What is the Right of First Refusal in Residential Real Estate?
I recently helped a client buy a house for which a third party had the “right of first refusal” (ROFR). My buyer had never heard of this term, and so I thought it would be a useful term to explain for others who may encounter it when looking to buy or sell a home.
Very simply, here is how the ROFR usually works in residential real estate: Emma owns a house and Ryan is the holder of the ROFR. Emma decides to sell her house, so she puts it on the market. Ashley comes along and puts in an offer on the house. Emma is satisfied with the offer and ready to sell to Ashley…but wait! Because Ryan has the ROFR, he gets first dibs on the property. Emma has to take the offer to him first and say, “Do you want to buy my house at these terms?” before she can sell to Ashley. If Ryan isn’t interested, Ashley gets the house. If Ryan says, “Yes! I’ll take it,” then Ashley is out of luck and Ryan gets the house.
Potential Issues with the Right of First Refusal
From this short scenario, you may begin to imagine potential issues that can arise from an arrangement like this. If you are Ashley and want to buy a house for which someone else holds the ROFR, you may have to wait to find out if you get the house or not, only to be disappointed when Ryan exercises his right to buy the house.
If you are Emma, trying to sell your house, you may run into buyers who like your home but are reluctant to be involved with a third party. In cases when the ROFR transfers with the property, the idea of dealing with this third party in a potential future sale may make the property less desirable to potential buyers, and can negatively impact your property value.
Examples of How the Right of First Refusal Works
There are many variations on how exactly a ROFR can work, depending on the exact language that is used in the contract and the specific terms that the involved parties agree on. If you are interested in more in-depth legal analysis of how to negotiate and exercise a ROFR there are some great articles out there. But here is what this can mean in a few different scenarios.
Right of First Refusal and Habitat for Humanity
In the scenario with my recent client, Habitat for Humanity had built the home and retained a ROFR that transfers with the property for 25 years from when the home was built. For my buyer, this meant two things:
First, after submitting our offer, we had to wait to make sure that Habitat did not want to purchase the house before we could move forward. They had a period of ten days in which to respond, and they got back to the seller’s agent within a few days to let the seller know they did not want to buy the property.
Second, in the event that my client, the new homeowner, wants to sell the home at any point before 2030, he will need to present any acceptable offer to Habitat before going forward with another buyer. Depending on your circumstances, this may be less-than-ideal, but for my buyer it was not an issue and so he was able to buy the home without complications. This home was sold in Durham, North Carolina, however it is typical for Habitat for Humanity to retain the ROFR on their homes, although the specifics of the terms can vary from area to area.
Right of First Refusal and Condo Associations
Another scenario where you are likely to encounter a ROFR is with condo associations. Many condo associations maintain the ROFR on the condo units, thus giving the association the power to essentially veto any sale by purchasing the unit itself. Some condo associations have the ROFR written to allow any individual condo owner to match the offer and buy the unit themselves.
One reason a condo association may choose to purchase one of the units is to acquire additional space for common areas or amenities, such as a workout room.
Another thing an ROFR accomplishes is giving the association some control over who moves into the building or community. It must be noted, however, that a condo association may not exercise this right for the purpose of denying housing based on race, color, religion, national origin, sex, disability or familiar status; the federal Fair Housing Act protects against this sort of discrimination. Multiple court cases have established the illegality of using a ROFR to discriminate against one of these groups.
Adjacent Properties and Right of First Refusal
Although less common, another situation where a person may hold the ROFR on a piece of property is when they already own an adjoining property. This can come about in different ways . If someone owns a large tract of land and subdivides it to sell to different buyers, while maintaining ownership of a piece themselves, they may wish to reserve some degree of control over what is built on, or who moves into, the adjoining properties. Maintaining the ROFR on the property allows some degree of control over who buys it later. Two different landowners who own adjacent properties may also choose to grant each other the ROFR, as a way to give each of them options in the future.
Contingent Offers and the Right of First Refusal
As a seller, there is rarely, if ever, a good reason to give a third party the right of first refusal to your property. It binds you to someone else’s decision, and rarely gets you anything. One unique situation in which it may seem appealing to a seller, is if the seller is having a hard time selling their home and they receive an offer that is contingent upon the sale of the would-be buyer’s home. Normally, accepting an offer with a lot of contingencies is unwise. You sit around hoping that the buyer’s home sells, or other conditions are fulfilled, while being unable to entertain other offers – they get options, while you have to wait. But when your house has been on the market for a while and you’ve gotten no offers, even a bad offer can seem appealing.
A right of first refusal clause in the purchase agreement may seem like a happy medium. It can be drafted so that, if the seller receives a better offer to purchase while waiting for the first buyer to sell their home, the first buyer has a period of time in which to remove the contingencies from their offer and move ahead with the purchase, otherwise the second buyer can go ahead and buy the house.
However, as the seller, the risk involved in this scenario outweighs any perceived benefit. As real estate agent Bill Gassett very strongly states, this is almost always a bad idea for the seller. You are basically handing the reins over to someone else (who isn’t currently able to buy your home), and possibly deterring more-qualified buyers in the process.
The Bottom Line on the Right of First Refusal
Here is the bottom line. As a buyer, you should be aware that a ROFR on a property you are interested in purchasing may slow down the purchase process, although in many cases you likely won’t have to wait much longer than you would have to hear back from the seller anyway. You will need to find out whether the ROFR carries with the property and is something you will need to deal with again when you sell the house down the road. As a seller, there is rarely an instance in which giving someone else the ROFR on your property is beneficial to you. However, there may be situations where maintaining the ROFR for yourself on a property you are selling could provide you with options down the road that are more important to you than the potential risk of deterring buyers.
As a final note, real estate law can differ widely from state to state, so as with any legal questions, you should always seek the advice of an experienced real estate attorney with any specific issues related to the ROFR and real estate transactions.
For more on the Right of First Refusal and residential real estate, check out these resources:
- First Right of Refusal – Protection or Illusion? from Kovitz Shifrin Nesbit Law
- Home Sale Contingencies and Right of First Refusal from Bill Gassett
- What is a Right of First Refusal? from Land Think
About the author: My name is Matt Minor and I’m a real estate agent with Hunter Rowe Real Estate in the Raleigh-Durham area of North Carolina. I’d love to help you buy or sell a home in the Triangle. Give me a call at 919-450-5999, or email me at firstname.lastname@example.org if you’re thinking about buying or selling a home in Raleigh, Durham, Chapel Hill, Cary, Apex, Carrboro, Clayton, Fuquay-Varina, Garner, Holly Springs, Knightdale, Mebane, Morrisville, Sanford, Smithfield or Wake Forest.