SS125: Right of First Refusal in Real Estate

SS125: Right of First Refusal in Real Estate

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing Right of First Refusal in Real Estate.

When looking to purchase a piece of real estate, there are a number of legal terms used to define your rights and requirements in a transaction. In this episode, Charles explains the right of first refusal clause and how it is used when making an offer.

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Talking Points:

TALKING POINTS

  • When looking to purchase or sell a piece of real estate; there are a number of legal terms you will come into contact with. The right of first refusal is a clause that is similar to an option contract. The holder of the right of first refusal has the right, not the obligation to enter into a real estate transaction; in most situations, it is the purchase of a home.
  • The right of first refusal is a contractual right to enter into a business transaction with a person or company before anyone else is able to. Within real estate, this is a clause that may be written into a lease or other agreement. It provides the holder with the right to first refusal, the right to purchase a property before the property owner reviews other offers. In most situations, the right to first refusal clause is added to a lease years before the owner decides to sell.
  • The property owner is still able to list and market the property for sale, at a price that they desire, however; before any offer can be accepted, the sellers must contact the right to first refusal holder. When the holder is notified, they are now able to make the decision, to purchase the property or not. If the holder wants to purchase the property, they make the seller an offer. If the holder declines to purchase the property, the seller is now able to negotiate other offers from buyers and accept one.
  • Typically, When Is a Right of First Refusal Used?
    • Between a tenant and a landlord: a tenant who believes they might be interested in purchasing a rental property they live in, may request a right to first refusal. The landlord must consider their offer before negotiating with other buyers. Usually, it is in the interest of the seller to sell directly to the tenant. It reduces their selling costs dramatically since no agent is required, in addition, the tenants are very familiar with the property and will most likely not require as many contingencies as another buyer. Lastly, the seller does not have to worry about; vacating the unit, cleaning, painting, or making repairs (in most instances), etc., since the potential new buyer is already living in the property.
    • Between family members: The right to first refusal is used with family members when one family member wants to purchase a property; they will have the first chance to submit their offer when the other family members are ready to sell. If the right to first refusal holder is not ready to purchase at that time, the sellers can now actively negotiate offers with other buyers.
    • With a property located within a homeowner’s association or condo: Occasionally, HOAs will include a right to first refusal clause in the governing documents. This clause allows associations to vet potential buyers before a homeowner accepts an offer. It is also used to avoid discounted sales that would otherwise lower the values of other units within the association.
  • What are the main advantages and disadvantages for buyers and sellers?
    • For buyers; the advantages include:
      • The ability to put an offer in on a property; before the seller is able to negotiate or accept other offers.
      • It allows you (in most cases) the ability to set a predetermined purchase price
      • It allows you time to get your finances and financing in order before purchasing
      • If you are a tenant in the property currently, you avoid having to move if the property is sold
    • For buyers, the disadvantages include:
      • It does not guarantee that the holder will actually purchase the property
      • Sellers are not required to list or sell their property by a predetermined timeframe.
      • Many tenants/right of first refusal holders may become emotionally attached to the property and overpay (even if the market drops)
    • For sellers; the advantages include:
      • In most cases, a tenant purchasing your property will be the easiest, and most cost-effective solution for the seller.
      • It allows you to set a predetermined price for your property (not an advantage if the value goes up).
      • Tenants living in your property will be more likely to overpay than having to find another property, move out and move into the new property.
      • You can always list the property with a right of first refusal.
    • For sellers; the disadvantages include:
      • The holder of the right of first refusal is not obligated to purchase your property.
      • It can tie your hands for a set period of time, from selling the property (minimizing the chance of a quick sale to a third party).
      • It is an added obligation for the seller.
    • As a seller, should you agree to a right-to-first-refusal clause?
      • Each right of first refusal has differing terms and timelines. Some have exceptions for cash offers and expiration dates on how long the right of first refusal lasts.
      • If you are renting a property to a tenant that you feel will be a qualified buyer in the future, it might make sense to add a right of first refusal to the lease. Some tenants will actually pay a higher rental rate for having the right of first refusal in their lease. Knowing that they have the first choice whether to stay in the property if you do indeed decide to sell.
      • Property owners can consult with their attorney to draft the right of first refusal that fits their individual goals the best.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing the rate of first refusal in real estate.

