What's a Right of First Refusal?

What if you could be first in line to purchase a property you are interested in? With a Right of First Refusal (ROFR) you can! You get first dibs. The ROFR is a clause, contract or agreement that gives an interested party the right to purchase or rent a property before the seller negotiates any other offers. The seller can market the home but before they can accept any other offers, the potential buyer that holds the Right of First Refusal must be notified and they can decide if they will buy the property or not.

ROFR = Right of First Refusal

This clause is triggered when someone else places an offer on the property. The holder receives the first opportunity to agree or reject a sale on the property. If the holder declines, the seller is free to negotiate with other interested parties.

This clause can occur in a lease between a tenant and a landlord if the tenant is interested in buying the rental property but needs time or is unable to do so right now. Sometimes this happens when family members or even adjacent property owners want the right to purchase or refuse before it is sold to someone else.

A Right of First Refusal Clause can also be entered into HOA documents. There are other variations of this clause, such as the option to buy property at the appraisal price at the time the clause was drafted or the right of the holder to match an offer the seller has received.

A ROFR can also occur if a seller has a property on the market and they receive an offer from a buyer who also has a house to sell before they can close. With this, the seller will keep the property on the market but accept a contingent offer, providing buyers with a 72-hour (typically, but negotiable) ROFR notice to perform in the event the seller receives a better offer. This gives the original buyer 72 hours to remove the contingency to sell their existing home. If they don’t, the seller typically has the right to cancel the contract.

ROFR = Right of First Refusal

Pros & Cons of the Right of First Refusal Clause

PROS

  • Typically, this clause is entered into a contract before a property is ever put on the market or before there is someone else in the picture to purchase the property. This leaves opportunity for upfront negotiation without the stress of competition.
  • Since there is a predetermined interested buyer, a home could sell faster, benefitting the seller.
  • If there are no other offers, this could benefit the buyer by retaining the right to hold this predetermined bid until they feel it’s a good time to purchase.
  • You pretty much get two chances to agree to terms.

CONS

  • The downfall for the buyer is that since a seller can receive an offer at any time, the buyer may need to be ready to move forward with the sale on a short notice.
  • The downfall for the seller is that it adds some constraint to being able to work with other buyers since they can’t negotiate with anyone else until they receive a formal termination of this contingency. Therefore, it could take too much time and they may lose the more secure offer.
  • If the buyer knows the seller needs to sell quickly for a specific reason, they may purposely take their time to try to get a better deal.
  • If the seller knows the buyer is in a hurry, they may try to drive the offer higher.
  • This will slow the purchase process down for the third-party buyer interested in the property.

ROFR = Right of First Refusal

Other Considerations & Food for Thought

Negotiate with caution and care. If you are entering into a Right of First Refusal Agreement, really think about things like:

  • How long will the contingency last — what is the expiration date (the longer the term, the greater the risk)? Can the interested party make an offer at any time?
  • How will the owner notify the holder that an offer has been received to purchase the property, and what if the holder cannot be located?
  • What needs to be in the notice for it to be valid to the holder? Just the main terms (price, deposit, inspection period, closing date, etc.)?
  • How long will the holder have to respond?
  • What must the ROFR holder do to accept the offer or what should they do if they do not accept the offer?
  • What type of deed will the holder receive?
  • What timeline will be given for closing if the holder accepts the offer?
  • Will there be any exceptions if receiving a cash offer or can the buyer obtain financing?
  • Think about the deadlines, restrictions, inspection rights, exclusions, limitations and obligations you would want to add to the clause.
  • What happens if the holder of the ROFR passes away?
  • Is time of the essence?
  • Is this right assignable?
  • How will you handle disputes?
  • Will it run with the land or bind to the current owner?

When drafting the ROFR clause, offer as much clarity as possible and don’t leave room for interpretation. Word it carefully to avoid liability throughout the transaction. If you have questions, before you sign anything consult with a Real Estate Professional and a lawyer just to be on the safe side.

Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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Ready To Become A Smarter Homebuyer?

By signing up, you agree to Nestiny terms of use .
Whether you need a step-by-step guide, video resource or one of our many helpful tools, Nestiny has your back 24/7 for all things home buying and selling. You choose the pace, material, and when and where to learn. Unlock your free access to Nestiny today!
Are you a real estate professional? Go here .
By clicking this button, you'll enjoy free unlimited access to Nestiny and agree to our terms of use . And don't worry! Nestiny will not share your information with any parties without your consent.