If the original buyer does not buy the house from you within the specified period, then you can return the earnest money from the original offer and can then sell your home to the second buyer.
Working as a top real estate agent in Franklin, MA, I have gone through the right of first refusal process many times. More than a few times, buyers have made an offer on a home I am listing and ask for a home sale contingency. On many occasions, my seller clients said no way, and the buyer proposed a right of 1st refusal instead, which was subsequently accepted.
Accepting a right of first refusal can be a win-win for a seller. You might be wondering if there are any drawbacks to this situation. There is only one. If you have accepted a ROFR giving the first buyer 72 hours to decide if they want to move forward, the second buyer may find they can’t wait that long.
Maybe they are being transferred to the area and have narrowed down their search to your home and another. The buyer might not want to take a chance on losing the other home they have an interest in. This is especially true in hot markets with limited inventory.
What to Expect With a Right of 1st Refusal or Kick Out Clause
When you are selling a home and receive an offer with the right of 1st refusal or kick-out clause, there should be a few things that you look for just like any other offer, including the following:
- What is the buyer willing to pay for your home.
- Is the buyer going to have a home inspection and other inspections? If so, how long do they have to complete them? 7-10 days is the typical time frame.
- How long will the buyer have to procure mortgage financing? Even though the buyer has a home they must sell before completing the purchase, they still can get pre-approved for a mortgage.
- Are there any other proposed contingencies?
- What is the proposed closing date?
- How long will the buyer have to respond should you get another offer from a different party.
- If the client does not have their home currently on the market, how long will you give them? This should be a short time frame – no longer than a week.
Be Careful With Contingency Offers
It should be noted – there are not many situations where a Realtor should advise you to accept a contingency offer like the one above.
Unless you are having lots of trouble selling the home – like if it is severely damaged, needs extensive work done, or has become highly undesirable for some other reason – it is usually better to just wait for a serious buyer that is in the position to purchase your home on time.
Waiting around for someone who is buying a home before selling their current property puts you in a bad position. You know how hard it is to sell a home now, from personal experience, and the person who made the offer on your home may run into the same problems.
You are left waiting for a sale that may never happen.
When accepting an offer with a home sale contingency, you are putting faith in this person that they will sell their home. The problem with this is you’ve given up complete control of your sale.
How do you know this person is going to price their home correctly? How do you know the real estate agent marketing their home will do a good job? Will the home be marketed properly? Is the home any more salable than your own?
The answers to these questions are vital and should be a large part of your decision process.
Unless your home is significantly less salable than the property owned by the person making the contingent offer, it is wise not even to consider a home sale contingency.
This is where the right of first refusal clause can come in handy instead of a home sale contingency. Once you add in a ROFR you minimize your risk and allow yourself to continue to seek other buyers.
If you are selling a home, accepting a ROFR is a much better alternative.
Why Would A Buyer Accept A Right Of First Refusal Clause?
You may be wondering why any buyer would take a clause to an agreement that would disadvantage them. The truth is any buyer who makes an offer contingent on their home’s sale is already in a compromised position. The ROFR might seem like an easier pill to swallow for a seller.
If they are working with a real estate agent, the agent will have told them that making this kind of offer is often ineffective because few sellers want to bother with this sort of contingency. They want to sell their homes with as little trouble as possible.
It is common for people only to see things from their perspective. If you are in a situation where you are struggling to sell, you may feel grateful for any offer and worry about upsetting a potential buyer, even one offering contingency deals, by asking for your clause to the purchase agreement.
Understand, any buyer like this is also going to struggle to buy a home. There will be other sellers that will feel the same way you do. It would help if you both were willing to compromise to achieve the outcomes you want.
Buying and Selling a Home at The Same Time
Often the discussion of the right of 1st refusal and home sale contingencies come into play when people are selling and buying properties simultaneously. These conversations almost always come into play when purchasing a home is impossible without first selling the property already owned.
This is where a good real estate agent comes into play to set people straight on how their local real estate market works.
