Right of First Refusal

What is right of first refusal?

Updated April 1, 2022

In real estate, a right of first refusal is a contractual right conferred upon a specific party that allows someone 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.

The right of first refusal, or ROFR, often is used when family members, neighbors, friends or even tenants are interested in buying the property should it be put on the market. Real estate agents also sometimes ask sellers for the ROFR if they have clients who are interested in such properties.

A right of first refusal can be beneficial to a buyer so that they can get in on a deal without any competition. Photo: Pixabay

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.

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It is not the same as 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.

The ROFR agreement offers advantages and disadvantages for buyers as well as sellers.

Pros and cons for buyers:

  • 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.

Pros and cons for sellers:

  • Because the house never goes on the market, there are no real estate agent fees.
  • 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.