If a buyer is interested in a property that is not currently for sale, a right of first refusal (ROFR) agreement ensures they have the first right to purchase a property once it is on the market. The ROFR is a contractual agreement between a buyer and seller in which the interested party (the buyer) is allowed to be the first to submit an offer on a specific property once it is for sale.
With this contract, a seller must contact the potential buyer before considering or accepting other offers. If the ROFR buyer does not want to submit an offer, only then can the seller accent other offers.
Pros & Cons to ROFR Agreements
Before entering into a ROFR agreement, you should consider the following advantages and disadvantages. For buyers, the benefits are as follows:
- You aren’t competing with other buyers. Right now, it’s a seller’s market—properties are not staying on the market long, and bidding wars are quite common. With a ROFR, the seller allows you to make an offer before accepting others, which can help you get the home (or other property) you want with a lot less hassle and stress.
- You may purchase the property below the market price. Because the sales price is often negotiated in the original agreement, you may be getting the property for less than its current value. It is important to note that this benefit is only applicable if prices are on the rise.
- You can create a financial plan. While you wait for the property to be listed for sale, you can save for a down payment, build your credit, and take other steps to prepare for purchasing the property.
For sellers, the benefits are as follows:
- You don’t have to list your property. As long as the deal goes through, you won’t have to worry about listing your property, which can save you time, money, and energy.
- You can make a profit. If your pre-negotiated sales price is over market value (and appraises for that price if the buyer has a mortgage lender), you may make a lot of money.
- You can select your buyer. If you have family or a tenant who has always loved your property, you can enter a ROFR agreement with them, which can ensure your property goes to someone you know will take care of it. If you offer your family (like children, nieces/nephews, etc.) a ROFR, you can also build generational wealth.
For buyers, the potential downsides are as follows:
- You have a limited time to decide. Included within your agreement is how much time you have to get the financing and make an offer on the property.
- You may overpay for the property. If the property’s value has decreased, you may overpay if prices have decreased. You may opt to risk letting the property go to market and making a lower offer, but you now have to compete with other buyers.
- You may miss out on other real estate opportunities. If you get attached to the property involved in the ROFR, you risk missing out on other properties, which can be an issue if your ROFR deal falls through.
For sellers, the potential downsides are as follows:
- You may lose money. You may be losing money if the negotiated sales price is lower than market value, and with only one buyer involved, you don’t have the opportunity to gain a higher price.
Entering Into a ROFR Agreement
If you plan to execute a ROFR agreement (or any legally binding agreement), it is in your best interest to have a lawyer present. As mentioned, these agreements include details like the buyer’s decision window or the sales price, and you should negotiate and understand the terms clearly before signing a contract.
At Bridges, Jillisky, Weller & Gullifer, LLC, our attorneys have decades of combined experience and diverse backgrounds. If you need help with a real estate matter, including drafting or entering into a ROFR agreement, contact our legal team online or at (937) 403-9033.