For example, in my area of Massachusetts, it is very uncommon for a home seller to accept a home sale contingency clause for the reasons mentioned above.
It is important to know this because some people will go out and start looking at homes – find something they love and then try to purchase it without selling their current home.
A seasoned real estate professional will have a conversation upfront explaining to their client that it is unlikely they will be able to purchase with a home sale clause. This saves a lot of time and anguish.
When you are not able to sell and buy at the same time, the focus should be getting your current home under contract first!
As is often the case with most things in life, some people will be so concerned about being homeless; they will try to cheat the system. Instead of asking for a home sale contingency, they will make selling their home subject to finding another. In my opinion, this is a colossal mistake. See all the reasons why in the article.
Other Types of Right of First Refusal
There are also a couple of other scenarios in real estate sales where a first rights of refusal could exist. A few examples include:
- Condo association right of first refusal – Some condominium associations retain the right to purchase a condo from an owner who is selling, thus retaining veto power over the acquisition.
- Landlords and tenants: – sometimes a tenant is interested in buying the rental they live in. A first right of refusal clause can be inserted into the lease. A landlord would then have to give the tenant first dibs on buying the property.
- The land between homes – this can occur when an owner of a subdivision sells a lot to someone, and there is a vacant lot adjacent to the property that has not been built upon. Sometimes an owner will grant a ROFR to the person who has already bought if they desire privacy and think that could drastically change.
The Downside to First Rights of Refusal
With many things in life, there is a disadvantage. Let me explain how the ROFR could backfire on you. You have your home on the market. A buyer comes along who wants to purchase your home but can’t because he has a house to sell. The buyer asks for a first right of refusal, which you grant.
Along comes buyer #2, who makes a great offer you want to accept. First, however, you have to give customer #1 their rights of first refusal.
If buyer #1 cannot qualify to buy your home without selling their home first, but they take the risk and gamble, they will sell it before they need to close where does that leave you?
In this circumstance, buyer #2 was ready, willing, and able to purchase with no hang-ups. Customer #1 was not but is going to gamble their escrow deposit that it will work out.
Where does that leave you if it doesn’t? That is only something you can answer as a home seller. You may be able to keep their deposit, but you still haven’t sold your home.
Work With A Real Estate Agent & Attorney
If you are the kind of seller that worries about difficulties in selling your home, and if you think you would be willing to work with a contingency sale, you should work with a real estate agent to protect yourself.
A good Realtor can help you understand where you and your home fit into the current market and help you know your options.
Your Realtor may tell you to avoid this kind of sale and to hold out for a good buyer. Or he or she may think that the rights of first refusal clause is exactly what you need.
A trained agent can guide you through the sales process and ensure that the contracts you sign are in your best interests. Experienced guidance can save you a considerable amount of money in your sale and make certain that you get the outcome you really want within the current real estate market. Remember, all real estate is local. Many prudent decisions are made based on what is going on in your current market.
It is also wise to have a real estate attorney to protect your interests, especially in cases where you will accept a right of first refusal or home sale contingency.
Having carefully crafted language inserted into the agreement outlining what you do and do not agree to is crucial.
Without a doubt, there are pros and cons to the first rights of refusal clause. As a seller, you need to determine if this is something you should deal with or not. In a strong seller’s market, the answer is probably no.
Hopefully, you have found this guide to the ROFR to be helpful.
Other Helpful Home Selling Articles
- First time home seller tips – are you going to be selling a home for the first time? Get some sound advice on how to sell for the most money in the shortest amount of time.
- What is a backup offer in real estate sales one term you may hear is a backup offer. See what you need to know about backup offers so you can make intelligent decisions.
- Important real estate terms buyers and sellers should know certain lingo when entering a real estate transaction. These are some of the most vital terms you should know.
Use these additional articles to make informed home buying and selling decisions. A kick-out clause may or may not be a good option for you. Understand your circumstances and consult with a top real estate agent.
About the author: The above Real Estate information on what is a first right of refusal was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at firstname.lastname@example.org or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.