If you’re in the market to buy a home, you’ll likely come across different clauses and acronyms that define what you can and can’t do when buying (or selling) real property.
Let’s explore one popular acronym: ROFR, which stands for right of first refusal. We’ll discuss how it’s used in real estate negotiations and whether it’s right for you.
In real estate, right of first refusal (ROFR) is granted through a special contract that gives a home buyer the right to make an offer on a property before other buyers.
If you’re in the market to buy a new house and find the perfect property – but it’s not for sale – it may seem like a lost cause, but that’s not necessarily the case. A ROFR clause gives a buyer the first chance to purchase a property if and when the seller decides to sell.
Under this agreement, the seller is obligated to contact the buyer, also known as the ROFR holder, and offer them the first opportunity to purchase the property. If the ROFR holder decides they no longer want to buy the property, the seller can start to accept other offers.
Right of first refusal is negotiated before a homeowner lists a property. When the property comes on the market, there’s typically a time limit or window on negotiations between the buyer and property owner. If the deadline expiresor the buyer decides not to purchase the property, the seller is free to sell the home to another buyer.
Right of first refusal typically applies in several scenarios, such as:
Right of first offer (ROFO) allows a buyer to make the first move when a homeowner wants to sell. Unlike a right of first refusal where an owner may be obligated to sell to the interested buyer under the contract’s terms, the seller is free to market the property to other buyers.
The prospective buyer has a specified window of time to put together an offer, which the seller can either accept or reject. If the seller can’t get a better offer from another buyer, they can accept the ROFO holder’s offer that they initially rejected.
For the buyer and seller’s protection, both sides must have a lawyer involved to draft a right of first refusal agreement because it must be legally enforceable, and there is often a time limit set for when the ROFR agreement applies.
The contract typically includes an agreement on how to calculate the future sale price of a property. For example, the price may be a flat amount or a certain percentage above the current market value. The terms and rules of the agreement should be clear to all parties prior to anyone signing on the dotted line.
In the absence of a specific purchase price agreement, the prospective buyer may have the right to match a third-party offer the owner was going to accept from another buyer. If that buyer no longer wants the property, the seller can accept the prospective buyer’s offer.
ROFR agreements have benefits and drawbacks for each party to the transaction. Let’s run through both sides of it for the buyer and the seller.
Before entering into a ROFR agreement, a potential buyer may need to take these factors into consideration:
The benefits for potential buyers are:
There are drawbacks for the buyer as well:
The seller has their own upsides and downsides to weigh. Let’s do a quick rundown.
There are a few potential benefits for the seller:
Just as there are drawbacks for buyers, there are drawbacks for sellers as well:
A right of first offer (ROFO) allows someone the opportunity to make the first move when a homeowner is looking to sell. Unlike a right of first refusal where an owner may be obligated to sell to the potential buyer under the original contract’s terms, the seller is still free to market the property for sale to others. The prospective buyer has a time limit to put together an offer, which the seller can accept or reject. The seller is also free to go back after initially rejecting the offer if they can’t get a more favorable deal from another interested party.
A right of first refusal clause is a useful tactic, but depending on the situation and the state of the housing market, it may or may not be worth negotiating.
Right of first refusal doesn’t guarantee the sale will work in favor of both parties. Sellers should research market conditions in their area to make sure they get the best deal. And buyers should browse through home listings to see if their dream home is finally on the market. If an interested buyer and homeowner decide to enter into a ROFR agreement, it’s important to have real estate lawyers draft and review the contract.
Get matched with a lender that will work for your financial situation.
LMB Mortgage Services, Inc., (dba Quicken Loans), is not acting as a lender or broker. The information provided by you to Quicken Loans is not an application for a mortgage loan, nor is it used to pre-qualify you with any lender. If you are contacted by a lender or broker advertising within our network, your quoted rate may be higher depending on your property location, credit score, loan-to-value ratio, debt-to-income ratio, and/or other factors. Quicken Loans does not offer its matching services in all states. This loan may not be available for all credit types, and not all service providers in the Quicken Loans network offer this or other products with interest-only options. The information that we provide is from companies which Quicken Loans and its partners may receive compensation. This compensation may influence the selection, appearance, and order of appearance on this site. The information provided by Quicken Loans does not include all financial services companies or all of their available product and service offerings. Article content appears via license from original author or content owner, including Rocket Mortgage.
Note: Actions on this website are recorded for quality assurance or training purposes. Input of data constitutes consent.
Quicken Loans is a registered trademark of Rocket Mortgage, LLC, used under license by LMB Mortgage Services, Inc.
LMB Mortgage Services, Inc. | NMLS #167283
4859 W Slauson Ave #405 Los Angeles, CA 90056
