What is the right of first refusal in real estate and how does it work?

You can’t predict the future, but you can plan for it. If a home you’d like to buy is unavailable or you’re renting a place that you think might work for you long term, consider making a deal for the right of first refusal. In real estate, right of first refusal reserves your place at the front of the line to make an offer on or buy a specific property. There are several ways this can work, so read on to learn more about how the right of first refusal can work for you.

Key Takeaways:

• Right of first refusal agreements give you the inside track on purchasing a specific property if it goes up for sale.
• Right of first refusal deals usually favor buyers, but there are pros and cons for both buyers and sellers.
• Employ the services of an expert when negotiating a right of first refusal deal to avoid potential issues.

Right of first refusal: Legal meaning in real estate

Right of first refusal is a legal agreement that gives someone the right to make the first offer on a home or equal any other offer the seller receives. This usually means you have the right to make the first offer on a home or the right to match any offers the seller receives. If you don’t want to go through with the sale when the opportunity presents itself, you can pass on buying the home without obligation.

Sometimes referred to as a ROFR or the right of refusal, the right of first refusal is often included in rental agreements where the tenant is interested in buying the home if the owner decides to sell.

It’s also used to show interest in a property not currently for sale. Making a right of first refusal deal with the owner of a home you’d like to buy puts you at the front of the line to buy it if they decide to sell.

When is the right of first refusal used in real estate?

A good time to think about the right of first refusal is when you see a property you’d like to buy that’s not on the market yet. By creating a right of first refusal contract, you know that if the property goes on the market, you’ll have the first chance to buy it.

Right of first refusal is a common incentive landlords offer tenants in a buyer’s market. It’s common with contingent buyers subject to kick-out clauses in a seller’s market.

Right of first refusal also can be useful during estate planning to prevent conflict over an inheritance.

Does a right of first refusal expire?

Yes, a right of first refusal can expire. The agreement generally includes a timeline that details the buyer’s window of opportunity to negotiate a sale and an expiration date.

Right of first refusal meaning vs. right of first offer

A similar concept you may hear discussed is the right of first offer, or ROFO. Right of first offer and right of first refusal each allow a specific buyer to make the first move, but a right of first offer lets the seller consider other offers.

With a right of first offer, the buyer has a specific time to make an offer. In the meantime, the seller can market the home to other buyers. When the seller receives the right of first offer holder’s bid, they can accept or reject it. They also can accept a different offer. If the seller rejects the right of first offer holder’s bid but doesn’t receive a better offer, they can renegotiate the purchase terms with the right of first offer holder.

Pros and cons for buyers

A right of first refusal generally favors buyers, but the strategy has pros and cons, as with any real estate deal.

Pros

The most common advantages buyers can expect from a right of first refusal include:

• First chance to buy a specific property.
• Time to consider your options and prepare to buy the property.
• Allows you to set a predetermined purchase price.
• It provides opportunities if you’re waiting for a home to come to market.

Cons

The right of first refusal also has drawbacks buyers should be aware of:

• It doesn’t guarantee you’ll be able to buy the property.
• Sellers aren’t obligated to sell their property to anyone.
• It may be unfavorable if you agree to a purchase price and the value drops.
• Your focus on this property could close your eyes to other opportunities.

Pros and cons for sellers

Sellers are generally hampered by a right of first refusal, particularly because there’s no guarantee the right of first refusal holder will buy the property. Still, there are legitimate reasons to pursue this strategy.

Pros

The leading benefits sellers can expect from a right of first refusal include:

• It may initiate or accentuate interest from current renters or future buyers.
• Knowing a buyer is lined up before deciding to sell the property can provide peace of mind.
• It sets a proposed purchase price upfront, which is an advantage if the property’s value decreases.

Cons

Disadvantages to an owner agreeing to a right of first refusal include:

• It doesn’t obligate the buyer to purchase the property.
• It can limit your options if a better offer comes up later.
• It may minimize your profit if the property’s value increases.

Who should negotiate a right of first refusal?

Before you reach out to a seller or your landlord about a right of first refusal agreement, it’s a good idea to get an expert to represent you. A real estate agent or qualified real estate attorney can help represent your interests. They can advise you on how to put together a proposal and agreement that works best for your situation.

How can I avoid right of first refusal problems?

To avoid problems with a right of first refusal agreement, consider the following:

• How long should a right of first refusal last?
• How much time should a buyer have to exercise their right or step away from the deal?
• What’s a fair method of calculating the property’s purchase price?
• How will a down payment affect a right of first refusal?
• Will entering a right of first refusal deal create any issues for a seller if they want to refinance their mortgage?

To answer these questions, lean on the experts. Consult a real estate agent or attorney qualified to represent you.

FAQ

Here are answers to common questions about right of first refusal agreements in real estate.

What happens if the right of first refusal agreement is violated?

If one party fails to uphold their end of a right of first refusal agreement, the other party may sue them. Damages can be monetary or specific, such as getting the first chance to purchase a property after the initial right of first refusal was violated. If specific reparations aren’t possible, the holder of the right of first refusal typically is awarded monetary damages. The more specific an agreement is, the less likely a dispute will end up in court. 

Can the right of first refusal apply to a tenant living in a rental property?

Yes, a tenant living in a rental property can negotiate a right of first refusal deal. Sometimes, it is required by law. The right of first refusal is usually included in the lease agreement and gives the tenant the first chance to buy the property if the landlord decides to sell.

Can I get out of a right of first refusal agreement?

Yes, you can get out of a right of first refusal deal. Extinguishment is the formal term for canceling a right of first refusal. The right holder can either fail to act within the agreed time frame or decline to buy the property.

The bottom line: Right of first refusal can offer peace of mind

Think of the right of first refusal as a planning tool and a way to enjoy some measure of relative certainty in an unpredictable real estate market. Knowing you’ll have the first shot at buying a home you want can be comforting.

If you’ve consulted with the experts and decided to move ahead with a purchase from a right of first refusal deal, or any type of real estate agreement, you can start the mortgage approval process online today.