A right of first refusal is a contractual right that allows a specific party to submit an offer on a property before anyone else does. If the prospective buyer decides not to submit a bid, the seller is allowed to offer the property to someone else. This arrangement is frequently used when family members, neighbors, friends, or tenants are interested in purchasing the property should it be put on the market. Real estate agents also sometimes ask sellers for the right of first refusal if they have clients who are interested in such properties.
The agreement, which is generally executed by lawyers, sets out the details of the transaction. It includes a limited time frame, sometimes as little as a couple of days, for the buyer to make an offer. In some cases, the agreement also includes a specific price or a method of calculating a future sales price.
This mechanism differs from a right of first offer (ROFO), in which the seller allows a specified party to make the first bid for the property while still marketing it to others. After reviewing the ROFO, the seller has the option to reject it and also to go back and agree to it later if no other offers from other parties are acceptable.
A right of first refusal can be beneficial to a buyer so that they can get in on a deal without any competition. There is no competition—or potential for a bidding war—because the property is never put on the market. Prices are often set in the agreement, which means that the buyer could get a really good deal if prices rise dramatically. However, if prices have been decreasing, the buyer ends up overpaying.
There isn’t much time to make a decision or line up financing once the owner decides to sell. For sellers, the advantage is that the house never goes on the market, so there are no real estate agent fees. However, the pre-set price means the seller could gain money or lose a lot depending on the state of the overall real estate market when the sale is being conducted. If the property is not offered to the person who has the right of first refusal, that party can sue for damages.
While the document provides a clear path for interested parties to acquire property, the strict timelines and fixed pricing structures can create friction. In many comparable situations, parties rely on these contracts to protect their interests during turbulent market periods, yet the rigid nature of the agreement often forces a choice between holding firm on a pre-determined value or risking a more volatile public sale process. A detailed market analysis can help parties determine the best approach to these agreements.
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