Discovering a First Right of Refusal on a Listing
Once in a while we learn that a seller has given someone a First Right of Refusal on a property for sale. Typically the property is rented and the seller granted a First Right of First Refusal to the tenant as part of the lease or rental agreement.
How does it work? Simply, if the seller receives an offer to purchase, the party with the first right has priority to buy the property by matching the buyer’s offer within a given time period or opt out. The arrangement should be disclosed to the buyer making the offer; so acceptance of the offer must be conditional on the seller being released from the first right by a specific date.
Buyer Reactions to a First Right
Buyers can be discouraged from making an offer on learning of a First Right of Refusal to another. Most commonly:
- They don’t want to go exert the time and effort of negotiating an offer with a first right of refusal potentially frustrating their ability to buy.
- It’s a privacy issue. They don’t appreciate a copy of their offer going to another who has a first right to buy by matching their offer with confidential terms.
What we’ve learned. The person who has the first right:
- Often may not be in a position financially, a fairly common situation.
- Their right to match an offer might have come at a bad time in their lives due to personal issues.
- They don’t agree with the price and/or other terms and conditions of the offer and so opt out.
What happened in 3 different cases:
1. Unsuccessful at selling their home, the sellers rent with a First Right of Refusal to the tenants. Months later, the tenants separate, the one remaining struggles to pay the rent and so again the seller lists the home for sale. Disclosure of the First Right of Refusal greatly reduces the number of showings for over a year. When an offer finally does come, the tenant can’t purchase, the buyer’s conditional deal expires and the seller is again left with no sale.
2. The tenants match the buyer’s offer and buy the property.
3. The seller lists the property and the existing tenant feels the price is too high. On learning that an offer is being negotiated the tenant tells the agent of his First Right of Refusal, which the Seller forgot to mention. Disclosure is made and the buyer backs off from buying. When the price is reduced, the tenant--in an attempt to buy-- learns he cannot qualify financially. Eventually an investor buys the property and keeps the tenant--good news for all.