Right of First Refusal
A Right of First Refusal is a right granted to a buyer by a seller, usually via a purchase agreement in a residential transaction, or often given to a tenant in a commercial transaction, that provides the buyer with a specific number of hours (as determined by buyer and seller) to match an offer by a subsequent buyer. In residential real estate, this often occurs when a buyer writes an offer that is contingent upon the sale of their own home. The seller is usually unwilling to take their home off the market while waiting for the buyer to sell their home. The buyer may, however, be eligible for a bridge loan, but they don’t necessarily want to exercise that option unless they have to, so they might ask for a 48 hour (as an example) Right of First Refusal. This would mean that, if anyone else makes an offer on the house, the first buyer has 48 hours in which to remove the contingency concerning the sale of his/her home. During this 48 hour period, the first buyer is usually attempting to secure a bridge loan in order to move ahead with the purchase.
Will the MLS accept a listing with a Right of First Refusal?
The MLS will accept listings with a Right of First Refusal, providing the seller agrees in writing on the listing agreement to pay a commission to any cooperating broker whose offer causes the Right of First Refusal to be exercised.
Is the Right of First Refusal risky?
The risks in allowing a seller to accept this kind of condition in an offer are two-fold:
- The MLS Rules & Regulations require the listing to be reported as sold once the purchase agreement is accepted with this condition, unless the Seller agrees to pay a commission to the broker (in the 2nd sale) who causes the Right of First Refusal to be exercised. Sellers are usually unable or unwilling to pay a commission on the first sale where they granted this right and another commission to the broker who wrote the 2nd offer that triggered the Right of First Refusal to be exercised. The reason that the property must be reported sold is because the granting of a first right essentially modifies the listing contract which states that a commission will be paid to a cooperating broker who writes an acceptable offer to the seller. In such cases, there is no guarantee that a broker, after working diligently with a buyer, will get paid in this case, even if he/she writes an acceptable offer because they may now lose out to the first buyer who has been granted this right.
- It has been argued that one who is working with the seller would advise the seller that granting this right is not in their best interest. Why would the seller risk a buyer getting cold feet during the time that the first buyer has 48 or 72 hours (just examples) to try to make good on their offer? There is no guarantee that they can make good on their offer and, in the meantime, the 2nd buyer may decide to buy something else. Seller then loses both buyers. If the first buyer really wants the house and qualifies for a bridge loan, a seller’s refusal to grant a Right of First Refusal would force the buyer to either obtain a bridge loan or strive hard to get their own house sold. In the meantime, the seller is free to offer the property for sale to any other buyer instantly.