Charles:
Couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
When looking to purchase or sell a piece of real estate, there are a number of legal terms you’ll come into contact with. The right of first refusal is a clause that is similar to an option contract. The holder or the right of first refusal has the right, not the obligation to enter into a real estate transaction. In most situations, it is the purchase of a home. Now, the right of first refusal is a contractual right to enter into a business transaction with a person or company before anyone else is able to. Within the scope of real estate, this is a clause that may be written into a lease or other agreement. It provides a holder of the right to first refusal, the right to purchase a property before the property owner reviews other offers. In most situations, the right to first refusal clause is added to a lease years before the owner decides to sell. Now the property owner is still able to list and market the property for sale at a price that they desire.

Charles:
However, before any offer can be accepted, the sellers must contact the right to first refusal holder. And when the holder is notified, they are now able to make the decision to either purchase the property or not. If the holder wants to purchase the property, they make the seller an offer. If the holder declines the purchase, the property, the seller is now able to negotiate other offers from buyers and accept one. So typically, when is a right of first refusal used? Well, typically it’s between a tenant and a landlord. A tenant who believes they might be interested in purchasing a rental property they live in may request a right of first refusal. The landlord must consider their offer before negotiating with other buyers. Usually it is in the interest of the seller to sell directly to the tenant. It reduces their selling costs dramatically since no agent is required.

Charles:
In addition, the tenants are very familiar with the property and will most likely not require as many contingencies as another buyer would. Lastly the seller does not have to worry about having the unit vacant cleaning, painting, or making repairs in, in most instances. Now, since the potential new buyer is already living in the property, it makes a sale much smoother. Next is between family members. So the right to first refusal is used with family members. When one family member wants to purchase a property, they’ll have the first chance to submit their offer when the other family members are ready to sell. If the right to first refusal holder is not ready to purchase at that time, the sellers can now actively negotiate offers with other buyers. Next is with a property located within a homeowner’s association or condo. Occasionally, HOAs will include a right to first refusal clause into the government governing documents of the association.

Charles:
And this clause allows associations to vet potential buyers before a homeowner accepts an offer. It is also used to avoid discounted sales that would otherwise lower the values of the other units within the association. So what are the main advantages and disadvantages for buyers and sellers? Well, for buyers, the advantages include the ability to put an offer in on a property before the seller is able to negotiate or accept other offers. It allows, in most cases, the ability to set a predetermined purchase price. It allows you time to get your finances and financing in order before purchasing. If you are a tenant in the property currently, you avoid having to move if the property is sold. Now for buyers, the disadvantages include it does not guarantee that the holder will actually purchase the property. Sellers are not required to list or sell their property by a predetermined timeframe.

Charles:
So if you want to purchase now and the seller’s not doesn’t want to sell, you can’t make them sell. Many tenants, right of refusal holders may become emotionally attached to the property and over in overpay, even if the market drops. And this is because they’re already living there and they’ve made it their home and they want to to purchase it. Now, for sellers, the advantages include in most cases, a tenant purchasing a property will be the easiest and most cost effective solution. It allows you to set a predetermined price for your property. Not an advantage of the value goes up, though now tenants living in your property will be more likely to overpay than having to find another property, move out and then move into another property. You can always list a property with a right of first refusal. You just can’t negotiate and accept offers without letting the holder know.

Charles:
Now, for sellers, the disadvantages include the holder of the right of first refusal is not obligated to purchase your property. You can tie hand for a set period of time from selling the property cause it’s minimizing the chance of a quick sale to a third party is an added obligation for you. So if you have to let that seller know or the buyer know the holder, if before you list it, then you have to wait. And it might be a predetermined time that you have to wait for them to get back in touch with you and to let you know. And this could delay your sale of the property. Now, as a sailor, should you agree or to the right of first refusal, if maybe a a one of your renters ask you? Well, each right of first refusal has differing terms and timelines.

Charles:
Some have exceptions for cash offers, and there’s expiration dates on how long the rite of first refusal lasts for. Now, if you’re renting a property to a tenant that you feel will be a qualified buyer in the future, it might make sense to add a right of first refusal into the lease. Some tenants will actually pay a higher rental rate for having the right of first refusal in their lease, knowing that they won’t have the first choice whether to stay in the property if you do indeed decide to sell while they’re there. Now property owners can consult with their attorney to draft the right of first refusal that fits their individual goals the best. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show [email protected]. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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