What Is A Right Of First Refusal In Housing?

Casey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified.

Casey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified.

Casey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified.

Casey Bond is a seasoned personal finance writer and editor. In addition to Forbes, her work has appeared on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, U.S. News & World Report, TheStreet and more. Casey is also a Certified.

Korrena Bailie has over a decade of experience reporting and editing personal finance stories and reviews. Her work has been featured in Wirecutter, The New York Times, Bankrate and Credit Karma.

Korrena Bailie has over a decade of experience reporting and editing personal finance stories and reviews. Her work has been featured in Wirecutter, The New York Times, Bankrate and Credit Karma.

Korrena Bailie has over a decade of experience reporting and editing personal finance stories and reviews. Her work has been featured in Wirecutter, The New York Times, Bankrate and Credit Karma.

Korrena Bailie has over a decade of experience reporting and editing personal finance stories and reviews. Her work has been featured in Wirecutter, The New York Times, Bankrate and Credit Karma.

| Editorial Director, Growth Projects

Updated: Oct 29, 2021, 12:01pm

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If you have your eye on a property that’s not for sale yet, you can call “dibs” by using a right of first refusal (ROFR). This is a clause in a contract (like a lease) that gives you the option to make an offer and accept the terms of a sale on a home before anyone else can on the public market. However, the seller has to agree.

There are a few situations when a ROFR clause is commonly used. The first is between landlords and tenants. If a tenant is interested in buying the property they’re currently renting, they can be the first to know when it goes up for sale and have the first chance at buying it.

A ROFR is also used between family members in order to give them preference before listing the property publicly. Homeowners associations (HOAs) also sometimes use a ROFR clause in order to pre-approve potential buyers before the seller is able to accept an offer.

How Does Right Of First Refusal Work?

A ROFR clause can be part of a larger contract, or a standalone agreement. Either way, it must be outlined in an official signed contract to be legally enforceable.

The seller may list the property but can’t entertain any offers from the public until the person with the right of first refusal gets the first shot. They have no obligation to finalize the purchase, and they can still put in an offer later after declining the first opportunity, but they’ll have to bid along with other interested third parties.

Generally, there’s an expiration date on how long the prospective buyer has to consider the deal before either accepting or declining. If they do decline, the seller can then negotiate with other prospective buyers.

These clauses also usually include a pre-determined sale price—either a percentage increase over the current market value when the contract is signed, or a set price. If there’s no price outlined in the contract, the person with the ROFR is usually given the opportunity to match an offer received by a third party.

Pros and Cons of Right Of First Refusal

The pros and cons of a ROFR will depend on which side of the deal you’re on—buyer vs. seller.

Pros for the Buyer

• More time to prepare. If you’re facing a financial hump, like you don’t have enough money for a down payment or your credit is damaged a ROFR can give you time to get things in order. When the current owner is eventually ready to sell, you can be in a better position to have your offer accepted.
• No competition. With no other buyers vying for the same property as you, you don’t have to worry about getting sucked into a bidding war and potentially paying an inflated price for the property. This is particularly beneficial in a hot housing market where homes are getting multiple offers.

Pros for the Seller

• Don’t have to list the property. Listing a piece of real estate and hiring an agent can be costly. If you already have someone ready to potentially buy your property as soon as you’re ready to sell it, you can skip these steps and save quite a bit of money.
• Could sell for above market value. Often, ROFR clauses include a future purchase price. If the housing market isn’t so hot when you’re ready to sell, the buyer may end up paying above-market to secure the property before it’s listed to the general public.

Cons for the Buyer

• Have to be ready to buy at a moment’s notice. Your buying timeline may not exactly line up with the seller’s plans. If they decide they’re ready to sell and you aren’t prepared, you may have to scramble to come up with cash or secure financing. Otherwise, you can decline the offer and let it go to the market.
• No room for negotiation. With a ROFR clause, the future sale price of the property in question is set when the contract is signed. This could be a good or bad thing, depending on the market when it finally goes up for sale. If home prices are down, you could end up paying more than the fair market value. However, in a hot seller’s market, you could be locking in a great deal ahead of time.

Cons for the Seller

• Limited market. Without a group of interested buyers bidding for your property, you could end up selling for less.
• Could dissuade other potential buyers. Since the person with the ROFR has a set period of time to evaluate the offer, other potential buyers could be turned off by the extended timeline and move on before the provision expires.
• Makes it tougher to refinance. Lenders usually don’t allow you to refinance if you have a ROFR clause. The property serves as collateral if you can’t pay back the loan, meaning the bank would sell the home to recoup it’s money if you default. With a ROFR in place, it would have to honor the clause and offer the interested party a chance to buy.

How Do I Enter a Right Of First Refusal?

If you want to have a ROFR in your lease or other contract, it’s a good idea for each person to hire a lawyer. They can help determine the appropriate amount of time that the ROFR should apply (i.e. how long the buyer has to accept or reject it), as well as how the purchase price should be set. Both parties should have a clear understanding of all the terms of the clause before signing.

Other Options To Consider

One similar alternative to the right of first refusal is the “right of first negotiation” or “right of first offer.” Essentially, it’s a more limited agreement; the other party isn’t necessarily offered the same terms as other buyers but simply given the right to make an offer first. The seller can then decide whether to accept or reject the offer and can offer different terms to third parties. Generally, a right of first offer is considered to favor the seller while a right of first refusal is considered to favor the buyer.

Forbes Advisor Editor Rachel Witkowski contributed to this article.