With the real estate market moving so fast these days, one aspect of the deal that many agents aren’t dealing with as much these days is a right-of-first-refusal.
Often, it is used when a buyer makes an offer with the sale of their home as a contingency. If they don’t sell and another offer comes along, the seller can then go with the other offer after the seller has given the first buyer that ‘first right to refuse’ by removing their contingency, thereby staying in the game. It is also referred to in this scenario as a ‘kick-out’ clause.
But first right of refusal can be used in multiple ways. Essentially, this clause has a right of first refusal negotiated into a lease or other housing agreement, they can be first in line to get the option to buy. So how does it work?
For agents, it still remains a key agreement and it is important to know what they mean for buyers and sellers.
A right of first refusal is a contractual right granted by an owner of property. The owner gives the holder of the right an opportunity to enter into a business transaction with the owner according to specified terms, before the owner may enter into that transaction with a third party.
A right-of-first-refusal is a contractual right, giving a buyer the option to purchase the property before it can be sold to a third party. An option is the right to exercise something, but not the obligation to do so.
For a buyer, the clause can be used in a lease, giving the leaseholder the right to have first choice on the home should the landlord decide to sell it. The agreement is generally worked into the contract at its inception. This gives the tenant time to save a down payment or improve their financial situation in the event they decide to purchase the property.
“Depending on the specifics of the contract, the interested party may have the opportunity to suggest a sale price without worrying about immediate competition,” explains Kathryn Bishop, a Keller Williams real estate agent in Studio City, Calif. “There’s less of a chance that the price will get driven up by a bidding war.”
However, buyers may have to be ready on short notice because you just never know when the seller might receive an offer.
For sellers, when there is plenty of supply and prices are low, a right-of-first-refusal agreements can be their friend. These pacts are formed before the home is marketed. As a result, they might get the original interested party to pay more than the home’s current value.
However, your clients who are sellers might also find it can be difficult to market a property for sale that is encumbered with a right-of-first-refusal agreement.
Neither potential buyers nor their agents really want to spend the time negotiating on a property that can be swept away at the last minute by an existing tenant after the negotiations have been completed.
In the end, it is important for agents to be up to speed on this process and its pros and cons.
Your clients should always make sure a right-of-first-refusal agreement makes sense for their situation and make sure that the details of the transaction suit them. They also should consult with an attorney before agreeing to any right-of-first-refusal contract.