What is a Right of First Refusal in Real Estate?

What is a Right of First Refusal in Real Estate?

Time Stamp: September 5, 2023 7:00 AM
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What is a Right of First Refusal in Real Estate?

The right of first refusal (ROFR) is a clause in a contract that gives a potential buyer the priority to make the first offer on a property before the owner can negotiate with other potential buyers. This agreement is commonly used between tenants and landlords and in estate planning to prevent family conflicts.

What is a Right of First Refusal in Real Estate?

In my experience as a Florida real estate agent, few people truly grasp the concept of the ROFR. It is essential to consult with real estate attorneys to ensure the legality and fairness of the right of first refusal. Stay tuned to explore its definition, how it works, and its pros and cons in more detail.

Understanding the Right of First Refusal in Real Estate

The right of first refusal is a crucial concept in real estate transactions that grants a potential buyer certain privileges and priority in purchasing a property. We will provide a comprehensive understanding of this concept, including its definition, how it works, and its upsides and downsides.

Definition of the Right of First Refusal
The right of first refusal, often referred to as ROFR, is a contractual agreement that gives a specific individual or entity the first opportunity to purchase a property before the owner can entertain offers from other potential buyers.

This agreement establishes a preference for the party with the ROFR, offering them the privilege to match or exceed the terms of any offers the owner receives.

Understanding First Right of Refusal in Real EstateHow the Right of First Refusal Works
When a property owner decides to sell, they must notify the holder of the right of first refusal. This notification allows the holder to determine whether to exercise their right and proceed with the purchase. If the holder chooses not to move or fails to respond within the specified timeframe, the owner can negotiate with other interested buyers.

If the holder of ROFR decides to exercise their right, they must communicate their intent and terms to the property owner within the allotted timeframe. The owner must consider this offer and choose whether to accept it or negotiate further. If the terms are agreed upon, the property sale moves forward with the holder of the first right of refusal.

An ROFR Can Take Place After Listing For Sale
In many areas around the country, a form of an ROFR is a kick-out clause.

The multiple listing service has a listing status showing a kick-out clause is in place, granting someone the ability to step forward when an offer is made on a property. The holder can move forward with the transaction under the clause. The second buyer is out of luck when they exercise their rights.

Many real estate agents feel accepting a kickout clause is better than a home sale contingency.

Pros and Cons of the Right of First Refusal
Like any contractual agreement, the right of first refusal has advantages and disadvantages. Understanding these can help buyers and sellers make informed decisions when considering their inclusion in a real estate transaction.
Pros:

  • Priority: The holder of the right of first refusal has the first opportunity to purchase the property, ensuring they are not excluded from the process.
  • Control: The owner potentially maintains a certain level of control over who purchases their property, which may be necessary for various reasons, such as preserving neighborhood characteristics or satisfying existing relationships.
  • Opportunity: The ROFR allows interested parties to secure a property they desire without entering into a competitive bidding process, potentially saving time and effort.

Cons:

  • Delay in Selling: A right of first refusal can slow the selling process since the owner must wait for the holder’s decision before proceeding with other offers.
  • Potential Disputes: Disagreements may arise between the owner and the holder of the right of first refusal over terms or a price negotiation, leading to potential conflicts and complications in the sale process.
  • Restrictions: The first right of refusal can limit the owner’s freedom to negotiate and explore other potential offers, potentially affecting the property’s overall market value.

Understanding the advantages and disadvantages of the ROFR is crucial for buyers and sellers in real estate transactions. While it offers certain benefits regarding control and priority, it can also present challenges and limitations that must be carefully considered.

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Right of First Refusal vs. Right of First Offer

Regarding real estate transactions, it’s essential to understand the distinction between the right of first refusal and the right of first offer. While they may seem similar, crucial differences can impact buyers, sellers, and the negotiation process.

