A first refusal is a bit nerve racking when you're selling a home. You may really like the offer you receive from a buyer, but not fully understand what the First Refusal Clause means. I hope this explanation will help you.
The first refusal buyer (FRB) must remove all of their other conditions in order for the seller to grant the first refusal. The realtor will insert a clause requiring the FRB to list their home on MLS within 24 hours of acceptance of the offer.
The FRB will have 24 hours to remove all of their conditions should you receive a satisfactory second offer.
If you receive a second offer, it does not have to match the first offer price; it is a new negotiation and those buyers will not know what was previously agreed.
In the same sense, if the second offer is better than the first, the FRB does not need to match the second offer.
PROS of the First Refusal Clause:
- It shows the market that someone else loves your home.
- The building and septic inspections would be completed and paid for by the buyer, so you would be aware of any shortcomings with the property.
- A first refusal usually commands a selling price that's closer to list price.
- Your realtor works hard to have the other property sold. (Your realtor would first evaluate the likelihood of the back-up selling based on current market conditions and pricing, and advice you of the risks involved.)
- A second offer forces the FRB to firm up their offer or walk away, but this is after the second buyers have waived all conditions.
- MLS still shows the property as Active so the public will still have interest.
CONS of First Refusal:
- You cannot secure bridge financing with a First Refusal as the bank considers it a conditional offer.
- Some realtors shy away from showing first refusals as they are afraid their buyers will fall in love with the property and then not be able to have it if the FRB firms up their offer.
- You have to continue to show the home and market it.
- The back-up property may not sell.
- Some buyers will not want to make an offer, pay for a septic and for a building inspection at a cost of approx. $1,000 and then lose the property. For this reason, sometimes the vendor offers to pay for the second buyer's inspections should they not be the successful buyers.
- The realtor sees the first refusal comments on MLS and will advise their buyer accordingly.
If you are faced with a decision regarding a First Refusal Buyer, take some time to fully understand the offer and ask questions of your realtor.
Connie Rivington-Howie is a sales representative with Century 21 John DeVries Ltd. in Ottawa, Ontario.