What is the right of first refusal in real estate?

When engaging in a real estate transaction, whether it’s to rent or own a property, there is a significant amount of legal jargon that you will run into that helps to define your rights and requirements. You’ll want to familiarize yourself with this terminology so you best understand the arrangement and your options for navigating it.

One term that you are likely to run into is the right of first refusal (ROFR).

What is the right of first refusal in real estate?

A right of first refusal is a clause used in contracts that allows one party the first opportunity to make an offer on a property. It is basically “first dibs” in legal form.

“The Right of First Refusal is when the tenant or occupant has been given the designation which guarantees them the option to enter a transaction before anyone else,” explains Raquel Fernandez, broker and owner of CENTURY 21 ICON in Port Jefferson, New York. “The seller cannot sell the property out from under them without first giving them the right of refusal or to exit the transaction.”

In action, the right of first refusal allows the holder of that right to either make an offer on a property before anyone else and without the competition of other bids or forgo that right and allow the property seller to seek out other offers. There is no requirement for the holder of the right of first refusal to make an offer if they do not want to, but they will get to make that decision before the seller can pursue other avenues.

In what situations does the term right of first refusal apply?

There are a number of situations in which a right of first refusal may be granted to allow one party the ability to make an offer on a property before anyone else.

Tenant/landlord

A right of first refusal is sometimes included in the lease for a tenant to grant them the ability to make an offer on a property should the landlord decide to sell it. This can be an incentive for some tenants who are interested in the possibility of purchasing the building or unit that they are renting, should the opportunity arise. It can be an obstacle for the landlord in selling the property, but it can also avoid challenges and some costs associated with a rental property changing hands.

Co-op or condo boards and homeowners associations

In some cases, Homeowners Associations (HOAs) or condominium boards may attempt to insert a right of first refusal clause in their agreements with homeowners who are governed by their arrangements. In these cases, the HOA or board may have the right to buy the home or unit back from the seller before they can seek offers from other prospective buyers on the market.

Two-party arrangements

Right of first refusal clauses are sometimes included to provide the opportunity for the home or unit to stay under the control of related parties. This clause may be used to give a relative or family member the right to buy a property from someone before they put it on the market and seek outside offers.

Pros and cons of right of refusal clauses

There are a number of benefits that a right of first refusal can provide to both parties in the arrangement, but it is not without its share of potential complications, as well.

Pros and cons for buyers

For a prospective buyer, having the right of first refusal provides an opportunity to purchase a home without having to go through the competition of the open market. It also offers continuity for tenants who would like to purchase the property they are currently living in, gaining equity in it while not having to move.

“They will always be first in line to purchase said property at agreed-upon price at the beginning of the contract and someone else can’t come and buy the property from under them,” says Fernandez.

Pros and cons for sellers

For sellers, providing a right of first refusal to a party guarantees a prospective buyer when deciding to sell. It means the people with the most invested interest in the property will have an opportunity to take it over, and they are likely motivated to make an offer. It also may attract more invested tenants to include such an offer in a lease.

“The pitfall would be on the seller’s side because they would potentially sell for less than market value based on the estimation done at said time,” says Fernandez.

Final word on right of first refusal

The right of first refusal allows tenants and prospective buyers who may already be invested in a property the ability to make the first offer on a property and potentially purchase it. It allows sellers to attract parties who are interested in potentially taking over a property and lines up a prospective buyer when the time comes — though it may result in the home selling for less than it would on the open market.