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

Before you buy a home, you’re likely already imagining where you want to live. If you’re renting a place, you think might work for the long-term or find a home that’s not for sale, a right of first refusal (ROFR) could give you the chance to buy that property in the future.

Also called a first right of refusal, this agreement allows you to match another offer before the owner sells the home. In other words, it can give you the first right to the home. There are several other ways this deal works, so read on to find out more about how you can use a right of first refusal.

Key takeaways:

• A right of first refusal can give a specific person the chance to match an offer before the property is sold to someone else.
• ROFR terms vary, but deadlines, notice method, and how the purchase price is determined matter most.
• It’s a good idea to involve a real estate attorney or agent before agreeing to a ROFR contract.

Right of first refusal: Legal meaning in real estate

The right of first refusal is a contract clause that gives the “right holder” the ability to buy a home before the seller accepts a third-party offer, or as specified in the agreement. In some cases, it gives a buyer the right to make the first offer or the right to match any offers the seller receives.

If you don’t want to proceed with the sale when the opportunity arises or can’t match the other offer, you can decline to buy the home.

Sometimes this agreement is called the right of refusal and is commonly included in rental agreements where the tenant is interested in buying the home if the owner decides to sell.

It’s also used if a potential buyer wants to show interest in a property that’s not currently for sale. Making a right of first refusal agreement with the current owner puts you at the front of the line to buy if they decide to sell.

How a right of refusal works, step by step

To get a better idea of how a right of first refusal works after agreeing to the deal, here’s a simple step-by-step guide:

1. The owner decides to sell or receives an offer on the home, depending on the contract’s terms.
2. The owner gives the right holder notice using the method listed in the agreement, such as a certified letter or email.
3. The right holder has a specific window of time to accept, match, or decline the offer.
4. If the holder declines the offer or misses the deadline, the owner can sell it to a third party.
5. If the holder accepts, they must make or match the offer.
6. If both parties agree to the offer, they’ll proceed to sign a purchase agreement and begin to close on the home.

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

There are several instances when the ROFR may be used to buy a property that’s not on the market yet. Let’s look at some common situations:

• ●      A tenant wants the option to buy if the landlord sells the home.
• ●      A family wants to give family members the first option to buy the home to prevent conflict over inheritance.
• ●      A buyer wants the opportunity to buy a specific home if it’s listed in the future.
• ●      A business partner wants priority to buy their partner’s share.
• ●      A developer wants to purchase an adjacent property that’s not for sale yet.
• ●      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.

Does a right of first refusal expire?

Yes, a right of first refusal typically expires. The agreement generally includes an expiration date and a timeline detailing the buyer’s window of opportunity to make an offer and negotiate the sale.

Right of first refusal vs. right of first offer

A right of first refusal isn’t the same as the right of first offer. The right of first offer (ROFO) gives the holder the first chance to make an offer before the seller markets the home to other buyers. The buyer typically has a specific time to make an offer, which the seller can either accept or reject. The seller can then begin to entertain additional offers or continue negotiating with the first buyer.

The right of first refusal is usually activated when the seller receives an offer from another buyer when they’ve decided to sell the home. The holder can accept the deal by matching the offer terms or passing on the sale.

Pros and cons for buyers

A ROFR generally favors buyers, but there are still pros and cons to consider before taking this route.

Pros

The most common advantages for buyers using a right of first refusal include:

• It gives you the first chance to buy a specific home.
• It may allow you to set a price in advance or determine how the price is set in the future.
• You’ll likely have additional time to prepare your finances to buy the home.
• You may be able to negotiate better terms with the seller. 

Cons

A ROFR also has drawbacks buyers should be aware of:

• It doesn’t guarantee you’ll be able to buy the home; the seller can still choose another offer.
• Sellers can change their minds and decide not to list the home for sale.
• You may need to act quickly to secure financing before the contract deadline.
• You may agree to a purchase price that’s higher than the home’s value at the time of the sale.
• You could lose out on additional opportunities if you’re set on this property.

Pros and cons for sellers

There are some reasons that a seller may consider a ROFR, but there are also disadvantages to consider.

Pros

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

• It may initiate or increase interest from current renters or future buyers.
• You may have additional peace of mind knowing a buyer is lined up before deciding to sell the property.
• You can set a proposed purchase price upfront, which can be an advantage if property values decrease.
• It can help you prioritize a tenant or known individual without committing to sell the property immediately.

Cons

As the seller, the primary disadvantages of agreeing to a right of first refusal include:

• There’s no guarantee that the buyer will purchase the property.
• Committing to a price now could limit your options if a better offer comes up later.
• It might reduce your profit if property values increase before you sell.
• Some buyers may not want to compete with the current buyer, which could make the property less attractive.

Who should negotiate a right of first refusal?

Before reaching out to your landlord or a homeowner about a ROFR, it’s a good idea to have an expert represent you and guide negotiations. A good real estate agent or qualified real estate attorney can help you through the process. They can advise on how to put together a proposal and create an agreement that works best for you.

How can I avoid problems with a right of first refusal?

To avoid issues with a right of first refusal agreement, consider addressing the following points in the contract:

• ●      How the owner must give notice of the sale (email, certified mail, etc.).
• ●      How long the potential buyer has to respond.
• ●      What counts as a valid third-party offer.
• ●      Whether the holder must match all offer terms or just the price.
• ●      How the price is determined if there’s no third-party offer.
• ●      Whether the right is transferable/assignable to another party.
• ●      When the right expires and how it can be terminated.

To make sure these points are clearly defined in the contract, be sure to work with experts. Consulting a real estate attorney or another attorney experienced in working with these contracts to help represent you along the way can ease confusion.

FAQ about a right of first refusal

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

Typically, a violation means the owner sells or agrees to sell the property without allowing the holder to use the right. Usually, one party can sue the other if the deal wasn’t upheld, but the more specific an agreement, the less likely a dispute ends up in court. In many cases, the right holder could be eligible for monetary damages or the opportunity to purchase the property if it’s still for sale. A real estate attorney can explain your options, as solutions depend on state laws and the contract language.

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. It’s commonly included in the lease or a separate agreement if the tenant wants the option to buy if the landlord sells. In some states, like Maryland, landlords are required to provide tenants with a right of first refusal.

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

Yes, you can get out of a right of first refusal deal. The formal term for canceling the ROFU is extinguishment, and the right holder can either decline to buy the property or miss the deadline to submit an offer.

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

The right of first refusal can be a great option to potentially buy a home and give you some certainty that you’ll be able to make an offer on a home you love. This peace of mind could outweigh the drawbacks, especially in an unpredictable real estate market.

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.

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