The Right of First Refusal:
The right of first refusal grants a potential buyer the priority to purchase a property before the owner entertains offers from other potential buyers. In other words, if the owner decides to sell, they must first allow the holder of the ROFR to buy the property on the terms and conditions offered by a third party.

The holder of this right can accept that offer and proceed with the purchase.

Right of First Refusal vs Right of First OfferThe Right of First Offer
On the other hand, the right of first offer allows a potential buyer to make the initial offer on a property. Still, the owner is not obliged to accept it or negotiate exclusively with that buyer. The owner can consider other offers or deal with other interested parties.

While both rights give potential buyers an advantage, the right of first refusal provides more security and control over the negotiation process. With the ROFR, the potential buyer knows they have the first opportunity to match or better any offer made by a third party, ensuring they are considered before other buyers.

However, it’s important to note that the ROFR may come with certain limitations, such as a specific time frame within which the potential buyer must exercise their right. If the potential buyer fails to act within the given timeframe, the owner can proceed with selling the property to someone else.

In contrast, the right of the first offer puts the potential buyer in a less favorable position, as they have to compete with other buyers if the owner decides to explore additional offers. While the potential buyer is still allowed to make the initial offer, there is no guarantee that their request will be accepted or given preferential consideration.

Ultimately, the choice between the first right of refusal and the right of first offer depends on the buyer’s and seller’s goals and preferences. Buyers who seek more control over the negotiation process may prefer the ROFR.

At the same time, sellers may lean towards the right of the first offer to maximize competition and secure a higher sale price.

Frequently Asked Questions About the Right of First Refusal

What is the difference between the Right of First Refusal and the Right of First Offer?
The first right of refusal and the right of first offer are similar concepts but have distinct differences. The ROFR grants the potential buyer the priority to match an external offer before the owner can negotiate with other buyers.

On the other hand, the ROFR allows the buyer to make the initial offer without obligating the seller to negotiate.

Can the owner negotiate with other potential buyers if a First Right of Refusal is in place?
If an ROFR is in place, the owner must present the offer to the prioritized buyer first. If the buyer decides to match the offer or negotiate the terms, the owner can only proceed with other potential buyers once the prioritized buyer declines the opportunity.

How does the ROFR affect the property’s sale price?
The ROFR can affect the property’s sale price. If the owner receives a higher external offer, they can ask the prioritized buyer if they are willing to match the offer or renegotiate. If the buyer agrees, they can purchase at the new price. However, if the buyer declines, the owner can negotiate with other buyers at a higher offer price.

Can the interested party exercise the ROFR after receiving a higher offer from another buyer?
No, once the interested party receives a higher offer from another buyer, they typically lose their right to exercise the ROFR. The purpose of this right is to grant priority to the interested party, but it does not guarantee their ability to purchase if a higher offer is presented.

Are there any legal requirements for including a First Right of Refusal in a real estate contract?
Including an ROFR in a real estate contract requires careful consideration and legal expertise. It is essential to involve real estate attorneys to ensure the legality and fairness of the contract. The attorneys representing the owner and the interested buyer collaborate to establish the terms, including the process for exercising the right and the consequences of not doing so.

Final Thoughts

Before engaging in a first right-of-refusal contract, it is vital to have legal representation. ROFR agreements can be complex. Making mistakes could easily cause serious financial issues without understanding what you’re signing.

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Learn all about Right of First Refusal in Real Estate and understand its importance along with possible implications. Expert insights here! #realestate #rightoffirstrefusal Click to Tweet

About the Author

Top Wellington Realtor, Michelle Gibson, wrote: “What is a Right of First Refusal in Real Estate?”

Michelle has been specializing in residential real estate since 2001 throughout Wellington Florida and the surrounding area. Whether you’re looking to buy, sell or rent she will guide you through the entire real estate transaction. If you’re ready to put Michelle’s knowledge and expertise to work for you call or e-mail her today.

Areas of service include Wellington, Lake Worth, Royal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more.

What is a Right of First Refusal in Real Estate?

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